UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________________
Commission file number: 1-7949
REGENCY AFFILIATES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 72-0888772
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(State or other jurisdiction (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 is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act |_|
Check whether the issuer (1) 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: |_|
Check mark whether there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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. |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes: |_| No: |X|
Issuer's revenues for its most recent year were $0.00.
The aggregate market value of the voting and non-voting Common Equity of the
Registrant held by non-affiliates as of May 12, 2006 was $7,908,007.
The number of shares outstanding of Common Stock of the Registrant as of May 12,
2006 was 3,123,412.
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...........................................7
ITEM 3. LEGAL PROCEEDINGS.................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES........................................................8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.........................................................9
ITEM 7. FINANCIAL STATEMENTS.............................................11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................12
ITEM 8A. CONTROLS AND PROCEDURES..........................................12
ITEM 8B. OTHER INFORMATION................................................12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT................12
ITEM 10. EXECUTIVE COMPENSATION...........................................14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................15
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................17
PART IV
ITEM 13. EXHIBITS.........................................................17
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................22
SIGNATURES
EXHIBIT INDEX
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 Plan of Operation," 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
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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 $2,440,000 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. This option expired in October 2005. 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 July 28,
2005, the Company purchased 8,000 shares of the Company's common stock for an
aggregate price of $42,160 in a privately negotiated transaction.
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
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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 OF BUSINESS - Regency Power Corporation".
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 Land. 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
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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.
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. On
December 30, 2005 the Company agreed to accept a $125,000 note from RCI as a
restructuring of the above named obligation. The note, which bears interest at
6.5%, calls for payments of $1,088 per month until December 2008 at which time
the balance will be due and payable.
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. In
June 2005, the Company obtained an appraisal of the Aggregate which concluded
that the Aggregate has no value.
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.
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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
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.
FILING OF GOING PRIVATE PROXY STATEMENT
On December 14, 2005, the Company filed with the SEC a preliminary
Schedule 13E-3 Transaction Statement with respect to a going private transaction
and a preliminary Schedule 14A Proxy Statement soliciting stockholders to vote
on amending the Company's certificate of incorporation to provide for a
1-for-100 reverse stock split (the "Reverse Stock Split") followed immediately
by a 50-for-1 forward stock split of the Company's common stock (the "Forward
Stock Split"), which would result in the reduction of the number of common
5
stockholders of record of the Company to fewer than 300. This will permit the
Company to discontinue the filing of annual and periodic reports and other
filings with the SEC. Once the Schedule 13E-3 Transaction Statement and Schedule
14A Proxy Statement are approved in a definitive form by the SEC, the Company
will mail copies to its stockholders. The Company currently intends to effect
the Reverse Stock Split and Forward Stock Split as soon as possible after such
distribution.
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, 2005, Regency 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 of our net operating loss would severely impact
our financial position and results of operations due to the significant amounts
of taxable income that have been, and may in the future be, offset by our net
operating loss carryforwards;
- If the Company consummates the Reverse Stock Split and Forward Stock
Split and becomes a privately held company, stockholders will own shares in a
private company and may not have the ability to sell their shares in the public
market. Furthermore, the Company would not file current, quarterly or annual
reports or be subject to the proxy requirements of the federal securities laws.
Stockholders may therefore find it more difficult to obtain information about
the Company and its financial performance.
- 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.
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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 100 F Street, N.E.,
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 January 20, 2004, a purported derivative and class action lawsuit 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., (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 "Delaware
Action"). The complaint alleged various breaches of fiduciary duties by the
former directors and Statesman, and that Royalty and its affiliates knowingly
participated in certain of the alleged breaches. In November 2004 the Court
dismissed all but one claim alleged in the complaint. The Company was not a
defendant with respect to the sole surviving claim, which related to the 2001
sale of a cache of previously quarried and piled aggregate rock by NRDC to Iron
Mountain (the "Aggregate Sale"). On October 16, 2005, the Court dismissed
plaintiffs' sole remaining claim for failure to state a claim for relief. The
dismissal was without prejudice and the plaintiffs were given leave to file an
amended complaint attacking the Aggregate Sale.
On January 30, 2006, plaintiffs filed an amended complaint challenging the
Aggregate Sale and alleging that the Aggregate Sale negatively impacted the
Company's common stockholders. The Company is not a defendant with respect to
this claim. Plaintiffs seek damages in excess of $5,400,000 with respect to the
claim related to the Aggregate Sale. Defendants have moved to dismiss the
amended complaint but briefing on the motion has not been completed. The Company
has been advised that the defendants intend to vigorously defend the claim
asserted against them in the Delaware Action.
7
The defendants in the Delaware 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,
the Company's insurance carrier contends that none of the claims contained in
the Delaware Action are covered by insurance on the basis of the "insured vs.
insured" exclusion since one of the 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 proceeding 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. On May 4, 2006, the parties settled the disputes between them
without admitting any liability, fault or wrongdoing, and entered into a
settlement agreement providing for, among other things, payment of $950,000 by
the Company to Mr. Nuttall and the purchase by the Company of the 29,134 shares
of Company common stock owned by Mr. Nuttall, at a purchase price of $6.50 per
share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded in the over-the-counter market on the OTC
Bulletin Board. The symbol for the listing is "RAFIE.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 May 12, 2006 the closing sale price of our
common stock was $6.65. As of May 12, 2006, there were approximately 2,318
common stockholders of record.
YEAR ENDED
DECEMBER 31, 2004
-----------------
HIGH ($) LOW ($)
-------- -------
First Quarter 6.45 6.01
Second Quarter 7.45 6.05
Third Quarter 6.50 6.01
Fourth Quarter 6.02 5.15
YEAR ENDED
DECEMBER 31, 2005
-----------------
HIGH ($) LOW ($)
-------- -------
First Quarter 6.25 5.10
Second Quarter 6.05 5.10
Third Quarter 6.10 5.68
Fourth Quarter 6.25 6.00
----------
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
Our transfer agent is Transfer On-Line, Inc., which 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.
