UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-7949
REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
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(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
610 N.E. Jensen Beach Blvd., Jensen Beach, Florida 34957
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including Area Code (772) 334-8181
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 |_|
As of August 15, 2005 there were 3,120,912 shares of the $.01 Par Value Common
Stock outstanding.
Transitional Small Business Disclosure Form (check one): Yes |_| No |X|
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets........................3
Condensed Consolidated Statements of Operations..............4
Condensed Consolidated Statements of Cash Flows..............5
Notes to Condensed Consolidated Financial Statements.........6
Item 2. Management's Discussion and Analysis or Plan of Operation....7-11
Item 3. Controls and Procedures......................................11
Part II - Other Information (Unaudited)
Item 1. Legal Proceedings............................................12-13
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.....................................................14
Item 3. Defaults Upon Senior Securities..............................14
Item 4. Submission of Matters to a Vote of Security Holders..........14
Item 5. Other Information............................................14
Item 6. Exhibits and Reports on Form 8-K.............................14-16
Signatures.................................................................17
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
June 30, 2005 (Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 1,016,103
Marketable securities 8,990,730
Accrued receivables 416,375
Other current assets 25,596
------------
Total Current Assets 10,448,804
Investment in partnerships 7,986,248
Other Assets
Aggregate inventory 832,427
Deferred costs 250,000
Other 1,300
------------
Total Other Assets 1,083,727
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Total Assets $ 19,518,779
============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 234,791
Accrued expenses 356,017
------------
Total Current Liabilities 590,808
Deferred credit 1,105,233
------------
Total Liabilities 1,696,041
------------
Shareholders' Equity
Serial preferred stock not subject to mandatory redemption
Maximum liquidation preference $24,975,312 1,052,988
Common stock, par value $.01; authorized 8,000,000 shares;
Issued 3,168,412 shares; outstanding 3,121,412 shares 31,214
Additional paid-in capital 8,344,871
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596)
Retained earnings 12,799,896
Note receivable - sale of stock (2,440,000)
Treasury stock, 47,000 shares (295,635)
------------
Total Shareholders' Equity 17,822,738
------------
Total Liabilities and Shareholders' Equity $ 19,518,779
============
The attached notes are an integral part of these financial statements.
3
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues $ -- $ -- $ -- $ --
Costs and expenses
Selling, general and administrative expenses 481,741 790,377 796,816 2,650,521
----------- ----------- ----------- -----------
Loss from operations (481,741) (790,377) (796,816) (2,650,521)
Income from equity investment in partnerships 147,832 463,191 693,091 862,657
Rental income -- -- -- 4,599
Interest and dividend income 42,894 29,861 81,271 70,718
Other income, net 75,207 21,836 123,529 57,784
----------- ----------- ----------- -----------
Loss from operations before income tax provision (215,808) (275,489) 101,075 (1,654,763)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) (215,808) (275,489) 101,075 (1,654,763)
=========== =========== =========== ===========
Net income (loss) per common share:
Basic and diluted $ (0.07) $ (0.09) $ (0.03) $ (0.55)
=========== =========== =========== ===========
Weighted average common shares outstanding
Basic and diluted 3,030,203 3,018,912 3,025,583 3,018,662
=========== =========== =========== ===========
The attached notes are an integral part of these financial statements.
