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, 2006
|_| 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 June 15, 2007 was $7,826,207.
The number of shares outstanding of Common Stock of the Registrant as of June
15, 2007 was 3,463,544.
Transitional Small Business Disclosure: Yes |_| No |X|
Documents incorporated by reference: None
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS........................................... 3
ITEM 2. DESCRIPTION OF PROPERTY........................................... 9
ITEM 3. LEGAL PROCEEDINGS................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES........................................................ 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION......................................................... 11
ITEM 7. FINANCIAL STATEMENTS.............................................. 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................... 13
ITEM 8A. CONTROLS AND PROCEDURES........................................... 13
ITEM 8B. OTHER INFORMATION................................................. 14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT...................................................... 14
ITEM 10. EXECUTIVE COMPENSATION............................................ 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS........................ 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE............................................. 20
ITEM 13. EXHIBITS.......................................................... 20
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................ 25
SIGNATURES
EXHIBIT INDEX
2
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. ("we", "us", "our", "Regency" or the "Company") 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 (the "SEC"), 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 were required to
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. The loans, redemption, and other
October 2002 transactions described above are collectively referred to herein as
the "Restructuring Transactions."
On April 30, 2004, the Company through a newly-formed, wholly-owned
subsidiary called Regency Power Corporation, a Delaware corporation ("Regency
Power"), acquired a 50% membership interest in MESC Capital, LLC, a Delaware
limited liability company ("MESC Capital"), from DTE Mobile, LLC ("DTE Mobile"),
pursuant to an Assignment and Assumption Agreement dated as of April 30, 2004.
The purchase price for the 50% membership interest was $3,000,000 and was funded
from the Company's working capital. DTE Mobile, which is owned by an unregulated
subsidiary of a large energy company that has significant experience in owning,
managing and operating electric generation and on-site energy facilities, owns
the other 50% membership interest in MESC Capital.
MESC Capital was formed to acquire all of the membership interests in
Mobile Energy Services Company, LLC, an Alabama limited liability company
("Mobile Energy"). Mobile Energy owns an on-site energy facility that supplies
steam and electricity to a Kimberly-Clark tissue mill in Mobile, Alabama. The
acquisition of Mobile Energy was also consummated on April 30, 2004 pursuant to
a Membership Interest Purchase Agreement, dated as of January 30, 2004, between
MESC Capital and Mobile Energy Services Holdings, Inc. The purchase price under
the Membership Interest Purchase Agreement, after certain pre-closing
adjustments, was $33,600,000. The purchase price and working capital reserves
were funded by the issuance of $28,500,000 of non-recourse debt, a total equity
contribution by MESC Capital of $8,600,290, $4,300,145 of which was funded by
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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
financing is non-recourse for the Company.
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.
The Company and general partner of Security are in disagreement as to the
manner in which taxable income of Security is to be allocated pursuant to the
partnership agreement and applicable law, and for 2004 and 2005, the Company
reported taxable income (loss) from Security in a manner it believes is proper,
but which was different than the manner reported by Security.
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Rustic Crafts International, Inc.
Rustic Crafts was until September 30, 2002 a manufacturer of decorative
wood and cast marble fireplaces, mantels, shelves, fireplace accessories and
other home furnishings. On September 30, 2002, Rustic Crafts sold all of its
operating assets to RCI for $1,307,000 comprised of (i) a $707,000 note bearing
interest at 5% per annum requiring monthly payments of principal and interest of
$13,342 and due September 30, 2007, (ii) a $400,000 note which, as restructured
in August 2003; bears interest at 7% per annum and requires monthly payments of
principal and interest of $5,032 with a balloon payment due September 8, 2006;
and (iii) $200,000 cash (the proceeds of which were from a $250,000 loan from
Regency to the buyer which was satisfied in January 2003). Additionally, the
buyer entered into a three-year lease for the land and building in Scranton, PA
owned by Rustic Crafts, with rental payments of $6,500 per month. Payments on
the 5% note are contingent upon the quarterly positive net cash flows of the
buyer, as defined by generally accepted accounting principles. Prior to the sale
of its operating assets, Rustic Crafts had established a $1,000,000 line of
credit with PNC Bank that was guaranteed by Regency and expired on May 18, 2002.
In conjunction with the Rustic Crafts asset sale, Rustic Crafts' indebtedness
under the line of credit together with its mortgage loan from PNC Bank in
respect of the Scranton, PA property and certain other indebtedness to PNC Bank
was restructured to replace such indebtedness with five notes totaling
$2,432,782. Each of the restructured notes of which were initially due in June
2004, and a ten-year amortization schedule and bore interest at the rate of
10.8% per annum. On June 27, 2003, a payment was made to PNC Bank in the amount
of $2,257,952 in full satisfaction of the restructured notes. On January 12,
2004, Rustic Crafts sold the Scranton, PA property for $531,500.
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. On December 30, 2005 the Company agreed
to accept a $125,000 note from Rustic Crafts 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. 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. During 2006 the
Company received $3,264 of such settlement which is included in other income. In
April 2006 Rustic Crafts defaulted on the note. The Company has initiated an
action for collection against Rustic Crafts and a personal guarantor on the
note.
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 an interest rate of 4.00%, in ninety-six equal
payments of principal and interest commencing in 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.
Based upon a subsequent fair market value appraisal, the Aggregate inventory was
deemed to have no value, and as such, a full valuation allowance of $832,427 was
taken in 2005.
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
Corporation (a Delaware corporation) acquired a 50% membership interest in MESC
Capital, LLC (a Delaware limited liability company) from DTE Mobile, LLC
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pursuant to an Assignment and Assumption Agreement dated as of April 30, 2004.
The purchase price for the 50% membership interest was $3,000,000 and was funded
from Regency's working capital. The terms of the Assignment and Assumption
Agreement were negotiated on an arms'-length basis between Regency and DTE
Mobile. DTE Mobile, which is owned by an unregulated subsidiary of a large
energy company that has significant experience in owning, managing and operating
electric generation and on-site energy facilities, owns the other 50% membership
interest in MESC Capital. MESC Capital was formed to acquire all of the
membership interests in Mobile Energy. Mobile Energy owns an on-site energy
facility that supplies steam and electricity to a Kimberly-Clark tissue mill in
Mobile, Alabama.
The acquisition of Mobile Energy was also consummated on April 30, 2004
pursuant to a Membership Interest Purchase Agreement, dated as of January 30,
2004, between MESC Capital and Mobile Energy Services Holdings, Inc. The
purchase price under the Membership Interest Purchase Agreement, after certain
pre-closing adjustments, was $33,600,000, and is subject to certain post-closing
adjustments. The purchase price and working capital reserves were funded by the
issuance of $28,500,000 of non-recourse debt, a total equity contribution by
MESC Capital of $8,600,290, $4,300,145 of which was funded by Regency Power and
$4,300,145 of which was funded by DTE Mobile, and a credit of $1,000,000 on
account of existing and continuing tax-exempt indebtedness of Mobile Energy.
The terms of the Membership Interest Purchase Agreement were negotiated on
an arms'-length basis between MESC Capital and Mobile Energy Services Holdings,
Inc. Regency did not participate in negotiations with respect to the Membership
Interest Purchase Agreement.
The $28,500,000 acquisition indebtedness was obtained from Allied Irish
Banks, P.L.C., which may assign or participate the loan in accordance with the
terms of the loan agreement. The loan will be amortized over the fifteen-year
term. In connection with the acquisition of the 50% membership interest in MESC
Capital, Regency Power and DTE Mobile entered into an Operating Agreement, dated
April 30, 2004, which sets forth their respective rights and obligations as
members of MESC Capital as well as the duties and authority of DTE Mobile as the
managing member of MESC Capital.
Under the Operating Agreement, Regency Power will receive 50% of all
distributions, and participate equally in ultimate management authority through
equal representation on the MESC Capital Board of Control. DTE Mobile, as
managing member, is responsible for day-to-day management of MESC Capital. DTE
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.
7
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.
