UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER 1-7949
REGENCY AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-0888772
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
610 N.E. Jensen Beach Blvd., Jensen Beach, Florida 34957
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(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code (772) 334-8181
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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of December 13, 2007, there were 3,465,544 shares of the $.01 Par Value
Common Stock outstanding.
Transitional Small Business Disclosure Form (check one): Yes |_| No |X|
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) .............. 3
Condensed Consolidated Statements of Operations (Unaudited) .... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) .... 5
Notes to Condensed Consolidated Financial Statements ........... 6
Item 2. Management's Discussion and Analysis or Plan of Operation ...... 8
Item 3. Controls and Procedures ........................................ 13
Part II - Other Information
Item 1. Legal Proceedings .............................................. 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .... 14
Item 3. Defaults Upon Senior Securities ................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ............ 15
Item 5. Other Information .............................................. 15
Item 6. Exhibits ....................................................... 15
Signatures .................................................................. 17
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
September 30, 2007 (Unaudited)
Assets
Current Assets
Cash and cash equivalents $ 295,882
Marketable securities 9,490,365
Other current assets 148,844
------------
Total Current Assets 9,935,091
Property and equipment, net 14,076
Investment in partnerships 9,311,621
Other Assets
Other 1,300
------------
Total Other Assets 1,300
------------
Total Assets $ 19,262,088
============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 242,285
------------
Total Liabilities 242,285
Shareholders' Equity
Serial preferred stock, Series C and D, 234,544 shares outstanding, not subject
to mandatory redemption. Maximum liquidation preference $21,141,940 486,076
Common stock, par value $.01; authorized 8,000,000 shares;
issued 3,531,812 shares; outstanding 3,465,544 shares 35,319
Additional paid-in capital 7,112,199
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596)
Retained earnings 13,465,655
Note receivable - sale of stock --
Treasury stock, 66,268 shares, at cost (408,850)
------------
Total Shareholders' Equity 19,019,803
------------
Total Liabilities and Shareholders' Equity $ 19,262,088
============
The attached notes are an integral part of these financial statements.
3
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
-----------------------------------------------------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net Sales $ -- $ -- $ -- $ --
Costs and expenses
Selling, general and administrative expenses 516,482 550,066 1,008,978 1,731,121
----------- ----------- ----------- -----------
Loss from operations (516,482) (550,066) (1,008,978) (1,731,121)
Income from equity investment in partnerships 1,017,263 994,307 1,739,247 2,054,341
Interest and dividend income 101,211 56,288 342,670 333,277
Other income, net 1,274 32,928 1,847 117,311
----------- ----------- ----------- -----------
Income from operations before income tax 603,266 533,457 1,074,786 773,808
Provision for income taxes 30,275 55,698 30,275 55,698
----------- ----------- ----------- -----------
Net Income 572,991 477,759 1,044,511 718,110
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.16 $ 0.15 $ 0.30 $ 0.23
=========== =========== =========== ===========
Diluted $ 0.13 $ 0.12 $ 0.24 $ 0.18
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 3,531,540 3,096,624 3,457,031 3,109,932
=========== =========== =========== ===========
Diluted 4,439,268 4,004,852 4,364,759 4,018,160
=========== =========== =========== ===========
The attached notes are an integral part of these financial statements.
4
Regency Affiliates, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30
---------------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net income $ 1,044,511 $ 718,110
Adjustments to reconcile net income to net
cash used in operating activities
Depreciation and amortization 2,517 --
Stock-based compensation 197,750 256,100
Income from equity investment in partnerships (1,739,247) (2,054,341)
Unrealized gain on marketable securities -- (114,044)
Changes in operating assets and liabilities
Accrued interest receivable -- (144,876)
Other current assets (7,693) (8,691)
Account payable and accrued expenses (231,641) (1,048,323)
Income taxes payable -- (113,000)
------------ ------------
Net cash used in operating activities (733,803) (2,509,065)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (12,589) --
Proceeds received from partnership distributions 500,000 800,000
Proceeds from sales of marketable securities 70,400,000 78,000,000
Purchases of marketable securities (70,405,065) (81,378,736)
------------ ------------
Net cash provided by (used in) investing activities 482,346 (2,578,736)
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 22,275 9,600
Purchases of treasury stock (88,189) (222,726)
------------ ------------
Net cash used in financing activities (65,914) (213,126)
------------ ------------
(Decrease) in cash and cash equivalents (317,371) (5,300,927)
Cash and cash equivalents - beginning 613,253 5,646,788
------------ ------------
Cash and cash equivalents - ending $ 295,882 $ 345,861
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 47,862 $ 63,863
Income taxes $ 32,900 $ 169,158
The attached notes are an integral part of these financial statements.