4
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-----------------------------
2005 2004
------------ ------------
Cash Flows from operating activities:
Net income (loss) $ (101,075) $ (1,654,763)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 1,899 2,329
Stock-based compensation 5,250 3,125
Income from equity investment in partnerships (693,091) (862,657)
Impairment of notes, accrued interest receivable -- 1,182,626
Unrealized gain on marketable securities -- (57,084)
Changes in operating assets and liabilities
Restricted cash -- 80,783
Accounts receivable -- 3,077
Accrued interest (69,133) (45,253)
Other current assets 16,300 64,212
Accounts payable and accrued expenses (100,018) (231,349)
------------ ------------
Net cash used in operating activities (737,719) (1,514,954)
------------ ------------
Cash flows from investing activities:
Cash investments in partnerships (200,058) (7,300,145)
Proceeds from partnership earnings received 325,000 --
Payments received on notes receivable -- 1,563
Proceeds from sales of marketable securities 54,000,000 94,500,000
Purchases of marketable securities (53,998,474) (84,945,761)
Net proceeds from sale of property and equipment -- 402,632
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Net cash provided by investing activities 126,468 2,658,289
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 158,000 --
------------ ------------
Net cash provided by financing activities 158,000 --
------------ ------------
(Decrease) increase in cash and cash equivalents $ (453,250) $ 1,143,335
Cash and cash equivalents - beginning 1,469,353 451,249
------------ ------------
Cash and cash equivalents - ending $ 1,016,103 $ 1,594,584
============ ============
Supplemental disclosure of cash flow information:
There were no cash payments made for interest or taxes during the periods
presented.
The attached notes are an integral part of these financial statements.
5
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month and six month periods ended June 30, 2005 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB, as amended, for the year ended
December 31, 2004.
Principles of Consolidation - The consolidated financial statements
include the accounts of Regency Affiliates, Inc. (the "Company"), its 75%
owned subsidiary, Iron Mountain Resources, Inc. ("IMR"), and its 80% owned
subsidiary, National Resource Development Corporation ("NRDC"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Note 2. Earnings Per Share
Basic earnings per share are computed by dividing net income attributable
to common shareholders (net income less preferred stock dividend
requirements and periodic accretion if applicable) by the weighted average
number of common shares outstanding during the year.
Note 3. Property and Equipment
On January 12, 2004, the Company sold its rental property located in
Scranton, PA for $531,500, less costs to sell of approximately $48,000. No
gain or loss was recognized on the transaction as the property was written
down to fair value at December 31, 2003. Property and equipment at June
30, 2005 was as follows:
Machinery and equipment $ 43,708
Less: Accumulated depreciation (43,708)
--------
$ -0-
========
Depreciation expense for the three months ended June 30, 2005 and 2004 was
$298 and $1,165, respectively and $1,899 and $2,239 for the six months
ended June 30, 2005 and 2004.
Note 4. Related Party Transactions
During the quarter ending June 30, 2005, two directors of the Company each
received 250 shares of common stock for services. The fair market value of the
stock issued was $2,550 and this expense is included in selling, general and
administrative expenses in the statement of operations.
During the quarter ending June 30, 2005, two officers of the Company each
exercised stock options to purchase 50,000 shares at an exercise price of $1.58
per share.
Note 5. Subsequent Events
On July 28, 2005, the Company purchased 8,000 shares of the Company's common
stock, $.01 par value, for $42,160 in a privately negotiated transaction. The
8,000 shares will be held as treasury stock by the Company.
6
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements and Associated Risk
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
but not limited to those regarding the Company's financial position, business
strategy, acquisition strategy and other plans and objectives for future
operations and any other statements that are not historical facts constitute
"forward-looking statements" within the meaning of federal securities laws and
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements
expressed or implied by such forward-looking statements to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable, there
can be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will have
the expected effect on its business or operations. These forward-looking
statements are made based on management's expectations and beliefs concerning
future events impacting the Company and are subject to uncertainties and factors
(including, but not limited to, those specified below) which are difficult to
predict and, in many instances, are beyond the control of the Company. Such
factors include:
- A default in the lease or sudden catastrophe to the property owned
by Security Land and Development Company Limited Partnership ("Security")
or the operating facilities owned by Mobile Energy Services Company, LLC
("Mobile Energy") from uninsured acts of God or war could have a
materially adverse impact upon our investment in Security or Mobile
Energy, respectively, and therefore our financial position and results of
operations;
- Our subsidiaries currently lack the necessary infrastructure at
the site of the Groveland mine in order to permit them to make more than
casual sales of the rock aggregate located at the Groveland Mine;
- We have had significant tax loss and credit carryforwards and no
assurance can be provided that the Internal Revenue Service would not
attempt to limit or disallow altogether our use, retroactively and/or
prospectively, of such carryforwards, due to ownership changes or any
other reason. The disallowance of the utilization or our net operating
loss would severely impact or financial position and results of operations
due to the significant amounts of taxable income that has been, and may in
the future be, offset by our net operating loss carryforwards;
7
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
- Royalty Holdings, LLC ("Royalty"), an affiliate of the Company's
management, beneficially owns approximately 60% of our common stock. As a
result, Royalty has the ability to control the outcome of all matters
requiring shareholder approval, including the election and removal of
directors and any merger, consolidation or sale of all or substantially
all of our assets; and
- The Company does not expect to pay dividends in the foreseeable
future.