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, 2006, 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 53% 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;
8
- Regency does not expect to pay dividends in the foreseeable future; and
- There are many public and private companies that are also searching for
operating businesses and other business opportunities as potential acquisition
or merger candidates. The Company will be in direct competition with these other
companies in its search for business opportunities. Many of these entities have
significantly greater financial and personnel resources than the Company.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our SEC 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, NE, 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 SEC.
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.
9
On January 30, 2006, plaintiffs filed an amended complaint challenging the
Aggregate Sale and alleging that the Aggregate Sale negatively impacted the
consideration the Company received in connection with the October 2002
restructuring transactions. The Company was not a defendant with respect to this
claim. Plaintiffs sought damages in excess of $5,400,000 with respect to the
claim related to the Aggregate Sale. On May 16, 2006, the Court dismissed the
sole remaining complaint alleged in the complaint determining that the sole
remaining complaint was derivative in nature and could therefore not be
maintained by the plaintiffs. On June 14, 2006, the plaintiffs filed a Notice of
Appeal appealing the Court's rulings. In its April 16, 2007 decision, citing an
intervening legal development in the area of direct and derivative claims
arising while the appeal was pending, the Supreme Court of the State of Delaware
reversed the Court's decision and remanded the case to the Court for further
proceedings. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS MARKET
INFORMATION AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
Our common stock is traded in the over-the-counter market on the Pink
Sheets. The symbol for the listing is "RAFI.PK". The following table sets forth
the high and low bid prices for each calendar quarter during the last two fiscal
years of Regency. On June 15, 2007 the closing sale price of our common stock
was $5.12. As of June 15, 2007, there were approximately 2,277 common
stockholders of record. The over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily reflect actual transactions.
YEAR ENDED
DECEMBER 31, 2005
-----------------
HIGH ($) LOW ($)
-------- -------
First Quarter 6.25 5.10
Second Quarter 6.05 5.10
Third Quarter 6.10 5.68
Fourth Quarter 6.25 6.00
YEAR ENDED
DECEMBER 31, 2006
-----------------
HIGH ($) LOW ($)
-------- -------
First Quarter 6.45 6.10
Second Quarter 7.00 5.40
Third Quarter 6.00 5.35
Fourth Quarter 6.20 5.45
----------
DIVIDEND POLICY
10
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.
RECENT SALES OF UNREGISTERED SECURITIES
The Company awarded 250 restricted shares of common stock to each of Errol
Glasser and Stanley Fleishman on each of January 4, 2006 and April 3, 2006
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;
11
- Royalty, an affiliate of the Company's management, beneficially owns
approximately 53% of our common stock. As a result, Royalty has the ability to
control the outcome of all matters requiring shareholder approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets;
- Regency does not expect to pay dividends in the foreseeable future; and
- There are many public and private companies that are also searching for
operating businesses and other business opportunities as potential acquisition
or merger candidates. The Company will be in direct competition with these other
companies in its search for business opportunities. Many of these entities have
significantly greater financial and personnel resources than the Company.
The following discussion and analysis of the financial condition and
results of operations of Regency should be read in conjunction with the
accompanying financial statements and related notes included in Item 7 of this
report.
GENERAL
The Company is committed to enhancing the value of the Company's common
stock by seeking opportunities to monetize its existing assets and by seeking
new business opportunities on an opportunistic basis. To date, the Company has
not entered into any binding agreements regarding any such transaction. The
Company does not propose to restrict its search for business opportunities to
any particular geographical area or industry, and may, therefore, acquire any
business, to the extent of its resources. The Company's discretion in the
selection of business opportunities is unrestricted, subject to the availability
of such opportunities, economic conditions, and other factors. No assurance can
be given that the Company will be successful identifying or securing a desirable
business opportunity, and no assurance can be given that any such opportunity
that is identified and secured will produce favorable results for the Company
and its stockholders.
Our Stockholders' Equity at December 31, 2006 was $17,843,456 as compared
to $17,253,209 on December 31, 2005, an increase of 3.42%.
RESULTS OF OPERATIONS
2006 COMPARED TO 2005
Net sales were $0 in both 2006 and 2005.
General and Administrative expenses decreased by $492,310 or 17.78% in
2006 as compared to 2005, due to an increase in legal fees which was offset by
the non-reoccurrence of the write down of the Aggregate in 2005 and a reduction
of consulting fees and stock based compensation.
Income from equity investment in partnerships increased in 2006 by
$170,794 or 6.03% as compared to 2005.
Interest expense was $63,863 in 2006 and $0 in 2005. This was a result of
a Florida Department of Revenue tax audit which disallowed the use of net
operating losses arising prior to the company being registered in the state,
thus creating taxable income and a related state tax expense. Although penalties
were abated, interest was assessed and paid in 2006.
Income tax expense was $112,651 in 2006 and $138,976 in 2005, relating to
state income taxes. We do not expect any Federal tax due as a result of previous
period operating losses.
Net Income increased by $1,359,811 in 2006 over 2005. The increase was due
to the non-recurring effect of a legal settlement of approximately $950,000 and
an increase in income from equity investment in partnerships in 2006.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2006, Regency had current assets of $10,239,704 and
Shareholders' Equity of $17,843,456 and had $10,098,553 in cash and marketable
securities, total assets of $18,317,382 and total liabilities of $473,926.
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
12
not be resolved and for 2004 and 2005, 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 fiscal 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. 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.
Management believes that the Company's cash balances are adequate to fund
the Company's cash requirements for at least the next twelve months.
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.
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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective.
No change occurred in the Company's internal controls concerning financial
reporting during the fourth quarter of the fiscal year ended December 31, 2006
that has materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.
13
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following directors were elected at the annual meeting of the
stockholders held June 29, 2006 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, 51 Mr. Levy has been Chairman of the Board of Directors,
President, and Chief Executive Officer of the Company
since 2002. 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; ERS Holding Company, LLC, a leading provider
of reverse logistics for the printer cartridge market
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., a NASDAQ Capital Market company
which provides shipping and transportation services on
the Great Lakes and chairman of the board and chief
executive officer of Hyde Park Acquisition Corp, an
OTC bulletin board company and a specified purpose
acquisition corporation. 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 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, 41 Mr. Hasson has been a Director and Chief Financial
Officer of the Company since 2002. 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.
Errol Glasser, 53 Mr. Glasser has been a Director of the Company since
2002. Mr. Glasser has been President of Triangle
Capital, LLC, a private investment and advisory
company based in New York City since 2004. Previously,
Mr. Glasser
14
was President of East End Capital Management and a
Managing Director at Kidder, Peabody & Co. with
responsibility for its West Coast investment banking
activity.
Carol Zelinski, 52 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 2006, 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 filed a late
Statement of Changes of Beneficial Ownership on Form 4 with respect to options
granted on April 1, 2006.
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. The current member of the Company's Audit Committee is an
"independent director" as determined pursuant to Rule 4200(a)(15) of The NASDAQ
Stock Market LLC 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
SEC rules. The Board of Directors believes that obtaining the services of an
audit committee financial expert is not economically rational at this time in
light of the costs associated with identifying and retaining an individual who
would qualify as an audit committee financial expert, the limited scope of our
operations and the relative simplicity of our financial statements and
accounting procedures.
Nominations for Board of Directors
The Nominating Committee of the Board of Directors considers director
candidates based upon a number of qualifications, including their independence,
knowledge, judgment, integrity, character, leadership, skills, education,
experience, financial literacy, standing in the community and ability to foster
a diversity of backgrounds and views and to complement the Board's existing
strengths. There are no specific, minimum or absolute criteria for Board
membership. The Nominating Committee seeks directors who have demonstrated an
ethical and successful career. This may include experience as a senior executive
of a publicly traded corporation, management consultant, investment banker,
partner at a law firm or registered public accounting firm, professor at an
accredited law or business school, experience in the management or leadership of
a substantial private business enterprise, educational, religious or
not-for-profit organization, or such other professional experience as the
Committee shall determine shall qualify an individual for Board service.
The Nominating Committee has not in the past relied upon third-party
search firms to identify director candidates, but may employ such firms if so
desired. The Nominating Committee generally relies upon, receives and reviews
recommendations from a wide variety of contacts, including current executive
officers, directors, community leaders, and stockholders, as a source for
potential director candidates. The Board retains complete independence in making
nominations for election as a member of the Board.