5
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month and nine month periods ended September 30,
2007 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2007. For further information, refer to
the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December 31,
2006.
Principles of Consolidation - The consolidated financial statements
include the accounts of Regency Affiliates, Inc. (the "Company"), its
wholly owned subsidiaries, Regency Power, Inc. and Rustic Crafts
International, Inc. ("Rustic Crafts"), its 75% owned subsidiary, Iron
Mountain Resources, Inc., and its 80% owned subsidiary, National Resource
Development Corporation ("NRDC"). All significant intercompany balances
and transactions have been eliminated in consolidation.
Note 2. Related Party Transactions
In December 2005, the Company's wholly owned subsidiary, Rustic Crafts,
entered into a stipulation of settlement with RCI Wood Products ("RCI")
regarding outstanding indebtedness with that company. Under the terms of
this settlement, RCI will pay to Rustic Crafts the sum of $125,000 with
interest at six and one-half percent per annum, payable in thirty-five
(35) monthly installments of $1,088 each, commencing in January 2006.
During the quarters ended March 31, 2007 and 2006, $0 and $3,264,
respectively, was received under this obligation. RCI defaulted on the
note in April 2006. The Company has initiated an action for collection
against RCI and personal guarantor of the note.
During the quarter ended March 31, 2006, two directors of the Company each
received 500 shares of common stock for services. The fair market value of
the stock issued was $6,100 and this expense is included in selling,
general and administrative expenses in the statement of operations.
During the quarter ended June 30, 2006, two former officers of the Company
exercised stock options to purchase 3,000 shares of common stock. 2,000
shares were purchased at an exercise price of $4.00 per share, and 1,000
shares were purchased at an exercise price of $1.60 per share.
During the quarter ended March 31, 2007, the Company repurchased 9,300
shares of its outstanding common stock at a cost of $60,450. The shares
were then subsequently retired from the treasury.
During the quarter ended March 31, 2007, in accordance with EITF 00-27,
"Accounting for Derivative Financial Instruments," the Company recorded
its redemption of 370,747 shares of Cumulative Preferred Stock, Series B
("Series B Stock") for 430,473 shares of the Company's common stock. In
1991, as part of a corporate restructuring, the Company issued the 370,747
shares of $10 stated value preferred stock designated as Series B to
senior lenders in exchange for $3,707,470 in outstanding obligations due
to them. The Series B Stock held contingent provisions and rights, and the
Company's common stock to be issued in connection with the redemption was
to be based upon the fair market value of the Company's common stock at
the date of redemption resulting in potential beneficial conversion
features and attributes for the preferred stockholders.
6
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2. Related Party Transactions, continued
On February 16, 2007, the Company exercised its right to redeem all of the
issued and outstanding Series B Stock (370,747 shares), payable on March
15, 2007. The aggregate redemption price of 430,473 shares of the
Company's common stock, at $6.65 per share, was $2,862,645. As this amount
is less than the original debt obligations exchanged with the preferred
stockholders, which represented their investment in 1991 of $3,707,470, no
deemed dividend nor beneficial conversion feature has been recognized by
the Company in the current period. This transaction resulted in the
retirement by the Company of all issued and outstanding Series B Stock.
During the quarter ended June 30, 2007 a director of the Company exercised
2,500 stock options at an exercise price of $2.40 per share and 2,500
stock options at an exercise price of $1.53 per share.
During the quarter ended June 30, 2007, the Company purchased 5,439 shares
of its common stock from a consultant of the Company at a cost of $5.10
per share, or $27,739 and subsequently retired such shares of common stock
from treasury. The Company also issued 6,000 shares of common stock to a
consultant of the Company upon the exercise of 1,000 stock options at an
exercise price of $1.60 per share and 5,000 stock options at an exercise
price of $1.53 per share.