- 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 the Company should be read in conjunction with the accompanying
financial statements and related notes included in Item 1 of this report.
General.
The Company is committed to enhancing the value of the Company's Common Stock by
seeking opportunities to monetize certain existing assets and by seeking new
business opportunities on an opportunistic basis.
Liquidity and Capital Resources.
On June 30, 2005, the Company had current assets of $10,448,804 and
Shareholders' Equity of $17,822,738. On June 30, 2005, the Company had
$10,006,833 in cash and marketable securities, total assets of $19,518,779 and
total current liabilities of $590,808.
On April 30, 2004, the Company through a newly-formed, wholly-owned subsidiary
called Regency Power Corporation, a Delaware corporation ("Regency Power"),
acquired a 50% membership interest in MESC Capital, LLC, a Delaware limited
liability company ("MESC Capital"), from DTE Mobile, LLC ("DTE Mobile"),
pursuant to an Assignment and Assumption Agreement dated as of April 30, 2004.
The purchase price for the 50% membership interest was $3,000,000 and was funded
from the Company's working capital. DTE Mobile, which is owned by an unregulated
subsidiary of a large energy company that has significant experience in owning,
managing and operating electric generation and on-site energy facilities, owns
the other 50% membership interest in MESC Capital.
MESC Capital was formed to acquire all of the membership interests in Mobile
Energy, an Alabama limited liability company. Mobile Energy owns an on-site
energy facility that supplies steam and electricity to a Kimberly-Clark tissue
mill in Mobile, Alabama. The acquisition of Mobile Energy was also consummated
on April 30, 2004 pursuant to a Membership Interest Purchase Agreement, dated as
of January 30, 2004, between MESC Capital and Mobile Energy Services Holdings,
Inc. The purchase price under the Membership Interest Purchase Agreement, after
certain pre-closing adjustments, was $33,600,000, and is subject to certain
post-closing adjustments. The purchase price and working capital reserves were
funded by the issuance of $28,500,000 of non-recourse debt, a total equity
contribution by MESC Capital of $8,600,290, $4,300,145 of
8
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
which was funded by Regency Power and $4,300,145 of which was funded by DTE
Mobile, and a credit of $1,000,000 on account of existing and continuing
tax-exempt indebtedness of Mobile Energy. The $28,500,000 acquisition
indebtedness will be fully amortized over the fifteen year term. Neither Regency
Power nor DTE Mobile is obligated to contribute additional capital, or loan or
otherwise advance funds, to MESC Capital.
At March 31, 2004, the Company held notes receivable totaling $1,127,708, which
were deemed uncollectible due to lack of cash flows generated and continual
default on payment terms by the issuer. Management determined to record full
impairment of the notes and any accrued interest thereon, resulting in an
impairment charge of $1,182,626, which is included in the Selling, General &
Administrative caption of the accompanying Statements of Operations. Management
intends however, to continue to pursue options available to receive payment on
the obligations from the debtor.
On June 24, 2003, US SSA LLC, a single purpose entity owned by Security,
borrowed $98,500,000 through a public debt issue underwritten by CTL Capital,
LLC. Proceeds of the refinancing were used to repay the outstanding balance of
Security's 1994 indebtedness, to establish reserves to make capital improvements
to the property, to provide reserves required by the new debt, to pay costs and
expenses related to issuing the debt, to pay fees related to the lease extension
with the GSA and the financing, and to make a distribution to the partners of
Security. The debt is for a term of 15.3 years maturing October 31, 2018 at
which time the loan will have been paid down to a balance of $10,000,000.