8
RECENT SALES OF UNREGISTERED SECURITIES
The Company awarded 250 restricted shares of common stock to each of Errol
Glasser and Stanley Fleishman on July 1, 2005 and October 1, 2005 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
None
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 of our net operating loss would severely impact
our financial position and results of operations due to the significant amounts
of taxable income that have been, and may in the future be, offset by our net
operating loss carryforwards;
- If the Company consummates the Reverse Stock Split and Forward Stock
Split and becomes a privately held company, stockholders will own shares in a
private company and may not have the ability to sell their shares in the public
market. Furthermore, the Company would not file current, quarterly or annual
reports or be subject to the proxy requirements of the federal securities laws.
Stockholders may therefore find it more difficult to obtain information about
the Company and its financial performance.
- 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
9
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.
Our Stockholders' Equity at December 31, 2005 was $17,253,209 as compared
to $17,558,413 on December 31, 2004, a decrease of 1.7%.
RESULTS OF OPERATIONS
2005 COMPARED TO 2004
Net sales were $0 in both 2005 and 2004.
General and Administrative expenses decreased by $941,081 or 25.47% in
2005 as compared to 2004, primarily due to the write off of a Rustic Craft note
in 2004 of $1,182,626 entered into General and Administrative expenses as well
as a significant decrease of legal fees and investment banking fees related to
the MESC transaction.
Income from equity investment in partnerships increased in 2005 by
$1,617,949 or 133.1% as compared to 2004. Increased income from the sale of
excess replacement equipment by MESC Capital as well as an increase in operating
income was partially offset by an increase in expenses for the maintenance of
the Security Land property including significant repairs to the building that
were expensed in 2005.
Legal Settlement expense increased by $950,000 from $0 as a result of the
accrual for the Nuttall arbitration settlement.
Interest expense was $0 in 2005 and 2004 due to the extinguishment of all
long-term debt.
Income tax expense was $138,976 in 2005 and $41,495 in 2004 relating to
state income taxes. We do not expect any Federal tax due as a result of previous
period operating losses.
Net loss decreased by $1,446,295 or 63.9% in 2005 over 2004. The change
was due to a decrease in general and administrative expenses, an increase in
income from equity investment in partnerships, partially offset by the accrual
of the Nuttall arbitration settlement.
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.
10
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.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2005, Regency had current assets of $12,148,732 and
Shareholders' Equity of $17,253,209. On December 31, 2005, Regency had
$11,638,778 in cash and marketable securities, total assets of $19,438,831 and
total liabilities of $1,393,133.
During the preparation of the Company's 2004 federal corporation income
tax return, a dispute arose between the Company and Security Land regarding the
proper amount of taxable income to be allocated to the Company and reported to
the Internal Revenue Service (the "IRS") on Federal Form K-1. This dispute could
not be resolved and as such the Company reported a different amount of income on
its corporation income tax return than was reported to the IRS by Security. The
discrepancy may cause the Company's tax returns to be audited by the IRS. The
Company believes that the outcome of any IRS examination will not effect the
financial statements of the Company in this year as net operating losses are
available to offset any additional income not reported.
In December, 2001 the Aggregate inventory was sold to Iron Mountain at a
purchase price of $18,200,000, payable, with interest of 2.46%, in ninety-six
equal payments of principal and interest scheduled to commence in December,
2003. The intercompany gain on this transaction has been eliminated in the
consolidation process resulting in the Aggregate inventory being carried at its
historical cost. On February 9, 2005, in lieu of foreclosure, Iron Mountain
reconveyed the Aggregate inventory back to NRDC and the note was deemed
satisfied. In June 2005, the Company obtained an appraisal of the Aggregate
which concluded that the Aggregate has no value and as such a full valuation
allowance of $832,427 was taken in 2005. This impairment is included in the
General and Administrative caption of the accompanying Consolidated Statement of
Operations.
FILING OF GOING PRIVATE PROXY STATEMENT
On December 14, 2005, the Company filed with the SEC a preliminary
Schedule 13E-3 Transaction Statement with respect to a going private transaction
and a preliminary Schedule 14A Proxy Statement soliciting stockholders to vote
on amending the Company's certificate of incorporation to provide for a
1-for-100 reverse stock split (the "Reverse Stock Split") followed immediately
by a 50-for-1 forward stock split of the Company's common stock (the "Forward
Stock Split"), which would result in the reduction of the number of common
stockholders of record of the Company to fewer than 300. This will permit the
Company to discontinue the filing of annual and periodic reports and other
filings with the SEC. Once the Schedule 13E-3 Transaction Statement and Schedule
14A Proxy Statement are approved in a definitive form by the SEC, the Company
will mail copies to its stockholders. The Company currently intends to effect
the Reverse Stock Split and Forward Stock Split as soon as possible after such
distribution.
OFF BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off balance sheet arrangements.
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. 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.
11
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, 2005
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, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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, 49 Mr. Levy is Chairman of the Board of Directors,
President, and Chief Executive Officer of the Company.
Mr. Levy founded the predecessor to Hyde Park
Holdings, LLC in July 1986 and has since served as its
Chairman. Hyde Park Holdings, LLC is an investor in
middle market businesses. Mr. Levy serves as an
officer or director of many companies in which Hyde
Park Holdings, LLC or its affiliates invests.