15
The Nominating Committee will consider qualified director candidates
recommended by stockholders in compliance with the Company's procedures and
subject to applicable inquiries. The Nominating Committee's evaluation of
candidates recommended by stockholders does not differ materially from its
evaluation of candidates recommended from other sources.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides the compensation of our named executive
officers, direct or indirect, for services rendered in all capacities for the
fiscal year ended December 31, 2006:
------------------------------------------------------------------------------------------------------------------------------------
Nonqualified
Non-Equity Deferred
Stock Option Incentive Plan Compensation All Other
Name and Principal Salary Bonus Awards Awards Compensation Earnings Compensation Total
Position Year ($) ($) ($) ($) ($) ($) ($) ($)
------------------------------------------------------------------------------------------------------------------------------------
Laurence S. Levy 2006 183,000 (1) 0 0 250,000 (2) 0 0 44,000 (3) 477,000
------------------------------------------------------------------------------------------------------------------------------------
President and Chief
------------------------------------------------------------------------------------------------------------------------------------
Executive Officer
------------------------------------------------------------------------------------------------------------------------------------
Neil N. Hasson 2006 50,000 0 0 0 0 0 12,500 (3) 62,500
------------------------------------------------------------------------------------------------------------------------------------
Chief Financial
Officer
------------------------------------------------------------------------------------------------------------------------------------
(1) Effective April 1, 2006, Mr. Levy's annual base annual salary is $200,000.
(2) On April 1, 2006 Mr. Levy was granted 50,000 stock options pursuant to the
Issuer's 2003 Stock Incentive Plan, as amended. The 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 was granted 250 shares
of our common stock at the end of each calendar quarter for which he or
she had served as a director for such entire calendar quarter. Effective
April 1, 2006, non-management directors no longer receive 250 shares of
our common stock for every quarter of a year of service completed. Please
see the full terms of the 2003 Stock Incentive Plan, as amended, for more
detailed information. The Company determined the above fair market value
of the options issued under the Black-Scholes Pricing Model.
(3) Other compensation consists of contributions made to a SEP-IRA retirement
plan.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information with respect to the value of
all equity awards that were outstanding at December 31, 2006.
16
------------------------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
------------------------------------------------------------------------------------------------------------------------------------
Equity
Incentive
Equity Plan
Market Incentive Awards:
Value Plan Market or
Equity of Awards: Payout
Incentive Number Shares Number of Value of
Plan Awards: of or Unearned Unearned
Number of Number of Number of Shares Units Shares, Shares,
Securities Securities Securities or Units of Units or Units or
Underlying Underlying Underlying of Stock Stock Other Other
Unexercised Unexercised Unexercised Option That That Rights Rights
Name Options Options Unearned Exercise Option Have Not Have That Have That Have
Exercisable Unexercisable Options Price Expiration Vested Not Not Vested Not Vested
(#) (#) (#) ($) Date (#) Vested (#) (#)
------------------------------------------------------------------------------------------------------------------------------------
25,000 0 0 1.35 4/3/2013
Laurence S. 50,000 0 0 1.53 10/1/2013
Levy (1) 50,000 0 0 2.01 6/10/2014
50,000 0 0 6.27 4/1/2016 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------------
Neil N. 25,000 0 0 1.35 4/3/2013
Hasson (1) 50,000 0 0 1.53 10/1/2013
50,000 0 0 2.01 6/10/2014 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------------
1. The options were granted pursuant to the Issuer's 2003 Stock Incentive
Plan, as amended.
DIRECTOR COMPENSATION
The following table summarizes compensation paid to our non-management directors
during the fiscal year ended December 31, 2006. Compensation to our directors
who are members of management is set forth in the Summary Compensation Table
above.
--------------------------------------------------------------------------------------------------------------------------
Nonqualified
Fees Earned Non-Equity Deferred
or Paid in Option Incentive Plan Compensation All Other
Cash Stock Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
--------------------------------------------------------------------------------------------------------------------------
Errol Glasser 15,000 (2) 6,153 (3) -- -- -- -- 21,153
--------------------------------------------------------------------------------------------------------------------------
Stanley
Fleishman (1) 15,000 (2) 6,153 (3) -- -- -- -- 21,153
--------------------------------------------------------------------------------------------------------------------------
(1) Mr. Fleishman resigned as a member of our Board of Directors on October 1,
2006.
(2) Effective April 1, 2006, non-management directors receive for services as
our director an annual amount of $30,000, payable in stock or cash at the sole
discretion of each non-management director and 500 shares of our common stock
for each committee served.
(3) 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. Effective April 1, 2006, non-management
directors no longer 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 each issued 500 shares of our common stock during the fiscal year
ended December 31, 2006. The above represents the fair value on the date of
issuances.
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
17
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 $50,000 for Mr. Hasson, a discretionary bonus and other
customary benefits.
LONG TERM INCENTIVE PLAN
There have been no awards under any long-term Incentive Plan during the
last completed fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information.
-----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES REMAINING
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE AVAILABLE FOR ISSUANCE UNDER
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS WARRANTS AND RIGHTS (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY (#) ($) IN COLUMN (a))
-------------------------------- -------------------------- ----------------------------- -------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 4,000 4.00 N/A
-----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders (1) 340,000 2.31 60,000
-----------------------------------------------------------------------------------------------------------------------------------
Total 344,000 2.33 60,000
-----------------------------------------------------------------------------------------------------------------------------------
----------
(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. Effective April
1, 2006, non-management directors no longer receive 250 shares of our common
stock for every quarter of a year of service completed. 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 June 15, 2007 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.
461 Fifth Avenue, 25th Floor
New York, New York 10017 1,823,738 (1) 52.7%
-----------------------------------------------------------------------------------------------------------
18
-----------------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF
BENEFICIAL OWNER AMOUNT BENEFICIALLY OWNED PERCENT OF CLASS
-------------------- --------------------------- --------------------------
-----------------------------------------------------------------------------------------------------------
Raffles Associates, L.P.
450 Seventh Avenue
New York, New York 10123 173,067 (2) 5.0%
-----------------------------------------------------------------------------------------------------------
Laurence S. Levy (1)
c/o Hyde Park Holdings, LLC
461 Fifth Avenue, 25th Floor
New York, New York 10017 2,048,738 (1)(3) 59.2%
-----------------------------------------------------------------------------------------------------------
Michael J. Meagher
c/o The Seaport Group LLC
360 Madison Avenue
New York, New York 10017 252,020 (4) 7.3%
-----------------------------------------------------------------------------------------------------------
(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.
(4) Based on information contained in the Statement on Schedule 13G filed by
such entity on March 16, 2007.
The following table sets forth certain information as of June 15, 2007 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) 59.2%
--------------------------------------------------------------------------------------------------------
Neil N. Hasson (1) 175,000 (3) 5.1%
--------------------------------------------------------------------------------------------------------
Errol Glasser
505 Park Avenue
Suite 1902
New York, New York 10022 23,750 (4) *
--------------------------------------------------------------------------------------------------------
All current Directors and
Executive Officers as a group 2,247,488 64.9%
--------------------------------------------------------------------------------------------------------
* Less than 1%
(1) The address of such beneficial owner is c/o Hyde Park Holdings, LLC, 461
Fifth Avenue, 25th Floor, New York, New York 10017.
(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.
19
(4) Includes 12,500 shares of Common Stock underlying stock options currently
exercisable or exercisable within sixty days issued to such individual
under the Company's 2003 Stock Incentive Plan, as amended and 11,250
directly.
(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, AND DIRECTOR
INDEPENDENCE
Director Independence
We are not listed on any national securities exchange and, consequently,
we and our Board of Directors are not subject to the independence requirements
of any national securities exchange. Our Board of Directors determines director
independence based on an analysis of The NASDAQ Stock Market LLC listing
standards and all relevant securities and other laws and regulations regarding
the definition of "independent".
Consistent with these considerations, after review of all relevant
transactions and relationships between each director, any of his or her family
members, and us, our executive officers and our independent registered public
accounting firm, the Board of Directors has affirmatively determined that Errol
Glasser is an independent director pursuant to The NASDAQ Stock Market LLC
listing standards. Mr. Glasser is also a member of our Audit Committee,
Compensation Committee and Nominating Committee and is "independent" pursuant to
The NASDAQ Stock Market LLC listing standards.