During the quarter ended September 30, 2007, the Company issued options to
an officer of the Company to purchase 50,000 shares of its common stock,
pursuant to the Issuer's 2003 Stock Incentive Plan, as amended. The stock
options expire on August 14, 2017 and have an exercise price of $5.10 per
share.
During the quarter ended September 30, 2007, two former directors each
exercised stock options to purchase 1,000 shares of the Company's common
stock at an exercise price of $1.60 per share.
Note 3. Stock Based Compensation
During the quarter ended June 30, 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.
During the quarter ended June 30, 2006, an officer of the Company received
50,000 stock options to purchase shares of the Company's common stock at
an exercise price of $6.27. The fair value of the stock options was
estimated using the Black-Scholes option-pricing model that requires
highly subjective assumptions including the expected stock price
volatility. The fair value of the stock options granted was estimated
using the following assumptions: no expected dividends, risk free interest
rate of 4.87% expected average life of approximately 10 years and an
expected stock price volatility of 70%. The fair value of the stock
options granted was $5.00 for total stock based compensation expense of
$250,000 for the quarter ended June 30, 2006.
During the quarter ended September 30, 2007, an officer of the Company
received 50,000 stock options to purchase shares of the Company's common
stock at an exercise price of $5.10. The fair value of the stock options
was estimated using the Black-Scholes option-pricing model that requires
highly subjective assumptions including the expected stock price
volatility. The fair value of the stock options granted was
7
Regency Affiliates, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
estimated using the following assumptions: no expected dividends, risk
free interest rate of 4.73% expected average life of approximately 10
years and an expected stock price volatility of 67%. The fair value of the
stock options granted was $3.96 for total stock based compensation expense
of $197,750 for the quarter ended September 30, 2007.
Note 4. Recently Issued Accounting Pronouncements
In February, 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" including an amendment of FAS
115, or FAS 159. This statement provides companies with an option to
report selected financial assets and liabilities at fair value. This
statement is effective for fiscal years beginning after November 15, 2007
with early adoption permitted. The Company is assessing FAS No. 159 and
has not yet determined the impact that the adoption of FAS No. 159 will
have on its results of operations or financial position, if any.
In September 2006, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 157 "Fair Value Measurements." This statement
defines fair value, establishes a fair value hierarchy to be used in
generally accepted accounting principles and expands disclosures about
fair value measurements. Although this statement does not require any new
fair value measurements, the application could change current practice.
The statement is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact of this statement to
its financial position and results of operations.
During the preparation of the Company's 2004, 2005, and 2006 Federal
corporation income tax return, a dispute arose between the Company and
Security Land regarding the proper amount of taxable income to be
allocated to the Company and reported to the Internal Revenue Service (the
"IRS") on Federal Form K-1. This dispute could not be resolved and as such
the Company reported a different amount of income on its corporation
income tax return than was reported to the IRS by Security. The
discrepancy may cause the Company's tax returns to be audited by the IRS.
The Company believes that the outcome of any IRS examination will not
affect the financial statements of the Company in this year as net
operating losses are available to offset any additional income not
reported.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48). FIN 48 clarifies the accounting for
income taxes by prescribing a minimum probability threshold that a tax
position must meet before a financial statement benefit is recognized. The
minimum threshold is defined in FIN 48 as a tax position that is more
likely than not to be sustained upon examination by the applicable taxing
authority, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The tax benefit
to be recognized is measured as the largest amount of benefit that is
greater than fifty percent likely of being realized upon ultimate
settlement. FIN 48 must be applied to all existing tax positions upon
initial adoption. The cumulative effect of applying FIN 48 at adoption, if
any, is to be reported as an adjustment to opening retained earnings for
the year of adoption. FIN 48 is effective for the Company's fiscal year
ending December 31, 2007, although early adoption is permitted.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements and Associated Risk
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
but not limited to those
8
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
regarding the Company's financial position, business strategy, acquisition
strategy and other plans and objectives for future operations and any other
statements that are not historical facts constitute "forward-looking statements"
within the meaning of federal securities laws and the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements expressed or implied
by such forward-looking statements to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, there can be no assurance that
the actual results or developments anticipated by the Company will be realized
or, even if substantially realized, that they will have the expected effect on
its business or operations. These forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors (including, but not limited
to, those specified below) which are difficult to predict and, in many
instances, are beyond the control of the Company. Such factors include:
- A default in the lease or sudden catastrophe to the property owned
by Security Land and Development Company Limited Partnership ("Security")
or the operating facilities owned by Mobile Energy Services Company, LLC
("Mobile Energy") from uninsured acts of God or war could have a
materially adverse impact upon our investment in Security or Mobile
Energy, respectively, and therefore our financial position and results of