Presently, these companies include: Ozburn-Hessey
Logistics LLC, a national logistics services company,
of which Mr. Levy is a director; Derby Industries LLC,
a sub-assembly business to the appliance, food and
transportation industries, of which Mr. Levy is
Chairman; PFI Resource Management LP, an investor in
the Private Funding Initiative program in the United
Kingdom, of which Mr. Levy is general partner; Parking
Company of America Airports LLC, an owner and operator
of airport parking garages, of which Mr. Levy is a
director; Warehouse Associates L.P., a provider of
warehouse and logistics services, of which Mr. Levy is
Chairman. Mr. Levy is also the chairman of the board
and chief executive officer of Rand Logistics, Inc. an
OTC bulletin board company which provides shipping and
transportation services on the Great Lakes. In
addition, from March 1997 to January 2001, Mr. Levy
served as Chairman of Detroit and Canada Tunnel
Corporation, a company which operates the toll tunnel
between Detroit, Michigan and Windsor, Ontario, and
from August 1993 until May 1999, Mr. Levy served as
Chief Executive Officer of High Voltage Engineering
12
Corporation, a diversified industrial and
manufacturing company. Mr. Levy received a Bachelor of
Commerce degree and a Bachelor of Accountancy degree
from the University of Witwatersrand in Johannesburg,
South Africa. He is qualified as a Chartered
Accountant (South Africa). Mr. Levy received a Master
of Business Administration degree from Harvard
University and graduated as a Baker Scholar.
Neil N. Hasson, 40 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.
Stanley Fleishman, 54 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, 52 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, 51 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.
There are no family relationships among any of the directors or executive
officers 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 2005, was subject to the
reporting requirements of Section 16(a) with respect to Regency failed to meet
such requirements on a timely basis except that Laurence S. Levy and Neil Hasson
each filed a late Statement of Changes of Beneficial Ownership on Form 4 with
respect to options granted on June 14, 2005.
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
The Audit Committee has been established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, and consists of
Errol Glasser and Stanley Fleishman. Each of the current members of the
Company's Audit Committee is an "independent director" as determined pursuant to
Rule 4200(a)(15) of the National Association of Securities Dealers' (NASD)
listing standards.
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
13
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 named executive officers.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
---------------------------------------------------------------------------------------------------------------------------------
OTHER RESTRICTED
ANNUAL SECURITIES STOCK ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING OPTIONS AWARD(S) COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($)
---------------------------------------------------------------------------------------------------------------------------------
Laurence S. Levy
President/CEO 2005 150,000 0 0 50,000 0 0
2004 150,000 0 0 50,000 0 0
2003 181,250 0 0 75,000 0 0
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Neil N. Hasson
CFO 2005 50,000 0 0 50,000 0 0
2004 50,000 0 0 50,000 0 0
2003 56,250 0 0 75,000 0 0
---------------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS EXERCISE MARKET PRICE
SECURITIES GRANTED TO PRICE PER ON DATE OF
UNDERLYING EMPLOYEES IN SHARE GRANT EXPIRATION
NAME OPTIONS GRANTED (#) FISCAL YEAR ($/SH) ($) DATE
----------------- ------------------ --------------- ------------ ------------ ------------
--------------------------------------------------------------------------------------------------------------------------------
Laurence S. Levy 50,000 50% 1.58 5.27 6/22/2005
--------------------------------------------------------------------------------------------------------------------------------
Neil N. Hasson 50,000 50% 1.58 5.27 6/22/2005
--------------------------------------------------------------------------------------------------------------------------------
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 the following exercises of stock options during
the fiscal year ending December 31, 2005 and the value at December 31, 2005 of
unexercised stock options held by the named executive officers.
14
--------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES UNDERLYING
ACQUIRED ON VALUE UNEXERCISED OPTIONS/SARS AT VALUE OF UNEXERCISED IN-THE-MONEY
EXERCISE REALIZED FY-END (#) OPTIONS/SARS AT FY-END($)
NAME (#) (S) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------------- ---------------------------------
--------------------------------------------------------------------------------------------------------------------------
Laurence
S. Levy 50,000 196,000 125,000/O 670,500/0
--------------------------------------------------------------------------------------------------------------------------
Neil N.
Hasson 50,000 196,000 125,000/0 670,500/0
--------------------------------------------------------------------------------------------------------------------------
INCENTIVE STOCK OPTION PLANS
Non Qualified Stock Options.
On June 14, 2005, Messrs. Levy and Hasson were each granted options to
purchase 50,000 shares of our common stock at an exercise price of $1.58 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 during the
fiscal year ended December 31, 2005. On June 14, 2005, Messrs. Levy and Hasson
were each granted options to purchase 50,000 shares of our common stock at an
exercise price of $1.58 per share under the 2003 Stock Incentive Plan, as
amended. On June 22, 2005 Messrs. Levy and Hasson elected to exercise the
options received on June 14, 2005.
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 $1.35 per share. Those options were issued in April 2003
pursuant to the Company's 2003 Stock Incentive Plan, as amended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information.
15
-----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
-----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES REMAINING
ISSUED UPON EXCERCISE OF WEIGHTED-AVERAGE EXCERCISE AVAILABLE FOR ISSUANCE UNDER
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS WARRANTS AND RIGHTS (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY (#) ($) IN COLUMN (a))
------------- -------------------------- ----------------------------- -------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 12,000 0.90 N/A
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders (1) 290,000 1.63 110,000
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Total 302,000 1.60 110,000
-----------------------------------------------------------------------------------------------------------------------------------
----------
(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.
Security Ownership of Certain Beneficial Owners.
The following table sets forth information regarding ownership of
outstanding shares of our common stock as of May 12, 2006 by those individuals
or groups who have advised us that they own more than five percent (5%) of such
outstanding shares.
---------------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF
BENEFICIAL OWNER AMOUNT BENEFICIALLY OWNED PERCENT OF CLASS
-------------------- --------------------------- ----------------
---------------------------------------------------------------------------------------------------------
Royalty Holdings, LLC and Royalty
Management, Inc.
450 Park Avenue
New York, New York 10022 1,823,738 (1) 58.40%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Raffles Associates, L.P.