On October 1, 2006, Stanley Fleishman resigned as a member of our Board of
Directors. Prior to Mr. Fleishman's resignation, the Board of Directors has
affirmatively determined that Mr. Fleishman was an independent director pursuant
to The NASDAQ Stock Market LLC listing standards. Prior to Mr. Fleishman's
resignation, he was a member of our Audit Committee, Compensation Committee and
Nominating Committee and was "independent" pursuant to The NASDAQ Stock Market
LLC listing standards.
License Agreement
Pursuant to a License Agreement entered into in March 2003, Royalty
Management, Inc., which is wholly-owned by Laurence S. Levy, our President,
Chief Executive Officer and a director, provides New York City office space,
office supplies and office services to us for $100,000 per year. Such amount was
increased in October 2006 to $126,000.
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:
Financial Statements: Page
--------------------- ----
Independent Accountant's Report F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-29
Index of Exhibits
20
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) *
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.) *
21
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). *
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).
22
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). *
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). *
23
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).
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).
24
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). *
10.44 Stock Option Agreement, dated as of April 1, 2006
between the Company and Laurence S. Levy (incorporated
by reference from the Company's Quarterly Report on Form
10-QSB filed on May 19, 2006). *
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 $63,838 for the fiscal year ended December 31, 2006
and $56,117 for the fiscal year ended December 31, 2005.
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,
2006 and $0 for the fiscal year ended December 31, 2005.
25
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 $45,023 for the fiscal year ended
December 31, 2006 and $35,018 for the fiscal year ended December 31, 2005.
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, 2006 and $0 for the fiscal year ended December 31, 2005.
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 2006 along with the proposed fees
for such services were reviewed and approved by the Company's Audit Committee.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
REGENCY AFFILIATES, INC.
July 13, 2007 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President and
Chief Executive Officer
July 13, 2007 By: /s/ Neil N. Hasson
Date ------------------------------------
Neil N. Hasson, Chief Financial
Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the date indicated.
July 13, 2007 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President,
Chief Executive Officer and Director
July 13, 2007 By: /s/ Neil N. Hasson
Date ------------------------------------
Neil N. Hasson, Chief Financial
Officer and Director
July 13, 2007 By: /s/ Errol Glasser
Date ------------------------------------
Errol Glasser, Director
INDEX TO EXHIBITS
1. Financial Statements: Page
--------------------- ----
Independent Registered Public Accounting Firm's Report F-1
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-28
2. Other Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as exhibit 3.1(i)(a) to the Company's Form 10-Q
dated November 19, 2002, and incorporated herein by
reference).
3.1(i)(b) Corrected Certificate of Amendment reflecting amendment
to Restated Certificate of Incorporation of the Company
(filed as exhibit 3.1(i)(b) to the Company's Form 10-Q,
dated November 19, 2002, and incorporated herein by
reference).
3.1(i)(c) Certificate of Amendment to Restated Certificate of
Amendment (filed as Exhibit A to the Company's
Information Statement on Schedule 14C filed on October
27, 2003).
27
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).
28
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). *
29
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). *
30
Exhibit No. Description of Document
----------- -----------------------
10.19 Amended and Restated Certificate of Designations of the
Series C Preferred Stock (filed as exhibit 99.4 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.20 Note Purchase Agreement, dated October 16, 2002, between
the Company Royalty Holdings LLC (filed as exhibit 99.5
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference).
10.21 5% Convertible Promissory Note of the Company (filed as
exhibit 99.6 to Company's Current Report on Form 8-K
filed October 18, 2002, and incorporated herein by
reference).
10.22 9% Promissory Note of the Company (filed as exhibit 99.7
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference).
10.23 Amended and Restated Promissory Note of the Company
(filed as exhibit 99.8 to Company's Current Report on
Form 8-K filed October 18, 2002, and incorporated herein
by reference).
10.24 Amendment No. 1 to Pledge Agreement (filed as exhibit
99.9 to Company's Current Report on Form 8-K filed
October 18, 2002, and incorporated herein by reference).
10.25 Letter Agreement, dated October 16, 2002, between the
Company and Statesman (filed as exhibit 99.10 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
10.26 Employment Agreement, dated October 16, 2002, between
Laurence S. Levy and the Company (filed as exhibit 99.11
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference). *
10.27 Employment Agreement, dated October 16, 2002, between
Neil N. Hasson and the Company (filed as exhibit 99.12
to Company's Current Report on Form 8-K filed October
18, 2002, and incorporated herein by reference). *
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). *
31
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).
32
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). *
10.44 Stock Option Agreement, dated as of April 1, 2006
between the Company and Laurence S. Levy (incorporated
by reference from the Company's Quarterly Report on Form
10-QSB filed on May 19, 2006). *
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.
33
Regency Affiliates, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2006 and 2005
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-21
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, 2006 and 2005 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the years ended December 31, 2006 and 2005. 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. The company is not required to
have nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, 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, 2006 and 2005 and the
results of its consolidated operations, changes in shareholder's equity and cash
flows for the years ended December 31, 2006 and 2005, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
June 25, 2007
F-1
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
-------------------------------------
2006 2005
---------------- ----------------
Assets
Current Assets
Cash and cash equivalents $ 613,253 $ 5,646,788
Marketable securities 9,485,300 5,991,990
Accrued interest receivable, net of allowance of $644,109 and $0 -- 499,233
Other current assets 141,151 10,721
---------------- ----------------
---------------- ----------------
Total Current Assets 10,239,704 12,148,732
Property, plant and equipment, net 4,004 --
Investment in partnerships / LLC 8,072,374 7,288,799
Other Assets
Other 1,300 1,300
---------------- ----------------
Total Other Assets 1,300 1,300
---------------- ----------------
Total Assets $ 18,317,382 $ 19,438,831
================ ================
See notes to the consolidated financial statements.
F-2
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
---------------------------------------
2006 2005
----------------- -----------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 473,926 $ 1,393,133
----------------- -----------------
Total Current Liabilities 473,926 1,393,133
Deferred credit -- 792,489
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;
3,103,078 in 2006 and 3,121,412 in 2005 issued; 31,031 31,214
3,036,810 in 2006 and 3,066,412 in 2005 outstanding
Additional paid-in capital 6,417,739 8,737,321
Readjustment resulting from quasi-reorganization at December 1987 (1,670,596) (1,670,596)
Retained earnings 12,421,144 11,880,077
Note receivable-sale of stock, net of allowance of $2,440,000 and $0 -- (2,440,000)
Treasury stock, 66,268 and 55,000 shares in 2006 and 2005, at cost (408,850) (337,795)
----------------- -----------------
Total Shareholders' Equity 17,843,456 17,253,209
----------------- -----------------
$ 18,317,382 $ 19,438,831
================= =================
See notes to the consolidated financial statements.
F-3
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Operations
December 31,
-------------------------------
2006 2005
------------- -------------
Net Sales $ -- $ --
------------- -------------
Costs and expenses
General and Administrative expenses (2,276,666) (2,768,976)
------------- -------------
Loss from operations (2,276,666) (2,768,976)
------------- -------------
Other income (expense)
Income from equity investment in partnerships 3,004,241 2,833,447
Expiration of option -- (250,000)
Legal settlement -- (950,000)
Interest expense (63,863) --
Impairment of loans notes (644,109) --
Interest and dividend income 631,590 447,256
Unrealized investment gains 2,525 8,505
------------- -------------
Net income (loss) before income taxes 653,718 (679,768)
Income tax expense 112,651 138,976
------------- -------------
Net Income (Loss) $ 541,067 $ (818,744)
============== ==============
Net income (loss) per common share:
Basic
Net income (loss) per common share $ 0.17 $ (0.27)
------------- -------------
Weighted average number of shares 3,110,209 3,051,037
------------- -------------
Diluted
Net income (loss) per common share $ 0.14 $ (0.27)
------------- -------------
Weighted average number of shares 4,018,123 3,051,037
------------- -------------
See notes to the consolidated financial statements.