operations;
- Our subsidiaries currently lack the necessary infrastructure at
the site of the Groveland mine in order to permit them to make more than
casual sales of the 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 ("IRS") would
not attempt to limit or disallow altogether our use, retroactively and/or
prospectively, of such carryforwards, due to ownership changes or any
other reason. The disallowance of the utilization or our net operating
loss would severely impact or financial position and results of operations
due to the significant amounts of taxable income that has been, and may in
the future be, offset by our net operating loss carryforwards;
- If we consummate the Reverse Stock Split (as defined below) and
Forward Stock Split (as defined below) and become 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,
we 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 us and our
financial performance;
- Royalty Holdings, LLC ("Royalty"), an affiliate of our management,
beneficially owns approximately 53% of our common stock. As a result,
Royalty has the ability to control the outcome of all matters requiring
stockholder approval, including the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our
assets;
- We do not expect to pay dividends in the foreseeable future; and
- There are many public and private companies that are also
searching for operating
9
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
businesses and other business opportunities as potential acquisition or
merger candidates. We 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 us.
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the accompanying
financial statements and related notes included in Item 1 of this report.
General.
The Company is committed to enhancing the value of the Company's common stock by
seeking opportunities to monetize certain existing assets and by seeking new
business opportunities on an opportunistic basis.
Liquidity and Capital Resources.
On September 30, 2007, the Company had current assets of $9,935,091 and
stockholders' equity of $19,019,803. On September 30, 2007, the Company had
$9,786,247 in cash and marketable securities, total assets of $19,262,088 and
total current liabilities of $242,285.
The most significant sources of cash are the Company's equity investment in MESC
Capital LLC ("MESC Capital") and interest and dividends earned from existing
cash and cash equivalents. In the event that cash flows from operating
activities are not sufficient, the Company could liquidate marketable securities
as necessary. We believe our cash flow from operations and existing cash and
cash equivalents will be adequate to satisfy our cash needs for the next twelve
months.
The most significant uses of cash are for employee compensation and professional
fees for legal and accounting services.
Currently, there are no plans for external financing of current operations or
holdings.
During the preparation of the Company's 2004, 2005, and 2006 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 IRS on Federal Form K-1. This dispute could not be resolved and
as such the Company reported a different amount of income on its corporation
income tax return than was reported to the IRS by Security. The discrepancy may
cause the Company's tax returns to be audited by the IRS. The Company believes
that the outcome of any IRS examination will not affect the financial statements
of the Company in this year as net operating losses are available to offset any
additional income not reported.
On September 30, 2002, our subsidiary, Rustic Crafts International, Inc.
("Rustic Crafts") sold all of its operating assets subject to the assumption of
certain of its liabilities. Prior to the sale, Rustic Crafts had established a
$1,000,000 line of credit with PNC Bank which was guaranteed by the Company and
expired on May 18, 2002. In conjunction with the Rustic Crafts asset sale,
Rustic Crafts' indebtedness under the line of credit together with its $960,000
mortgage loan from PNC Bank and certain other indebtedness to PNC Bank was
restructured to replace such indebtedness with five notes totaling $2,432,782
and have a ten year amortization schedule. The notes bear interest at the
blended rate of 10.8% per annum. As part of the PNC Bank debt restructuring,
Rustic Crafts was required to pay down the outstanding loan balance with
$200,000 of the purchase price in the Rustic Crafts asset
10
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
sale, and was required to make a $540,000 payment in December 2002. A $40,000
payment was made to PNC Bank in December 2002, but Rustic Crafts and the Company
failed to make the balance of the December 2002 payment. Accordingly, the PNC
Bank debt was subsequently modified to provide for the payment of the remaining
$500,000 payment on or before June 30, 2003. On June 30, 2003, the Company paid
all outstanding principal and interest due to PNC Bank, in satisfaction of the
above described obligations. In December 2005, Rustic Crafts agreed to accept a
$125,000 note from RCI Wood Products, Inc ("RCI") as a restructuring of the
above named obligation. The note bears an interest rate of 6.5% and calls for
payments of $1,088 per month until December 2008 at which time the balance will
be due and payable. During the quarter ended September 30, 2007
Rustic Crafts did not receive any payments under this obligation. 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 Rustic Crafts received $3,264 of such settlement which is
included in other income. In April 2006 RCI defaulted on the note. The Company
has initiated an action for collection against RCI and a personal guarantor on
the note. In connection with the redemption of our common stock owned by
Statesman Inc. ("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 the Company 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 the Company and (ii) certain
limitations on the ability of Statesman to issue or transfer shares or other
beneficial interests in Statesman or to sell, transfer, purchase or acquire any
capital stock of the Company, in each case without first receiving 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. As of
December 31, 2006, through the date of this Form 10-QSB, the Company has not
collected the $2,440,000 note and accrued interest of approximately $644,000 due
from Statesman. The Company has sent demand and default notices to Statesman but
has not received a response to date. Per the terms of the Agreement, upon event
of 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.