450 Seventh Avenue
New York, New York 10123 173,067 (2) 5.54%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Laurence S. Levy (1)
c/o Hyde Park Holdings, LLC
450 Park Avenue
New York, New York 10022 2,048,738 (1)(3) 62.11%
---------------------------------------------------------------------------------------------------------
----------
(1) Based on information contained in the Statement on Schedule 13D filed by
such entities on June 24, 2005.
(2) Based on information contained in the amended Statement on Schedule 13G
filed by such entity on January 26, 2006.
(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, (ii) 175,000 shares underlying currently
exercisable options granted to Mr. Levy under the Company's 2003 Stock
Incentive Plan, as amended and (iii) 50,000 shares owned directly.
16
The following table sets forth certain information as of May 12, 2006 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 AMOUNT AND NATURE OF BENEFICIAL
BENEFICIAL OWNER OWNER PERCENT OF CLASS
------------------- ------------------------------- ----------------
----------------------------------------------------------------------------------------------------
Laurence S. Levy (1) 2,048,738 (2) 62.11%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Neil N. Hasson (1) 175,000 (3) 5.39%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Errol Glasser
280 Madison Avenue
Suite 600
New York, New York 10016 24,750 (4) Less than 1%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Stanley Fleishman
c/o Jetro, 15-24 132nd Street
College Point, New York 10123 20,750 (4) Less than 1%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
All current Directors and
Executive Officers as a group 2,269,238 65.62%
----------------------------------------------------------------------------------------------------
----------
(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, (ii) 175,000 shares underlying currently
exercisable options granted to Mr. Levy under the Company's 2003 Stock
Incentive Plan, as amended and (iii) 50,000 shares owned directly.
(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 and 50,000 shares owned directly.
(4) Includes 17,500 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.
(5) Based on information contained in the amended Statement on Schedule 13G
filed by such entity on January 25, 2006.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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
The following documents are filed as part of this report:
17
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-19
Index of 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).
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) *
18
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). *
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 (filed as Exhibit
10.9 to the Company's Annual Report on Form 10-KSB
filed on April 14, 2004, and incorporated herein by
reference). *
10.11 Stock Option Agreement, dated October 1, 2003 between
the Company and Stanley Fleishman (filed as Exhibit
10.10 to the Company's Annual Report on Form 10-KSB
filed on April 14, 2004, and incorporated herein by
reference). *
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-QSB
filed on August 23, 2004, and incorporated herein by
reference). *
19
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-QSB
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).
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). *
20
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). *
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).
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).
21
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).
10.42 Stock Option Agreement, dated as of June 14, 2005 between the
Company and Laurence S. Levy (incorporated by reference from
an Amendment to Schedule 13D filed on June 24, 2005). *
10.43 Stock Option Agreement, dated as of June 14, 2005 between the
Company and Neil Hasson (incorporated by reference from an
Amendment to Schedule 13D filed on June 24, 2005). *
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed or to be billed by Rosenberg Rich Baker
Berman & Company for each of the last two fiscal years for professional services
rendered for the audit of the Company's annual financial statements, review of
financial statements included in the Company's quarterly reports on Form 10-QSB
and services that were provided in connection with statutory and regulatory
filings or engagements were $56,117 for the fiscal year ended December 31, 2005
and $58,786 for the fiscal year ended December 31, 2004.
22
Audit-Related Fees. The aggregate fees billed by Rosenberg Rich Baker Berman &
Company for each of the last two fiscal years for assurance and related services
that were reasonably related to the performance of the audit or review of the
Company's financial statements were $0 for the fiscal year ended December 31,
2005 and $0 for the fiscal year ended December 31, 2004
Tax Fees. The aggregate fees billed by Rosenberg Rich Baker Berman & Company in
each of the last two fiscal years for professional services rendered for tax
compliance, tax advice and tax planning were $35,018 for the fiscal year ended
December 31, 2005 and $35,000 for the fiscal year ended December 31, 2004.
All Other Fees. The aggregate fees billed by Rosenberg Rich Baker Berman &
Company in each of the last two fiscal years for products and services other
than those reported in the three prior categories were $0 for the fiscal year
ended December 31, 2005 and $0 for the fiscal year ended December 31, 2004.
Policy on Pre-Approval of Services Provided by Rosenberg Rich Baker Berman &
Company
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the
engagement of Rosenberg Rich Baker Berman & Company are subject to the specific
pre-approval of the Audit Committee. All audit and permitted non-audit services
to be performed by Rosenberg Rich Baker Berman & Company require pre-approval by
the Audit Committee. The procedures require all proposed engagements of
Rosenberg Rich Baker Berman & Company for services of any kind to be submitted
for approval to the Audit Committee prior to the beginning of any services. The
Company's audit and tax services proposed for 2005 along with the proposed fees
for such services were reviewed and approved by the Company's Audit Committee.
23
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 15, 2006 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President and
Chief Executive Officer
May 15, 2006 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 15, 2006 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President,
Chief Executive Officer and Director
May 15, 2006 By: /s/ Neil N. Hasson
Date ------------------------------------
Neil N. Hasson, Chief Financial
Officer and Director
May 15, 2006 By: /s/ Errol Glasser
Date ------------------------------------
Errol Glasser, Director
May 15, 2006 By: /s/ Stanley Fleishman
Date ------------------------------------
Stanley Fleishman, Director
24
INDEX TO EXHIBITS
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-19
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 (filed as Exhibit
10.9 to the Company's Annual Report on Form 10-KSB
filed on April 14, 2004, and incorporated herein by
reference). *
10.11 Stock Option Agreement, dated October 1, 2003 between
the Company and Stanley Fleishman (filed as Exhibit
10.10 to the Company's Annual Report on Form 10-KSB
filed on April 14, 2004, and incorporated herein by
reference). *
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-QSB
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-QSB
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).