Security also successfully obtained residual value insurance for approximately
$10,000,000. The interest cost of the financing is 4.63%. The financing is
non-recourse to the Company. The Company received approximately $41,000,000 from
the Security distribution. In addition, under the terms of the Security
partnership agreement, the Company is entitled to (i) 95% of Security's
distributions of cash flow until it has received $2,000,000 of such
distributions, and thereafter 50% of such distributions and (ii) once it has
received $2,000,000 of cash flow distributions, a $180,000 annual management fee
from Security. The foregoing percentages are inclusive of the Company's interest
as a limited partner in 1500 Woodlawn, the general partner of Security. In
connection with the Security refinancing and distribution, the Company was
required to repay its KBC Bank loan. The payoff amount was approximately
$14,125,000, which included a release fee and make-whole premium.
In order to satisfy the Company's working capital needs, in April 2003 the
Company obtained a loan facility from Royalty, an affiliate of Messrs. Levy and
Hasson, pursuant to which the Company could have borrowed up to an aggregate of
$300,000 from Royalty. Amounts borrowed were evidenced by a demand note bearing
interest of 8% per annum. On July 3, 2003, the Company repaid all amounts
outstanding under the $300,000 working capital loan facility from Royalty, and
terminated the facility. The payment amount consisted of $180,000 of principal
and $2,910 of accrued and unpaid interest.
On October 16, 2002, the Company redeemed all the shares of Common Stock owned
by Statesman Group, Inc. ("Statesman"), a former shareholder of the Company. The
Company funded the redemption from the proceeds of an aggregate of $4,750,000
borrowed from Royalty, an affiliate of current management, in exchange for two
notes - a $3,500,000 5% Convertible Promissory Note due October 16, 2012 and a
$1,250,000 9% Promissory Note due October 16, 2007. Both notes allowed interest
to accrue without current payment. The principal and interest under the
Convertible Promissory Note could be converted into Common Stock at a conversion
rate of $2.00 per shares.
9
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
On November 7, 2002, Royalty converted $1,495,902 of the principal amount of the
Convertible Note plus accrued interest into 750,000 shares of Common Stock and
on July 3, 2003, Royalty converted the remaining $2,004,098 outstanding
principal amount of the Convertible Note and the $71,378 of accrued and unpaid
interest thereon into 1,037,738 shares of the Company's Common Stock. The 9%
Promissory Note was required to be prepaid upon our receipt of sufficient
proceeds from the Company's investment in Security after discharging certain
other indebtedness. Accordingly, on July 3, 2003, the Company repaid the full
$1,250,000 principal amount of, and all accrued and unpaid interest under, the
9% Promissory Note.
On September 30, 2002, our subsidiary, Rustic Crafts International, Inc.
("Rustic Crafts") sold all of its operating assets subject to the assumption of
certain of its liabilities. Prior to the sale, Rustic Crafts had established a
$1,000,000 line of credit with PNC Bank which was guaranteed by the Company and
expired on May 18, 2002. In conjunction with the Rustic Crafts asset sale,
Rustic Crafts' indebtedness under the line of credit together with its $960,000
mortgage loan from PNC Bank and certain other indebtedness to PNC Bank was
restructured to replace such indebtedness with five notes totaling $2,432,782
and have a ten year amortization schedule. The notes bear interest at the
blended rate of 10.8% per annum. As part of the PNC Bank debt restructuring,
Rustic Crafts was required to pay down the outstanding loan balance with
$200,000 of the purchase price in the Rustic Crafts asset sale, and was required
to make a $540,000 payment in December 2002. A $40,000 payment was made to PNC
Bank in December 2002, but Rustic Crafts and the Company failed to make the
balance of the December 2002 payment. Accordingly, the PNC Bank debt was
subsequently modified to provide for the payment of the remaining $500,000
payment on or before June 30, 2003. On June 30, 2003, the Company paid all
outstanding principal and interest due to PNC Bank, in satisfaction of the above
described obligations.