Filing of Going Private Proxy Statement
On December 14, 2005, the Company filed with the Securities and Exchange
Commission (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
stockholders. The Company currently intends to effect the Reverse Stock Split
and Forward Stock Split as soon as possible thereafter.
11
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Results of Operations.
2007 Compared to 2006
For the three months ended September 30, 2007 and September 30, 2006:
No revenue was generated by the Company during these periods.
Selling, general and administrative expenses decreased by $33,584 or
6.5% in 2007 compared to 2006. primarily due to a decrease of
approximately $160,000 in professional fees relating to pending and
resolved litigations, a non-recurring interest expense from state
income taxes for 2006 of $64,000, and a decrease of approximately
$8,000 as a result of a change in health insurance was offset by
stock based compensation paid in September 2007 of approximately
$198,000.
Net income from equity investment in partnerships increased by
$22,956 in 2007, 2.3% higher than in 2006 primarily due to an
increase in net income from Security Land of approximately $46,000
which was offset by a decrease in net income from MESC Capital of
approximately $23,000. The increase in net income from Security Land
in 2007 was primarily a result income received pursuant to an
escalation clause with respect to rent due under the lease
agreement. The reduction of the three month net income from MESC
Capital was a result of an increase in repairs and maintenance
costs.
Net income increased by $ 95,232 in 2007 over 2006 or 19.9%. The
change was primarily due an increase in 2007 net income from equity
investments in partnerships, lower selling, general and
administrative expenses and higher dividend and interest income from
marketable securities.
For the nine months ended September 30, 2007 and September 30, 2006:
No revenue was generated by the Company in this period.
Selling, general and administrative expenses decreased by $722,143
or 71.5% in 2007 compared to 2006 primarily due to a decrease of
approximately $640,000 in professional fees relating to pending and
resolved litigations, a reduction of stock based compensation paid
in September 2007 of approximately $58,000, and a non-recurring
interest expense from state income taxes for 2006 of $64,000 which
was offset by a change in employee benefit costs of approximately
$40,000.
Net income from equity investment in partnerships decreased by
$315,094 or 15.3% in 2007 compared to 2006 primarily due to a
decrease in net income from MESC Capital of approximately $408,000,
offset by an increase in net income from Security Land of
approximately $93,000. The increase in net income from Security Land
in 2007 was primarily a result of income received pursuant to an
escalation clause with respect to rent due under the lease
agreement. The reduction of net income from MESC Capital was
primarily caused by a major overhaul of equipment and delayed
repairs resulting from Hurricane Katrina.
Net income increased by $326,401 in 2007 over 2006 or 45.5%
primarily due to the reduction in professional fees, non-recurring
interest expense incurred, and stock based compensation.
12
Regency Affiliates, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
The Company's Shareholders' Equity at September 30, 2007 was $19,019,803 as
compared to $18,014,293 on September 30, 2006, an increase of $1,005,510 or
5.6%.
Impact of Inflation.
Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on its results
of operations.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements.
Critical Accounting Estimates
Accounting estimates and assumptions discussed in this section are those
considered most critical to understanding the financial statements because they
involve significant judgments and uncertainties. For these estimates, we caution
that future events may not develop as forecast, and that the best estimates
often require adjustment.