10.42 Stock Option Agreement, dated as of June 14, 2005
between the Company and Laurence S. Levy (incorporated
by reference from an Amendment to Schedule 13D filed on
June 24, 2005). *
10.43 Stock Option Agreement, dated as of June 14, 2005
between the Company and Neil Hasson (incorporated by
reference from an Amendment to Schedule 13D filed on
June 24, 2005). *
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, 2005 and 2004
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Report of Independent Registered Public Accounting Firm F-1
Financial Statements
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-19
Report of Independent Registered Public 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, 2005 and 2004 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the years ended December 31, 2005 and 2004. 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, 2005 and 2004 and the
results of its consolidated operations, changes in shareholder's equity and cash
flows for the years ended December 31, 2005 and 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
April 25, 2006
F-1
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
-------------------------------------
2005 2004
---------------- ----------------
Assets
Current Assets
Cash and cash equivalents $ 5,646,788 $ 1,469,353
Marketable securities 5,991,990 8,992,257
Accrued interest receivable 499,233 347,242
Other current assets 10,721 41,896
---------------- ----------------
Total Current Assets 12,148,732 10,850,748
Property, plant and equipment, net -- 1,899
Investment in partnerships 7,288,799 7,754,686
Other Assets
Aggregate inventory -- 832,427
Deferred costs -- 250,000
Other 1,300 1,300
---------------- ----------------
Total Other Assets 1,300 1,083,727
---------------- ----------------
Total Assets $ 19,438,831 $ 19,691,060
================ ================
See notes to the consolidated financial statements. F-2
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
-------------------------------
2005 2004
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 1,393,133 $ 690,827
------------ ------------
Total Current Liabilities 1,393,133 690,827
Deferred credit 792,489 1,441,820
Shareholders' equity
Serial preferred stock not subject to mandatory redemption
605,291 shares issued and outstanding (Maximum liquidation
preference $24,849,410) 1,052,988 1,052,988
Common stock, par value $.01; 8,000,000 shares authorized and
3,121,412 in 2005 and 3,020,412 in 2004 outstanding 31,214 30,204
Additional paid-in capital 8,737,321 8,182,631
Readjustment resulting from quasi-reorganization at December 1987 (1,670,596) (1,670,596)
Retained earnings 11,880,077 12,698,821
Note receivable - sale of stock (2,440,000) (2,440,000)
Treasury stock, 55,000 and 47,000 shares in 2005 and 2004,
respectively (337,795) (295,635)
------------ ------------
Total Shareholders' Equity 17,253,209 17,558,413
------------ ------------
$ 19,438,831 $ 19,691,060
============ ============
See notes to the consolidated financial statements. F-3
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Operations
December 31,
----------------------------
2005 2004
----------- -----------
Net Sales $ -- $ --
----------- -----------
Costs and expenses
General and Administrative expenses (2,768,976) (3,710,057)
----------- -----------
Loss from operations (2,768,976) (3,710,057)
----------- -----------
Other income (expense)
Income from equity investment in partnerships 2,833,447 1,215,498
Expiration of option (250,000) --
Legal settlement (950,000) -0-
Rental income -- 4,599
Interest and dividend income 447,256 261,948
Unrealized investment gains 8,505 4,468
----------- -----------
Net income (loss) before income taxes (679,768) (2,223,544)
Income tax (expense) benefit (138,976) (41,495)
----------- -----------
Net Income (Loss) $ (818,744) $(2,265,039)
=========== ===========
Net income (loss) per common share:
Basic and diluted
Net income (loss) per common share $ (0.27) $ (0.75)
----------- -----------
Weighted average number of shares 3,051,037 3,019,317
----------- -----------
See notes to the consolidated financial statements. F-4
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
Years Ended December 31, 2005 and 2004
Readjustment
Preferred Stock Common Stock Additional Resulting
--------------------- ---------------------- Paid in from Quasi-
Shares Amount Shares Amount Capital Reorganization
------ ------ ------ ------ ----------- --------------
Balance - January 1, 2004 605,291 $ 1,052,988 3,018,412 $ 37,733 $ 8,180,545 $(1,670,596)
Retirement of treasury shares (10,694) (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)
======= =========== ========= =========== =========== ===========
Exercise of stock options -- -- 100,000 1,000 157,000 --
Stock options granted to officers -- -- -- -- 392,000 --
Common stock issued to directors -- -- 1,000 10 5,690 --
Purchase treasury shares -- -- -- -- -- --
Net income -- -- -- -- -- --
------- ----------- --------- ----------- ----------- -----------
Balance - December 31, 2005 605,291 $ 1,052,988 3,121,412 $ 31,214 $ 8,737,321 $(1,670,596)
======= =========== ========= =========== =========== ===========
Note Treasury Stock Total
Retained Receivable ------------------------ Stockholders'
Earnings Sale of Stock Shares Amount Equity
-------- ------------- ------ ------ -------------
Balance - January 1, 2004 $ 14,963,860 $ (2,440,000) 1,160,233 $ (18,243) $ 20,106,287
Retirement of treasury shares -- 18,243 (1,160,233) 18,243 --
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 12,698,821 (2,440,000) 47,000 (295,635) 17,558,413
============ ============ ====== ============ ============
Exercise of stock options -- -- -- -- 158,000
Stock options granted to officers -- -- -- -- 392,000
Common stock issued to directors -- -- -- -- 5,700
Purchase treasury shares -- -- 8,000 (42,160) (42,160)
Net income (818,744) -- -- -- (818,744)
------------ ------------ ------ ------------ ------------
Balance - December 31, 2005 $ 11,880,077 $ (2,440,000) 55,000 $ (337,795) $ 17,253,209
============ ============ ====== ============ ============
See notes to the consolidated financial statements. F-5
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------
2005 2004
------------- -------------
Cash flows from operating activities
Net loss $ (818,744) $ (2,265,039)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Income from equity investment in partnerships (2,833,447) (1,215,498)
Impairment of notes receivable -- 1,127,708
Stock-based compensation 397,700 --
Depreciation and amortization 1,899 4,658
Issuance of common stock in lieu of cash -- 12,800
Unrealized gain on marketable securities -- (104,244)
Impairment of aggregate inventory 832,427 --
Expiration of option 250,000 --
Changes in assets and liabilities
Increase in accounts receivable -- 3,077
Increase in interest receivable (151,991) (47,918)
Decrease in other current assets 31,178 22,399
Decrease in accounts payable and accrued expenses 702,306 (16,047)
------------- -------------