F-4
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2006 and 2005
Readjustment
Preferred Stock Common Stock Additional Resulting
---------------------------- ----------------------------- Paid in from Quasi-
Shares Amount Shares Amount Capital Reorganization
------------ ------------ ------------ ------------ ------------ --------------
Balance - January 1, 2005 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 -- -- -- -- 392,000 --
Common stock issued to directors -- -- 1,000 10 5,690 --
Purchase treasury shares -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2005 605,291 1,052,988 3,121,412 31,214 8,737,321 (1,670,596)
============ ============ ============ ============ ============ ============
Exercise of stock options -- -- 3,000 30 9,570 --
Stock options granted to officers -- -- -- -- 250,000 --
Common stock issued to directors -- -- 2,000 20 12,306 --
Purchase treasury shares -- -- -- -- -- --
Reserve for uncollectible note -- -- -- -- (2,440,000) --
Retirement of treasury shares -- -- (23,334) (233) (151,438) --
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2006 605,291 $ 1,052,988 3,103,078 $ 31,031 $ 6,417,739 $ (1,670,596)
============ ============ ============ ============ ============ ============
Note Treasury Stock Total
Retained Receivable ----------------------------- Stockholders'
Earnings Sale of Stock Shares Amount Equity
------------ ------------- ------------ ------------ ------------
Balance - January 1, 2005 $ 12,698,821 $ (2,440,000) 47,000 (295,635) $ 17,558,413
Exercise of stock options -- -- -- -- 158,000
Stock options granted to -- -- -- -- 392,000
Common stock issued to directors -- -- -- -- 5,700
Purchase treasury shares -- -- 8,000 (42,160) (42,160)
Net loss (818,744) -- -- -- (818,744)
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2005 11,880,077 (2,440,000) 55,000 (337,795) 17,253,209
============ ============ ============ ============ ============
Exercise of stock options -- -- -- -- 9,600
Stock options granted to officers -- -- -- -- 250,000
Common stock issued to directors -- -- -- -- 12,286
Purchase treasury shares -- -- 34,602 (222,726) (222,726)
Reserve for uncollectible note -- 2,440,000 -- -- --
Retirement of treasury shares -- -- (23,334) 151,671 --
Net income 541,067 -- -- -- 541,067
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2006 $ 12,421,144 $ -- 66,268 $ (408,850) $ 17,843,456
============ ============ ============ ============ ============
See notes to the consolidated financial statements.
F-5
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
-------------------------------------
2006 2005
--------------- ----------------
Cash flows from operating activities
Net income (loss) $ 541,067 $ (818,744)
Adjustments to reconcile net income to net cash (used in)
operating activities
Income from equity investment in partnerships (3,004,241) (2,833,447)
Stock-based compensation 262,306 397,700
Depreciation and amortization 138 1,899
Impairment of aggregate inventory -- 832,427
Unrealized gain on marketable securities -- --
Impairment of notes receivable 644,109 --
Expiration of option -- 250,000
Changes in assets and liabilities
Increase (decrease) in accrued interest receivable (499,233) (151,991)
Increase (decrease) in other current assets 130,430 31,178
Increase (decrease) in accounts payable and accrued expenses (919,207) 702,306
--------------- ----------------
Net cash used in operating activities (2,622,957) (1,588,672)
--------------- ----------------
Cash flows from investing activities
Purchases of property and equipment (4,142) --
Distribution of earnings from partnership 1,300,000 2,650,000
Purchases of marketable securities (112,993,310) (113,999,733)
Proceeds from sales of marketable securities 109,500,000 117,000,000
--------------- ----------------
Net cash provided by (used in) investing activities (2,197,452) 5,650,267
--------------- ----------------
Cash flows from financing activities
Proceeds from the exercise of stock options 9,600 158,000
Purchase of treasury stock (222,726) (42,160)
--------------- ----------------
Net cash provided by (used in) financing activities (213,126) 115,840
--------------- ----------------
Net increase (decrease) in cash and cash equivalents $ (5,033,535) $ 4,177,435
Cash and cash equivalents - beginning 5,646,788 1,469,353
--------------- ----------------
Cash and cash equivalents - ending $ 613,253 $ 5,646,788
=============== ================
See notes to the consolidated financial statements.
F-6
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
---------------------------
2006 2005
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 63,863 $ --
------------ ------------
Income taxes $ 168,698 $ 25,976
------------ ------------
Supplemental disclosures of non-cash investing and financing activities:
None.
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 Inc since April 30, 2004, date of
inception, its 75% owned subsidiary, Iron Mountain Resources, Inc.
("Iron Mountain") 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 and stock
options issued for services and compensation by employees under the fair
value method. For non-employees, the fair market value of the Company's
stock is measured on the date of stock issuance or the date an
option/warrant is granted. The Company determined the fair market value
of the options issued under the Black-Scholes Pricing Model. Effective
January 1, 2006, the Company adopted the provisions of SFAS 123(R),
"Share-based Payment," which establishes accounting for equity
instruments exchanged for employee services. Under the provisions of
SFAS 123(R), share-based compensation cost is measured at the grant
date, based on the fair value of the award, and is recognized as an
expense over the employee's requisite service period (generally the
vesting period of the equity grant). Prior to January 1, 2006, the
Company accounted for share-based compensation to employees in
accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees, and related interpretations.
The Company also followed the disclosure requirements of SFAS 123,
"Accounting for Stock-Based Compensation." The Company elected to adopt
the modified prospective transition method as provided by SFAS 123(R)
and, accordingly, financial statement amounts for the prior periods
presented in the Form 10-KSB have not been restated to reflect the fair
value method of expensing share-based compensation.
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.
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
statement. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
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 that 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, 2006 and 2005:
2006 2005
-------------- --------------
Building and land $ -- $ --
Machinery and equipment 47,850 43,708
-------------- --------------
47,850 43,708
Accumulated depreciation 43,846 43,708
-------------- --------------
$ 4,004 $ --
============== ==============
F-8
Depreciation expense for the years ended December 31, 2006 and 2005 was
$138 and $1,899, respectively.
Investments - The Company uses the equity method of accounting for
investments in equity securities in which it has more than a 20%
interest, but does not have a controlling interest and is not the
primary beneficiary. The Company uses the cost method of accounting for
investments in equity securities in which it has a less than 20% equity
interest and virtually no influence over the investee's operations.
Aggregate Inventory - Inventory, which consists of 70+ million short
tons of previously quarried and stockpiled aggregate rock located at the
site of the Groveland Mine in Dickinson County, Michigan, is stated at
lower of cost or market. The Company is also subject to a royalty
agreement which requires the payment of certain royalties to a previous
owner of the aggregate inventory upon sale of the aggregate.
In December, 2001 the aggregate inventory was sold to Iron Mountain, 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 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 have no value, and as
such a full valuation allowance of $832,427 was taken in 2005.
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, 2005:
6,000,000 US Treasury bills $ 5,983,485 $ 8,505 $ -- $ 5,991,990
As of December 31, 2006:
9,500,000 US Treasury bills $ 9,482,775 $ 2,525 $ -- $ 9,485,300
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, 2006 and 2005 the Company's income from
its equity investment in Security was $1,615,800 and $649,333,
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.
F-9
The Company accounts for the Investment in Partnerships using the equity
method, whereby the carrying value of these investments are increased or
decreased by the Company's allocable share of book income or loss. The
total amount of distributions made in excess of the Company's
partnership basis as of December 31, 2005 was $792,489, which is
recorded as a deferred credit on the accompanying financial statements.