Management believes that the Company's cash balance and anticipated cash flows
from operations will be adequate to fund our cash requirements for at least the
next twelve months.
Results of Operations.
2005 Compared to 2004
For the three months ended June 30, 2005:
No revenue was generated by the Company in this period.
Selling and administrative expenses decreased by $308,636 or 39.0%
in 2005 compared to 2004 primarily due to a reduction in
professional fees related to continuing litigation defense and fees
relating to the MESC acquisition in 2004.
Income from equity investment in partnerships decreased by $315,359
or 68.1% compared to 2004 primarily due to a reduction in income
earned by Security after its refinancing.
Net Loss decreased by $59,681 in 2005 over 2004 or 21.7%
10
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. (continued)
For the six months ended June 30, 2005:
No revenue was generated by the Company in this period.
Selling and administrative expenses decreased by $1,853,705 or 69.9%
in 2005 compared to 2004 primarily due to the write off of the notes
receivable in 2004. Also, professional fees for continuing
litigation and for the MESC acquisition were less in 2005.
Income from equity investment in partnerships decreased by $169,566,
19.7% less than 2004 due to a reduction in the partnership income
earned by Security after its refinancing. The decrease is partially
offset by additional income received from MESC.
Net Loss decreased by $1,755,838 in 2005 over 2005 or 106.1%.
The Company's Shareholders' Equity at June 30, 2005 was $17,822,738 as
compared to $18,454,649 on June 30, 2004, a decrease of $ 631,911.
Impact of Inflation.
Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on its results
of operations.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements.
ITEM 3. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective.
In connection with the evaluation of the Company's internal controls during the
Company's last fiscal quarter, the Company's Chief Executive Officer and Chief
Financial Officer have determined that there are no changes to the Company's
internal controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
11
Regency Affiliates, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 14, 2001, we initiated a proceeding in The Circuit Court of the
Nineteenth Judicial Circuit in and for Martin County, Florida, case number
01-1087-CA against Larry J. Horbach, individually and L.J. Horbach & Associates.
Larry Horbach was a former interim CFO and Board member. We claim that Larry
Horbach, without appropriate authority, borrowed $100,050 from Mid City Bank in
the name of Regency. We further claim that Horbach converted all or part of the
proceeds from the loan for his benefit and breached his fiduciary duties as an
officer and director. Horbach filed a Motion for the Court to determine whether
the claims asserted against him were properly brought in Florida, or whether
they should have been filed in Nebraska. The matter was fully briefed, and the
Florida Court took the matter under advisement. The Florida Court has not yet
rendered its decision on this jurisdictional issue.
On February 7, 2002, a complaint naming Regency as defendant was filed in the
District Court of Douglas County, Nebraska, case number 1012. The Plaintiffs are
Larry J. Horbach, individually and L.J. Horbach & Associates and they are
demanding payment on a loan they purchased from Mid City Bank. The plaintiffs
are requesting payment of $82,512.57 plus accrued interest, costs and attorney
fees. We are vigorously defending this litigation.
On May 2, 2002, a lawsuit (the "Federal Action") was filed in the Federal
District Court for the District of Nebraska (the "Nebraska Court") by two
dissident Company shareholders, Edward E. Gatz and Donald D. Graham, captioned
Gatz et al. v. Ponsoldt, Sr., et al, against the former officers and directors
of the Company, Statesman and, as a nominal defendant only, the Company. In
December 2002, plaintiffs filed a seven-count Amended Complaint to add claims
against Royalty and Royalty's control persons. All Defendants moved to dismiss
all claims against them on jurisdictional and substantive grounds.
On July 7, 2003, the Nebraska Court ruled that venue in the District of Nebraska
was improper and granted defendants' motions to transfer the case to the
District of Delaware. In connection with the transfer of the case to Delaware,
the Court denied as moot the other motions pending before it without prejudice
to their reassertion in the United States District Court for the District of
Delaware (the "Delaware Federal Court"). In September and October 2003, all
defendants filed motions to dismiss the Federal Action with the Delaware Federal
Court and plaintiffs filed a motion for permission to file an amended and
supplemental complaint as well as a preliminary injunction or status quo order
seeking, among other things, to prevent the Company from taking any actions
outside the ordinary course of business.