Net cash used in operating activities (1,588,672) (2,478,104)
------------- -------------
Cash flows from investing activities
Cash investments in partnerships -- (7,300,145)
Payments received on notes receivable -- 1,563
Distribution of earnings from partnership 2,650,000 1,000,000
Purchases of marketable securities (113,999,733) (129,892,989)
Proceeds from sales of marketable securities 117,000,000 139,500,000
Net proceeds from the sale of property and equipment -- 483,415
------------- -------------
Net cash provided by investing activities 5,650,267 3,791,844
------------- -------------
Cash flows from financing activities
Proceeds from the exercise of stock options 158,000 --
Purchase of treasury stock (42,160) (295,635)
------------- -------------
Net cash provided by (used in) financing activities 115,840 (295,635)
------------- -------------
Net increase in cash and cash equivalents $ 4,177,435 $ 1,018,105
Cash and cash equivalents - beginning 1,469,353 451,248
------------- -------------
Cash and cash equivalents - ending $ 5,646,788 $ 1,469,353
============= =============
See notes to the consolidated financial statements. F-6
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
------------------------
2005 2004
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ -- $ --
------- -------
Income taxes $25,976 $41,495
------- -------
Supplemental disclosures of non-cash investing and financing activities:
During the year ended December 31, 2004, the Company 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.
See notes to the consolidated financial statements. F-7
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of Regency Affiliates, Inc. (the "Company"), its
wholly owned subsidiary, Regency Power Corporation since April 30, 2004,
date of inception, its 75% owned subsidiary, Iron Mountain Resources, Inc.
and its 80% owned subsidiary, National Resource Development Corporation
("NRDC"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Earnings Per Share - Basic earnings per share is 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 all stock options outstanding that
are "in the money".
Stock Based Compensation - The Company accounts for stock issued for
services based on 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 $5,700 in 2005 and
$12,800 in 2004. The underlying fair value of the common shares amounted
to $5.70 and $6.40 per share, respectively.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock Based Compensation - Transition and
Disclosure", the Company accounts for stock-based compensation to
employees using the intrinsic value method as prescribed under Accounting
Principles Board Opinion No.25, "Accounting for Stock Issued to Employees"
and the related interpretations; and provides the disclosure only
provisions of SFAS No. 148.
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.
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.
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, 2005 and 2004:
2005 2004
------- -------
Building and land $ -- $ --
Machinery and equipment 43,708 43,708
------- -------
43,708 43,708
Accumulated depreciation 43,708 41,809
------- -------
$ -- $ 1,899
======= =======
Depreciation expense for the years ended December 31, 2005 and 2004 was
$1,899 and $4,658, respectively.
F-8
Aggregate Inventory - Inventory held by a subsidiary, NRDC,, 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. The purchase price
was $18,200,000 and is payable, with interest of 2.46%, in ninety-six
equal payments of principal and interest scheduled to commence in
December, 2003. The intercompany gain on this transaction has been
eliminated in the consolidation process resulting in the aggregate
inventory being carried at its historical cost. On February 9, 2005, in
lieu of foreclosure, Iron Mountain Resources reconveyed the aggregate
inventory back to NRDC and the note was deemed satisfied. Based upon a
subsequent fair market value appraisal, the aggregate inventory was deemed
to be worthless and as such a full valuation allowance of $832,427 was
taken in 2005. This impairment is included in the General and
Administrative caption of the accompanying Consolidated Statement of
Operations.
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.
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.
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.
Note 2. Marketable Securities
The cost and fair value of the Company's investments in marketable
securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Trading securities: Cost Gains Losses Value
---------- ---------- ---------- ----------
As of December 31, 2004:
9,000,000 US Treasury bills $8,987,789 $ 4,468 $ -- $8,992,257
As of December 31, 2005:
6,000,000 US Treasury bills $5,983,485 $ 8,505 $ -- $5,991,990
F-9
Note 3. Investment in Security Land and Development Company Limited Partnership
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.
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, 2005 and 2004 the Company's income from
its equity investment in Security was $649,333 and $360,225, 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.
The Company accounts for the Investment in Partnerships using the equity
method, whereby the carrying value of these investments increased or
decreased by the Company's allocable share of book income or loss. The
cumulative total amount of distributions made in excess of the Company's
partnership basis through December 31, 2005 was $792,489, which is
recorded as a deferred credit on the accompanying financial statements.
Summarized financial information for Security is as follows:
F-10
2005 2004
------------ ------------
Balance Sheet Data
Cash and receivables $ 1,214,068 $ 1,227,837
Restricted cash 1,940,300 2,744,101
Real estate, net 35,347,723 38,600,829
Deferred charges, net 8,771,067 9,472,752
Other assets 307,620 414,136
------------ ------------
Total Assets 47,580,778 52,459,655
============ ============
Accounts payable and accrued expenses 347,120 650,690
Project note payable 87,631,474 91,904,929
Other liabilities 180,482 177,453
------------ ------------
Total Liabilities 88,159,076 92,733,072
============ ============
Partners' capital:
Regency Affiliates, Inc. 143,360 432,997
Other partners (40,721,658) (40,706,414)
------------ ------------
Total Partners' Capital (40,578,298) (40,273,417)
------------ ------------
Total Liabilities and Partners' Capital 47,580,778 52,459,655
============ ============
Statement of Operations Data
Revenues $ 13,095,605 $ 12,943,455
Expenses 9,130,411 9,282,554
------------ ------------
Net operating income 3,965,194 3,660,901
Other expenses (3,281,685) (3,281,685)
------------ ------------
Net income $ 683,509 $ 379,216
============ ============
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 $1,708 in 2005 and
$948 in 2004 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 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
F-11
Membership Interest Purchase Agreement were negotiated 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.