Investments-These assets are reviewed for impairment based on criteria that
include the extent on which cost exceeds market value, the duration of that
decline, and the Company's ability to hold to recovery. Market research and
analysis is performed to identify potential impairments on a regular basis.
Note Receivable-These assets are reviewed for collectibility on an ongoing
basis. Any notes deemed uncollectible have been offset by an allowance and
related accrued interest has been charged to expense.
Income Taxes-As stated above, assumptions have been made that taxable income
that may result from a possible IRS examination will be offset by existing net
operating losses generated by the Company from prior periods. Other assumptions
have been made that these net operating losses will not be limited or
disallowed, which could affect the results of operations in future periods.
The Company has significant net operating losses available to offset future
taxable income. The losses have been converted into deferred tax assets using an
estimated 34% tax rate. These deferred tax assets have been offset with a
valuation allowance 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.
ITEM 3. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective.
13
Regency Affiliates, Inc. and Subsidiaries
In connection with the evaluation of the Company's internal controls during the
Company's last fiscal quarter, the Company's Chief Executive Officer and Chief
Financial Officer have determined that there are no changes to the Company's
internal controls over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 20, 2004, a purported derivative and class action lawsuit was filed
by two 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 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended September 30, 2007 two former directors of the Company
exercised stock options to purchase 2,000 shares of the Company's common stock
at an exercise price of $1.60 per share. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
14
Regency Affiliates, Inc. and Subsidiaries
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(a) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
3.1(i)(b) Corrected Certificate of Amendment reflecting amendment
to Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(b) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
3.1(i)(c) Certificate of Amendment of Restated Certificate of
Incorporation of Regency Affiliates, Inc. (filed as
Exhibit A to the Company's Information Statement on
Schedule 14C filed on October 27, 2003 and incorporated
by reference herein).
3.1(i)(d) Certificate of Designation - Series B Preferred Stock,
$10 Stated Value, $.10 par value (filed as Exhibit to
Form 10-K dated June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of Designation, Series
C Preferred Stock, $100 Stated Value, $.10 par value
(filed as Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and incorporated
herein by reference).
3.1(i)(f) Certificate of Designation - Series D Junior Preferred
Stock, $10 Stated Value, $.10 par value (filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated
herein by reference).
15
Regency Affiliates, Inc. and Subsidiaries
ITEM 6. EXHIBITS. (continued)
3.1(i)(g) Certificate of Designation - Series E Preferred Stock,
$100 Stated Value, $.10 par value (filed as Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and incorporated
herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1,
Registration Number 2-86906, and incorporated herein by
reference).
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company (filed as
Exhibit 3.1(ii)(b) to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2002, filed
on November 19, 2002, and incorporated herein by
reference).
31.1 Chief Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Chief Financial Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
* Filed herewith
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
REGENCY AFFILIATES, INC.
(Registrant)
Date: December 17, 2007 /s/ Laurence S. Levy
----------------- ---------------------------------------
(President and Chief Executive Officer)
Date: December 17, 2007 /s/ Neil N. Hasson
----------------- ---------------------------------------
(Chief Financial Officer)
17
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(a) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
3.1(i)(b) Corrected Certificate of Amendment reflecting amendment
to Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1(i)(b) to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
2002, filed on November 19, 2002, and incorporated
herein by reference).
3.1(i)(c) Certificate of Amendment of Restated Certificate of
Incorporation of Regency Affiliates, Inc. (filed as
Exhibit A to the Company's Information Statement on
Schedule 14C filed on October 27, 2003 and incorporated
by reference herein).
3.1(i)(d) Certificate of Designation - Series B Preferred Stock,
$10 Stated Value, $.10 par value (filed as Exhibit to
Form 10-K dated June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of Designation, Series
C Preferred Stock, $100 Stated Value, $.10 par value
(filed as Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and incorporated
herein by reference).
3.1(i)(f) Certificate of Designation - Series D Junior Preferred
Stock, $10 Stated Value, $.10 par value (filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated
herein by reference).
3.1(i)(g) Certificate of Designation - Series E Preferred Stock,
$100 Stated Value, $.10 par value (filed as Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and incorporated
herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1,
Registration Number 2-86906, and incorporated herein by
reference).
18
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company (filed as
Exhibit 3.1(ii)(b) to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 2002, filed
on November 19, 2002, and incorporated herein by
reference).
31.1 Chief Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Chief Financial Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
* Filed herewith