On December 18, 2003, the Delaware Federal Court issued an opinion and order
which, among other things (i) granted defendants' motions to dismiss the amended
complaint with respect to certain claims, (ii) denied plaintiffs' motion for
leave to file a supplemental and second amended complaint, (iii) denied
plaintiffs' request for a preliminary injunction and a status quo order and (iv)
dismissed the remainder of the amended complaint for lack of subject matter
jurisdiction. As a result of the Delaware Federal Court's opinion and order, the
Federal Action was dismissed in its entirety.
12
Regency Affiliates, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. (continued)
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 IMR 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 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 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) or 46,667 unrestricted shares of the Company (post-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.
13
Regency Affiliates, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ending June 30, 2005, The Company awarded 250 restricted
shares of common stock to each of Errol Glasser and Stanley Fleishman, 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.
During the quarter ending June 30, 2005, two officers of the Company each
exercised stock options to purchase 50,000 shares at an exercise price of $1.58
per share. Exemption from the registration requirements of the Securities Act
for the issuance of such shares is claimed under Section 4(2) of the Securities
Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(a) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
3.1(i)(b) Corrected Certificate of Amendment reflecting amendment
to Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(b) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
14
Regency Affiliates, Inc. and Subsidiaries
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS.
3.1(i)(c) Certificate of Amendment of Restated Certificate of
Incorporation of Regency Affiliates, Inc. (filed as
Exhibit A to the Company's Information Statement on
Schedule 14C filed on October 27, 2003 and incorporated
by reference herein).
3.1(i)(d) Certificate of Designation - Series B Preferred Stock,
$10 Stated Value, $.10 par value (filed as Exhibit to
Form 10-K dated June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of Designation, Series
C Preferred Stock, $100 Stated Value, $.10 par value
(filed as Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and incorporated
herein by reference).
3.1(i)(f) Certificate of Designation - Series D Junior Preferred
Stock, $10 Stated Value, $.10 par value (filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated
herein by reference).
3.1(i)(g) Certificate of Designation - Series E Preferred Stock,
$100 Stated Value, $.10 par value (filed as Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and incorporated
herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1,
Registration Number 2-86906, and incorporated herein by
reference).
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company (filed as
Exhibit 3.1(ii)(b) to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2002, filed
on November 19, 2002, and incorporated herein by
reference).
31.1 Chief Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
15
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.*
*Filed herewith
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENCY AFFILIATES, INC.
(Registrant)
Date: August 15, 2005 /s/ Laurence S. Levy
--------------------- ---------------------------------------
(President and Chief Executive Officer)
Date: August 15, 2005 /s/ Neil N. Hasson
--------------------- ---------------------------------------
(Chief Financial Officer)
17
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(a) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
3.1(i)(b) Corrected Certificate of Amendment reflecting amendment
to Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(b) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
3.1(i)(c) Certificate of Amendment of Restated Certificate of
Incorporation of Regency Affiliates, Inc. (filed as
Exhibit A to the Company's Information Statement on
Schedule 14C filed on October 27, 2003 and incorporated
by reference herein).
3.1(i)(d) Certificate of Designation - Series B Preferred Stock,
$10 Stated Value, $.10 par value (filed as Exhibit to
Form 10-K dated June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of Designation, Series
C Preferred Stock, $100 Stated Value, $.10 par value
(filed as Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and incorporated
herein by reference).
3.1(i)(f) Certificate of Designation - Series D Junior Preferred
Stock, $10 Stated Value, $.10 par value (filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated
herein by reference).
3.1(i)(g) Certificate of Designation - Series E Preferred Stock,
$100 Stated Value, $.10 par value (filed as Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and incorporated
herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1,
Registration Number 2-86906, and incorporated herein by
reference).
18
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company (filed as
Exhibit 3.1(ii)(b) to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2002, filed
on November 19, 2002, and incorporated herein by
reference).
31.1 Chief Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Chief Financial Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
*Filed herewith
19