The Company accounts for the Investment in Partnerships using the equity
method, whereby the carrying value of these investments is increased or
decreased by the Company's allocable share of book income or loss. The
Company recognized income of $2,182,406 in 2005 and $854,325 in 2004 from
this investment.
Summarized financial information for MESC Capital LLC is as follows:
2005 2004
------------ ------------
Balance Sheet Data
Cash and cash equivalents $ 2,096,656 $ 1,658,231
Restricted cash 1,640,427 1,276,851
Trade receivable 2,542,298 2,480,957
Current portion of net investment in direct financing lease 1,120,066 983,101
Insurance and other receivables 101,372 2,606,195
Inventory 3,296,835 4,695,436
Other assets 213,634 123,545
------------ ------------
Total current assets 11,011,288 13,824,316
------------ ------------
Debt issuance costs and derivative instruments, net 1,703,784 2,045,974
General plant, net 108,486 185,572
Investment in direct financing lease, net current portion 24,313,554 24,161,125
------------ ------------
Total assets 37,137,112 40,216,987
============ ============
Accounts payable 1,450,040 2,690,985
Accrued liabilities 451,197 446,047
Current portion of long term debt 1,085,850 917,700
------------ ------------
Total current liabilities 2,987,087 4,054,732
Current portion of long term debt 27,182,950 28,268,800
------------ ------------
Total liabilities 30,170,037 32,323,532
Members' equity 6,967,075 7,893,455
------------ ------------
Total liabilities and members' equity 37,137,112 40,216,987
============ ============
Statement of Operations Data
Revenues $ 13,972,688 $ 9,231,830
Expenses 10,910,557 6,934,111
------------ ------------
Net operating income 3,062,131 2,297,719
Other income and expense 1,302,681 (589,070)
------------ ------------
Net income $ 4,364,812 $ 1,708,649
============ ============
F-12
Note 5. 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
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
==========
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.
In December 2005, a stipulation of settlement was entered into in which
Regency agreed to accept a total of $125,000 payable over three years in
full settlement of the notes detailed above. No gain or income was
recognized as a result of this settlement due to the uncertainty that the
amount will actually be realized. Such recovery will be recognized upon
receipt.
Note 6. Serial Preferred Stock
At December 31, 2005 and 2004, the Company had 2,000,000 of authorized
shares of $.10 par value serial preferred stock. Serial preferred stock at
December 31, 2005 and 2004, all of which is convertible (except Series C,
which is not convertible) and cumulative, consists of:
Shares Value
--------------------------- -------------------------------------------------
2005 2004
----------- ------------
Designated Outstanding Carrying Liquidation Liquidation
---------- ----------- -------- ----------- ------------
Series C, $100 stated
value, cumulative 210,000 208,850 $ 229,136 $ 20,885,000 $ 20,885,000
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 25,694 256,940 256,940 256,940
------- ------- ------------ -------------- --------------
606,747 605,291 $ 1,052,988 $ 24,849,410 $ 24,849,410
======= ======= ============ ============== ==============
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
F-13
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.
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 was recorded as a reduction in paid-in capital
in the accompanying financial statements.
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" 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. The Company's bylaws provide for
eight members on its Board of Directors.
Note 7. Stock Option - Statesman
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,
F-14
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.
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. This option expired in 2005 and was therefore
recorded as an expense.
Note 8. Stock Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for options. As such, the disclosure only
provisions of the Statement of Financial Accounting Standard (SFAS) No.
148, "Accounting for Stock Based Compensation - Transition and Disclosure"
are used to report the following information.
The fair value of the Company's stock-based compensation below was
estimated using the Black-Scholes option pricing model which requires
highly subjective assumptions including the expected stock price
volatility. The fair value of the Company's stock options was estimated
using the following assumptions: no expected dividends, risk free interest
rate of 3.5% expected average life of approximately 10 years and an
expected stock price volatility of 90%. The weighted average fair value of
options granted was $5.20 during 2005 and $6.08 during 2004.
Had compensation cost for the options been determined based on the fair
value at the grant dates for those options, stock based compensation, net
loss and net loss per common share basic and diluted would have been as
follows for the years ended December 31, 2005 and 2004:
Year Ended Year Ended
December 31, December 31,
2005 2004
------------ ------------
Net income (loss), as reported $ 131,256 $(2,265,039)
Add: Stock-based compensation included 397,700 12,800
Less: Stock-based compensation - FMV (525,700) (608,100)
----------- -----------
Pro forma net income (loss) $ 3,256 $(2,860,339)
=========== ===========
Net loss per share
As reported $ .04 $ (.75)
=========== ===========
Pro forma $ .00 $ (.95)
=========== ===========
F-15
The following is a summary of the status of the Company's options for the
year ended December 31, 2005:
Exercise Average Average
Price Exercise Contract
Range Options Price Life
------------ ------- -------- --------------
Outstanding at beginning of year $ .40 - 2.40 302,000 $ 2.12 10
Less than one
Issued 1.58 100,000 1.58 year
Less than one
Exercised, forfeited or expired 1.58 (100,000) 1.58 year
------------ ------- -------- --------------
Outstanding at end of period $ .40 - 2.40 302,000 $ 2.12 10
============ ======= ======== ==============
Note 9. 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, 2005 and 2004, the Company's net deferred tax asset,
utilizing a 34% effective tax rate, respectively, consists of:
2005 2004
----------- -----------
Deferred tax assets:
Net operating loss carry forward 2,567,000 1,485,884
Valuation allowance (2,567,000) (1,485,884)
----------- -----------
Subtotal $ -- $ --
=========== ===========
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 $6,400,000 expiring through
2020. These losses can be carried forward to offset future taxable income
and, if not utilized, will expire in varying amount. 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, 2005 and 2004, the tax effect of net
operating loss carryforwards reduced the current provision for regular
Federal income taxes by approximately $-0- and $-0-, respectively. At
December 31, 2005 and 2004, the Company has provided $138,976 and $41,495,
respectively, for taxes, which relate to state income taxes.