Summarized financial information for Security is as follows:
2006 2005
---------------- ----------------
Balance Sheet Data
Cash and receivables $ 1,098,135 $ 1,214,068
Restricted cash 2,142,313 1,940,300
Real estate, net 32,916,330 35,347,723
Deferred charges, net 8,069,382 8,771,067
Other assets 322,160 307,620
---------------- ----------------
Total Assets 44,548,320 47,580,778
================ ================
Accounts payable and accrued expenses 235,552 347,120
Project note payable 83,152,857 87,631,474
Other liabilities 171,258 180,482
---------------- ----------------
Total Liabilities 83,559,667 88,159,076
Partners' capital:
Regency Affiliates, Inc. 1,758,882 143,360
Other partners (40,770,229) (40,721,658)
---------------- ----------------
Total Partners' Capital (39,011,347) (40,578,298)
---------------- ----------------
Total Liabilities and Partner's Capital 44,548,320 47,580,778
================ ================
Statement of Operations Data
Revenues $ 13,250,710 $ 13,095,605
Expenses (8,124,183) (9,130,411)
---------------- ----------------
Net operating income 5,126,527 3,965,194
Other expenses (3,425,685) (3,281,685)
---------------- ----------------
Net income $ 1,700,842 $ 683,509
================ ================
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 $4,253 in
2006 and $1,708 in 2005 from this investment.
Note 4. Investment in MESC Capital LLC
On April 30, 2004, the Company, through a newly-formed, wholly-owned
subsidiary called Regency Power Corporation, a Delaware corporation,
acquired a 50% membership interest in MESC Capital, LLC, a Delaware
limited liability company, from DTE Mobile, LLC, pursuant to an
Assignment and Assumption Agreement dated as of April 30, 2004. The
purchase price for the 50% membership interest was $3,000,000 and was
funded from Regency's working capital. The terms of the Assignment and
Assumption Agreement were negotiated on an arms'-length basis between
Regency and DTE Mobile. DTE Mobile, which is owned by an unregulated
subsidiary of a large energy company that has significant experience in
owning, managing and operating electric generation and on-site energy
facilities, owns the other 50% membership interest in MESC Capital.
MESC Capital was formed to acquire all of the membership interests in
Mobile Energy Services Company, LLC, an Alabama limited liability
company. Mobile Energy owns an on-site energy facility that supplies
F-10
steam and electricity to a Kimberly-Clark tissue mill in Mobile,
Alabama. The acquisition of Mobile Energy was also consummated on April
30, 2004 pursuant to a Membership Interest Purchase Agreement, dated as
of January 30, 2004, between MESC Capital and Mobile Energy Services
Holdings, Inc. The purchase price under the Membership Interest Purchase
Agreement, after certain pre-closing adjustments, was $33,600,000, and
is subject to certain post-closing adjustments. The purchase price and
working capital reserves were funded by the issuance of $28,500,000 of
non-recourse debt, a total equity contribution by MESC Capital of
$8,600,290, $4,300,145 of which was funded by Regency Power and
$4,300,145 of which was funded by DTE Mobile, and a credit of $1,000,000
on account of existing and continuing tax-exempt indebtedness of Mobile
Energy. The terms of the Membership Interest Purchase Agreement were
negotiated on an arms'-length basis between MESC Capital and Mobile
Energy Services Holdings, Inc. The Company did not participate in
negotiations with respect to the Membership Interest Purchase Agreement.
The $28,500,000 acquisition indebtedness was obtained from Allied Irish
Banks, P.L.C., which may assign or participate the loan in accordance
with the terms of the loan agreement. The loan will be amortized over
the fifteen-year term. In connection with the acquisition of the 50%
membership interest in MESC Capital, Regency Power and DTE Mobile
entered into an Operating Agreement, dated April 30, 2004, which sets
forth their respective rights and obligations as members of MESC Capital
as well as the duties and authority of DTE Mobile as the managing member
of MESC Capital. Under the Operating Agreement, Regency Power will
receive 50% of all distributions. Neither Regency Power nor DTE Mobile
is obligated to contribute additional capital, or loan or otherwise
advance funds, to MESC Capital, and neither member can sell or transfer
its interest in MESC Capital without the consent of the other and
without first complying with a right of first offer in favor of the
non-selling member.
The Company accounts for the Investment in Partnerships using the equity
method, whereby the carrying value of these investments are increased or
decreased by the Company's allocable share of book income or loss. The
Company recognized income of $1,384,188 in 2006 and $2,182,406 in 2005
from this investment.
Summarized financial information for MESC Capital LLC is as follows:
2006 2005
---------------- ---------------
Balance Sheet Data
Cash and cash equivalents $ 2,820,687 $ 2,096,656
Restricted cash 1,759,631 1,640,427
Trade receivable 2,099,264 2,542,298
Current portion of net investment in direct financing lease 1,212,266 1,120,066
Insurance and other receivables 37,043 101,372
Inventory 3,428,940 3,296,835
Other assets 195,192 213,634
---------------- ---------------
Total current assets 11,553,023 11,011,288
---------------- ---------------
Debt issuance costs and derivative instruments, net 1,626,328 1,703,784
General plant, net 53,902 108,486
Investment in direct financing lease, net current portion 23,101,289 24,313,554
---------------- ---------------
Total assets 36,334,542 37,137,112
================ ===============
Accounts payable 1,289,754 1,450,040
Accrued liabilities 559,602 451,197
Current portion of long term debt 1,219,800 1,085,850
---------------- ---------------
Total current liabilities 3,069,156 2,987,087
Current portion of long term debt 25,963,150 27,182,950
---------------- ---------------
Total liabilities 29,032,306 30,170,037
Members' equity 7,302,236 6,967,075
---------------- ---------------
Total liabilities and members' equity 36,334,542 37,137,112
================ ===============
Statement of Operations Data
Revenues $ 14,460,440 $ 13,972,688
Expenses 10,225,793 10,910,557
---------------- ---------------
Net operating income 4,234,647 3,062,131
Other income (expense) (1,466,272) 1,302,681
---------------- ---------------
Net income $ 2,768,375 $ 4,364,812
================ ===============
F-11
Note 5. Notes Receivable
Pursuant to the sale of the net operating assets of the Company's
subsidiary, Rustic Crafts Inc. ("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 and any accrued interest thereon which totaled $1,182,626.
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. During 2006 the Company received $3,264 of such settlement
which is included in other income. In April 2006 Rustic Crafts defaulted
on the note. The Company has initiated an action for collection against
Rustic Crafts and a personal guarantor on the note.
Note 6. Serial Preferred Stock
At December 31, 2006 and 2005, the Company had 2,000,000 of authorized
shares of $.10 par value serial preferred stock. Serial preferred stock at
December 31, 2006 and 2005, all of which is convertible and cumulative,
consists of:
Shares Value
------------------------------ -----------------------------------------------------
2006 2005
-------------- --------------
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
========== ========== ============ ============== ==============
F-12
Series C - The Series C shares were issued on July 7, 1993 as part of
the transaction to acquire an 80% interest in NRDC. The cumulative
dividend right is equal to 20% (not to exceed $500,000) of annual after
tax earnings of NRDC. At the Company's option, the Series C may be
redeemed at the lesser of (a) the stated value plus accrued and unpaid
dividends or (b) the fair market value of the common stock interest
acquired by the Company in NRDC. At the Company's option, the redemption
price may be satisfied by the delivery of the shares in NRDC owned by
the Company.
Also, on October 16, 2002, the Company entered into agreements with
Statesman providing for the amendment to the Company's Series C
Preferred Stock and certain restrictions relating to Statesman's future
ownership of an interest in the Company and Statesman's ability to issue
or transfer beneficial interests in Statesman, in exchange for a payment
to Statesman of $2,730,000. The payment 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" (which occurred with the acquisition of Rustic Crafts in
1997 (see Note 6) and if the Company has reached a defined ratio of
earnings to fixed charges. In addition, dividends accrue for a period
of 35 additional months without cash payment.
(b) At the Company's option, the shares may be redeemed, subject to
certain limitations, by cash payment or by exchanging shares of its
common stock at 77% of its stated value divided by the quoted market
value of its common stock.
(c) A contingent conversion provision which conversion right, and the
Company common shares to be issued in connection with the conversion,
would be based on the stated value divided by the average bid and
asked price for the 90 days preceding the conversion date of the
Company's common shares. In addition, the number of the Company's
common shares to be received upon conversion is subject to certain
limitations.
Junior Series D - The junior preferred stock was issued in 1992 in
exchange for the Company's Restructuring Serial Promissory Notes. This
preferred stock is redeemable, at the Company's option, at the stated
value plus accrued and unpaid dividends and is contingently convertible
into common at the fair market value of the common as determined by the
average of the bid and asked price for the thirty (30) day period
preceding the conversion date.