F-16
The provision (benefit) for income taxes is as follows
Year Ended December 31,
----------------------------
2005 2004
-------- --------
Current $138,976 $ 41,495
Deferred -- --
-------- --------
$138,976 $ 41,495
======== ========
The difference between income tax benefits in the financial statements and
the tax benefit computed at the applicable statutory rates of 34% at
December 31, 2005 is as follows:
2005 2004
----- -----
Federal (expense) benefit at the statutory rate (34.0)% 34.0%
State tax expense (51.4) 1.9
Benefit of net operating loss carry forward 34.0 -0-
Valuation Allowance -0- (34.0)
----- -----
Effective tax rate of income tax (expense) benefit 51.4% 1.9%
----- -----
Note 10. Employment Agreements
On October 16, 2002, the Company entered into Employment Agreements with
Mr. Levy and Mr. Hasson, with terms as follows:
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 11. Related Party Transactions
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.
F-17
Note 12. 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.
(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.
(iii) On January 20, 2004, a purported derivative and class action
lawsuit 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., (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 "Delaware
Action"). The complaint alleged various breaches of fiduciary duties
by the former directors and Statesman, and that Royalty and its
affiliates knowingly participated in certain of the alleged
breaches. In November 2004 the Court dismissed all but one claim
alleged in the complaint. The Company was not a defendant with
respect to the sole surviving claim, which related to the 2001 sale
of a cache of previously quarried and piled aggregate rock by NRDC
to Iron Mountain (the "Aggregate Sale"). On October 16, 2005, the
Court dismissed plaintiffs' sole remaining claim for failure to
state a claim for relief. The dismissal was without prejudice and
the plaintiffs were given leave to file an amended complaint
attacking the Aggregate Sale.
On January 30, 2006, plaintiffs filed an amended complaint
challenging the Aggregate Sale and alleging that the Aggregate Sale
negatively impacted the Company's common stockholders. The Company
is not a defendant with respect to this claim. Plaintiffs seek
damages in excess of $5,400,000 with respect to the claim related to
the Aggregate Sale. Defendants have moved to dismiss the amended
complaint but briefing on the motion has not been completed. The
Company has been advised that the defendants intend to vigorously
defend the claim asserted against them in the Delaware Action.
The defendants in the Delaware 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, the Company's
insurance carrier contends that none of the claims contained in the
Delaware Action are covered by insurance on the basis of the
"insured vs. insured" exclusion since one of the plaintiffs, Donald
D. Graham, was previously a director of the Company.
(iv) On May 10, 2004, Gary Nuttall, a former President of the
Company, commenced an arbitration against the Company with respect
to certain claims allegedly arising under his 1995 Employment
Agreement with the Company. He is seeking severance and all other
compensation and benefits due him under the 1995 Employment
Agreement in an amount in excess of approximately $1,650,000
($1,400,000 of which is a financing bonus), 466,667 unrestricted
shares of the Company (pre-split), options to purchase additional
stock of the Company, punitive damages, interest, fees and costs
associated with the arbitration. On May 4, 2006, the parties settled
the disputes between them without admitting any liability, fault or
wrongdoing, and entered into a settlement agreement providing for,
among other things, payment of $950,000 by the Company to Mr.
Nuttall and the purchase by the Company of the 29,134 shares of
Company common stock owned by Mr. Nuttall, at a purchase price of
$6.50 per share. The $950,000 settlement is included in other income
and expense on the Statement of Operations and included in accounts
payable and accrued expenses on the balance sheet.
(v) 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.
F-18
(vi) 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.
(vii) The Company does not expect to pay dividends in the
foreseeable future.
(viii) 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 13. 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:
2006 $18,511
2007 9,481
-------
Total $27,992
=======
Rent expense was $17,630 and $16,790 for the years ended December 31, 2005
and 2004, respectively.
Note 14. Filing of Going Private Proxy Statement
On December 14, 2005, the Company filed with the SEC a preliminary
Schedule 13E-3 Transaction Statement with respect to a going private
transaction and a preliminary Schedule 14A Proxy Statement soliciting
stockholders to vote on amending the Company's certificate of
incorporation to provide for a 1-for-100 reverse stock split (the "Reverse
Stock Split") followed immediately by a 50-for-1 forward stock split of
the Company's common stock (the "Forward Stock Split"), which would result
in the reduction of the number of common stockholders of record of the
Company to fewer than 300. This will permit the Company to discontinue the
filing of annual and periodic reports and other filings with the SEC. Once
the Schedule 13E-3 Transaction Statement and Schedule 14A Proxy Statement
are approved in a definitive form by the SEC, the Company will mail copies
to its stockholders. The Company currently intends to effect the Reverse
Stock Split and Forward Stock Split as soon as possible after such
distribution.
Note 15. New Accounting Standards
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share Based Payments", an amendment of FAS No. 123
"Accounting for Stock Based Compensation". FAS 123R eliminates the ability
to account for share based payments using Accounting Principles Board
Opinion No.25, "Accounting for Stock Issued to Employees", and instead
requires companies to recognize compensation expense using a fair-value
based method. The expense will be measured as the fair value of the award
on its grant date and recorded over the applicable service period. The
requirements of FAS 123R are effective for the Company beginning in 2006.
F-19