Generally, no dividends can be paid on the Company's common stock until
all cumulative dividends on the serial preferred stock have been paid.
Additionally, no dividends on the Company's common shares can be paid if
the Company is in default or in arrears with respect to any sinking or
analogous fund or any call or tenders or other agreement for the
purchase, redemption or other retirement of shares of preferred stock.
No provision for dividends has been made for the Company's Series B and
C "increasing rate preferred stock," as defined in Staff Accounting
Bulletin Topic 5Q, due to the contingent nature of dividends on such
shares.
F-13
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 and Note Receivable - 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, Inc. The options were issued to Statesman in order to
secure the release of Mr. William R. Ponsoldt, Sr. to serve as President
and Chief Executive Officer of the Company and to recognize in part, the
amendment to the Series C preferred shares under which Statesman
forfeited certain common stock conversion rights with respect thereto.
Statesman also agreed to provide loan guarantees not to exceed the sum
of $300,000 upon the request of the Company and a showing of reasonable
need. Statesman and/or its affiliated interests have provided loan
guarantees and/or unsecured prime interest rate direct loans to the
Company exceeding $2,000,000 since June 1997.
On October 15, 2001 the Statesman Group, Inc. ("Statesman") exercised in
full its option, which had been granted in 1997, to acquire 610,000
post-reverse-split shares of the Company's common stock. The exercise
was made pursuant to an agreement which provided for (1) a purchase
price at $0.40 per share (par value) rather than the formula price in
the option, which would have yielded 25% less to the Company, (2) the
execution of a note from Statesman to the Company in the principal
amount of $2,440,000 payable in five years with interest to accrue at
the prevailing prime rate and (3) the obligation to be collateralized by
the 610,000 post-reverse-split common shares of the Company purchased
upon exercise of the option as well as the 20% remaining interest in the
Company's 80% owned subsidiary, NRDC.
On October 16, 2002, in Amendment No. 1 to the Pledge Agreement dated as
of October 15, 2001, the Pledge Agreement was amended to provide the
obligation to be collateralized by 208,650 shares of the Company's
Series C preferred shares in lieu of the 610,000 post-reverse-split
common shares, as well as the 20% remaining interest in the Company's
80% owned subsidiary, NRDC.
In addition, 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.
As of December 31, 2006, through the date of this Form 10-KSB, the
Company has not collected the $2,440,000 note and accrued interest of
approximately $644,000 due from the Statesman Group, Inc. The Company
has sent demand and default notices to Statesman but has not received a
response to date. Per the terms of the note, a default, overdue
principal and overdue interest will bear interest, payable upon demand,
at a rate of twelve percent (12%) per annum, and the pledged securities
may be transferred into the Company's name, or sold for proceeds to
satisfy the obligation and collection costs incurred. The Company has
currently reserved the receivable balance in full while it continues its
collection efforts. The reserve adjustment included a charge to
impairment of loans as other expense in the 2006 statement of
operations, and an allowance against the note within equity as of
December 31, 2006.
Note 8. Stock Based Compensation
2003 Incentive Stock Plan
F-14
Effective as of March 17, 2003, the Company's Board of Directors and
Stockholders approved and adopted the 2003 Stock Incentive Plan (the
"2003 Plan"). The 2003 Plan allows the Administrator (as defined in the
2003 Plan), currently the Compensation Committee, to determine the
issuance of incentive stock options, non-qualified stock options and
restricted stock to eligible employees and outside directors and
consultants of the Company. The Company has reserved 500,000 shares of
common stock for issuance under the 2003 Plan. The exercise price of any
option granted under the 2003 Plan is determined by the Administrator,
and no option or award exercise date can exceed ten years from the grant
date.
For 2006, the Company issued a total of 1,000 shares of restricted
common stock to two directors of the Company, at a fair value on date of
issuances of $12,306. For 2005, the Company issued a total 2,000 shares
of restricted common stock to two directors of the Company, at a fair
value on date of issuances of $12,160.
On April 1, 2006, the Company granted 50,000 stock options to the
Company's Chief Executive Officer under the 2003 Plan. The options
granted have a term of 10 years and vest immediately. On June 14, 2005,
the Company granted 50,000 stock options to each of the Company's Chief
Executive Officer and Chief Financial Officer. These options have a term
of 10 years and vest immediately.
The fair value of the stock options granted during 2006 and 2005,
respectively, under the 2003 Plan was $250,000 and $392,000. Each stock
option award is estimated as of the date of grant using a Black-Scholes
option valuation model that uses the assumptions noted in the table
below. The risk-free rate for the expected term of the option is based
on the U.S. Treasury yield curve in effect at the time of grant.
In 2005, the Company applied 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 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
4.87% and 3.5%, expected average life of 10 years and an expected stock
price volatility of 70% and 90%, for each of the years ended December
31, 2006 and 2005, respectively. The weighted average fair value of
options granted was $5.00 during 2006 and $5.50 during 2005.
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 year ended December 31, 2005:
Year Ended
December 31,
2005
------------
Net income (loss), as reported $ 131,256
Add: Stock-based compensation included 397,700
Less: Stock-based compensation - FMV (525,700)
------------
Pro forma net income (loss) $ 3,256
============
Net income per share
As reported $ .04
============
Pro forma $ .00
============
F-15
The following is a summary of the status of the Company's options for
the years ended December 31, 2006 and 2005:
Exercise Average Average
Price Exercise Contract
Range Options Price Life
---------------- --------------- ------------- --------------
Outstanding at 1/1/05 $ .40 - 2.40 302,000 $ 2.12 10
Issued 1.58 100,000 1.58 10
Exercised, forfeited or expired 1.58 (100,000) 1.58 10
---------------- --------------- ------------- --------------
Outstanding at 12/31/05 $ .40 - 2.40 302,000 $ 2.12 10
================ =============== ============= ==============
================ =============== ============= ==============
Exercise Average Average
Price Exercise Contract
Range Options Price Life
================ =============== ============= ==============
Outstanding at 1/1/06 $ .40 - 2.40 302,000 $ 2.12 10
================ =============== ============= ==============
Issued 6.27 50,000 6.27 10
================ =============== ============= ==============
Exercised, forfeited or expired 1.60-4.00 (8,000) .40 10
================ =============== ============= ==============
Outstanding at 12/31/06 $ .40 - 6.27 344,000 $ 2.76 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, 2006 and 2005, the Company's net deferred tax asset,
utilizing a 34% effective tax rate, respectively, consists of:
2006 2005
----------- -----------
Deferred tax assets:
Net operating loss carry forward 1,992,000 2,567,000
Valuation allowance (1,992,000) (2,567,000)
----------- -----------
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 $4,000,000 which expire
through 2025. 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, 2006 and 2005, 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, 2006 and 2005, the Company has provided $112,651 and
$138,976, respectively, for taxes, which relate to state income taxes.
F-16
The provision for income taxes is as follows
2006 2005
------------ ------------
Current $ 112,651 $ 138,976
Deferred -- --
------------ ------------
$ 112,651 $ 138,976
============ ============
The current provisions for 2006 and 2005 include approximately $56,000
and $113,000 of Florida State income taxes for the periods 2001 and 2003
assessed during an audit conducted in 2006. This was a result of a
Florida Department of Revenue tax audit which disallowed the use of net
operating losses arising prior to the Company being registered in the
state, thus creating taxable income and a related state tax expense.
Although penalties were abated, interest was assessed of $63,863 and
paid in 2006.
The difference between income tax benefits and expense in the financial
statements and the tax benefit and expense computed at December 31, 2006
and 2005 is as follows:
2006 2005
---- ----
Federal (expense) benefit at the statutory rate (34.0)% (34.0)%
State tax (expense) (8.0) (3.8)
Benefit of net operating loss carry forward 34.0 34.0
Valuation Allowance -0- -0-
----- -----
Effective tax rate of income tax (expense) benefit (8.0)% (3.8)%
===== =====
As of December 31, 2006, approximately $128,300 of state taxes were
remitted on the Company's behalf by its SLDC limited partnership
interest. These prepaid taxes are included in Other Current Assets on
the Balance Sheet.
Note 10. Employment Agreements
In connection with the 2002 redemption of Statesman's interest, each of
the Company's directors resigned effective October 28, 2002 with
successors appointed by Royalty, the holder of certain notes payable.
Simultaneously, all officers of the Company resigned and were replaced
by Laurence S. Levy (an affiliate of Royalty) as CEO and Neil Hasson (an
affiliate of Royalty) as CFO and Secretary. On October 16, 2002, the
Company entered into Employment Agreements with Mr. Levy and Mr. Hasson,
with terms as follows:
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). Effective April 1, 2006, Mr. Levy's annual base
salary is $200,000.
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. In October
2006 this amount was increased to $126,000.
F-17
During the year ended December 31, 2006, the Company repurchased the
shares of common stock of a former director as part of a legal
settlement. The stock was purchased at a price of $6.50 per share at a
total cost of $189,371. Subsequently, the Company retired 23,334 of
these shares from the treasury.
During the years ended December 31, 2006 and 2005, two directors of the
Company received 500 shares each for services at a total cost of $12,306
for 2006, and 1,000 shares each for services at a total cost of $12,160
for 2005.
During 2006, two directors of the Company were paid $15,000 each for
directors' fees and services rendered to the Company in such capacity.
During 2006, two former officers of the Company exercised stock options
to purchase 3,000 shares of common stock. Two thousand shares were
purchased at an exercise price of $4.00 per share, and one thousand
shares were purchased at an exercise price of $1.60 per share.
Note 12. Simplified Employee Pension -Individual Retirement Account (SEP-IRA)
The Company had adopted a SEP-IRA Plan in 2004. During the years ended
December 31, 2006 and 2005, the Company made contributions of $67,375
and $50,000, respectively, to the plan. The SEP-IRA Plan covers all
employees who received compensation from the Company during the year.
Employer contributions are discretionary and determined annually. In
addition, the SEP-IRA Plan allows participants to make elective deferral
contributions through payroll deductions.
Note 13. Contingencies, Risks and Uncertainties
The Company is subject to numerous contingencies, risks and
uncertainties including, but not limited to, the following that could
have a severe impact on the Company:
(i) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine in order to permit the Company to make more
than casual sales of the aggregate (See Note 1).
(ii)A default in the Lease or sudden catastrophe to the Security West
Building from uninsured acts of God or war could have a materially
adverse impact upon the Company's investment in Security Land and
Development Company Limited Partnership and, therefore, its financial
position and results of operations (See Note 4).
(iii) On January 20, 2004, a purported derivative and class action
lawsuit 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 consideration the Company received in connection with the
October 2002 restructuring transactions. The Company was not a
defendant with respect to this claim. Plaintiffs sought damages in
excess of $5,400,000 with respect to the claim related to the
Aggregate Sale. On May 16, 2006, the Court dismissed the sole
remaining complaint alleged in the complaint determining that the sole
remaining complaint was derivative in nature and could therefore not
be maintained by the plaintiffs. On June 14, 2006, the plaintiffs
filed a Notice of Appeal appealing the Court's rulings. In its April
16, 2007 decision, citing an intervening legal development in the area
of direct and derivative claims arising while the appeal was pending,
the Supreme Court of the State of Delaware reversed the Court's
decision and remanded the case to the Court for further proceedings.
The Company has been advised that the defendants intend to vigorously
defend the claim asserted against them in the Delaware Action.
F-18
The defendants in the Delaware State Action, other than Statesman, are
entitled to be indemnified by the Company for damages, if any, and
expenses, including legal fees, they may incur as a result of the
lawsuit, subject to certain circumstances under which such
indemnification is not available. In addition, other than with respect
to the claims against the current director defendants in their
capacities as such, the claims contained in the Delaware State Action
are not covered by insurance, as the Company's carrier has declined
coverage on the basis of the "insured vs. insured" exclusion since one
of the named plaintiffs, Donald D. Graham, was previously a director
of the Company. The Company has submitted a claim to its carrier with
respect to the claims in the Delaware State Action against the current
director defendants. No assurance can be given as to the position that
the carrier will take with respect to such claims.
(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 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 of $6.50 per
share. The $950,000 settlement is included in other income and expense
on the 2005 Statement of Operations and is included in accounts
payable and accrued expenses on the balance sheet as of December 31,
2005. Such amounts were paid in 2006 in full settlement and
satisfaction of such matter.
(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
(See Note 9).
(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 14. 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:
2007 $9,481
------
Total $9,481
======
Rent expense was $18,511 and $17,630 for the years ended December 31,
2006 and 2005, respectively.
F-19
Note 15. 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 obligations of filing annual and periodic reports and
make 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 all of its stockholders
describing all of the material terms of the Reverse Stock Split and
Forward Stock Split. The Company currently intends to effect the Reverse
Stock Split and Forward Stock Split as soon as possible thereafter.
Note 16. Subsequent Events
In March 2007, the Company exercised its right to redeem all outstanding
shares of Series B preferred stock in exchange for 430,473 shares of the
Company's common stock.
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 consideration the Company received in connection with the
October 2002 restructuring transactions. The Company was not a defendant
with respect to this claim. Plaintiffs sought damages in excess of
$5,400,000 with respect to the claim related to the Aggregate Sale. On
May 16, 2006, the Court dismissed the sole remaining complaint alleged
in the complaint determining that the sole remaining complaint was
derivative in nature and could therefore not be maintained by the
plaintiffs. On June 14, 2006, the plaintiffs filed a Notice of Appeal
appealing the Court's rulings. In its April 16, 2007 decision, citing an
intervening legal development in the area of direct and derivative
claims arising while the appeal was pending, the Supreme Court of the
State of Delaware reversed the Court's decision and remanded the case to
the Court for further proceedings. 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 State Action, other than Statesman, are
entitled to be indemnified by the Company for damages, if any, and
expenses, including legal fees, they may incur as a result of the
lawsuit, subject to certain circumstances under which such
indemnification is not available. In addition, other than with respect
to the claims against the current director defendants in their
capacities as such, the claims contained in the Delaware State Action
are not covered by insurance, as the Company's carrier has declined
coverage on the basis of the "insured vs. insured" exclusion since one
of the named plaintiffs, Donald D. Graham, was previously a director of
the Company. The Company has submitted a claim to its carrier with
respect to the claims in the Delaware State Action against the current
director defendants. No assurance can be given as to the position that
the carrier will take with respect to such claims.
F-20
Note 17. New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within
those fiscal years. Management does not expect the implementation of
this new standard to have a material impact on the Company's financial
position, results of operations and cash flows.
On September 13, 2006, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
Period Misstatements When Quantifying Misstatements in Current Year
Financial Statements.", which provides guidance on the consideration of
the effects of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. The standard
is effective for the first annual financial statements for fiscal years
beginning after November 15, 2006. The Company is currently considering
the effect of implementing the requirements of this standard.
On February 3, 2006, the FASB issued FASB Staff Position FSP FAS 123R-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement Upon the Occurrence of a
Contingent Event." This FASB Staff Position (FSP) addresses the
classification of options and similar instruments issued as employee
compensation that allow for cash settlement upon the occurrence of a
contingent event. The guidance in this FSP amends paragraphs 32 and A229
of FASB Statement No. 123 (revised 2004), Share-Based Payment
On October 10, 2006, the FASB issued FASB Staff Position FSP FAS 123R-5,
"Amendment of FASB Staff Position FAS 123R-1." This FASB Staff Position
(FSP) addresses whether a modification of an instrument in connection
with an equity restructuring should be considered a modification for
purposes of applying FSP FAS 123(R)-1, "Classification and Measurement
of Freestanding Financial Instruments Originally Issued in Exchange for
Employee Services under FASB Statement No. 123(R)."
On February 3, 2006, the FASB issued FASB Staff Position FSP FAS 123R-6,
"Technical Corrections of FASB Statement No. 123(R)," This FASB Staff
Position (FSP) addresses certain technical corrections of FASB Statement
No. 123 (revised 2004), Share-Based Payment .
The Company's adoption of SFAS 123(R) and the implementation of these
new standards did not have a material impact on the Company's financial
position, results of operations and cash flows.
F-21