UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------------
FORM 10-KSB
ANNUAL REPORT
Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
REGENCY AFFILIATES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 1-7949 72-0888772
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
610 Jensen Beach Boulevard
Jensen Beach, Florida 34957
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(Address of Principal Executive Offices)
(772) 334-8181
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Issuer's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes |X| No |_|
Mark if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $0.00
The number of shares outstanding of the registrant's $.01 Par Value Common Stock
issued as of April 13, 2004, was 3,018,912 and the aggregate market value of
voting stock held by non-affiliates of the registrant was approximately
$7,607,514.
Transitional Small Business Disclosure: Yes |_| No |X|
Documents incorporated by reference: None
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS........................................1
ITEM 2. DESCRIPTION OF PROPERTY........................................6
ITEM 3. LEGAL PROCEEDINGS..............................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS........................................................8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................9
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS ............................12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................12
ITEM 8A. CONTROLS AND PROCEDURES.......................................12
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS .............................13
ITEM 10. EXECUTIVE COMPENSATION........................................14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................19
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K...................................................20
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................26
SIGNATURES
EXHIBIT INDEX
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
This filing contains statements which, to the extent they are not
recitations of historical fact, constitute "forward looking statements" under
federal securities laws. All such statements are intended to be subject to the
safe harbor protection provided by applicable securities laws. For discussions
identifying some important factors that could cause actual Regency Affiliates,
Inc. ("Regency" or the "Company" or "we" or the "Registrant") results to differ
materially from those anticipated in the forward looking statements contained in
this filing, see Regency's "Narrative Description of Business," "Management's
Discussion and Analysis," and "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 under-takes no obligation to publicly revise these forward looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-QSB to be filed by the Company
subsequent to this Annual Report on Form 10-KSB and any Current Reports on Form
8-K filed by the Company.
GENERAL DEVELOPMENT OF BUSINESS
The Company, formerly TransContinental Energy Corporation, was organized
as a Delaware corporation in 1980 to be the successor to TransContinental Oil
Corporation, which existed since 1947.
In July 1993 we acquired an 80% interest in National Resource Development
Corporation ("NRDC"). At the time, NRDC's principal asset consisted of
previously quarried and stockpiled rock ("Aggregate") inventory located at a
mine site in Michigan. The remaining 20% interest in NRDC is owned by Statesman
Group, Inc. ("Statesman"), a former shareholder of Regency. In December 2001,
the Aggregate inventory was sold to Iron Mountain Resources, Inc. ("Iron
Mountain"), our 75% owned subsidiary, in exchange for an $18,200,000 note. See
"NARRATIVE DISCRIPTION 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 totalling $1,107,000 and $200,000 cash. See
"NARRATIVE DESCRIPTION OF BUSINESS - Rustic Crafts International, Inc."
Between April 1999 and September 1999, Regency acquired approximately 50%
of the outstanding common stock of Glas-Aire Industries Group, Ltd. In October
2001 we disposed of our interest in Glas-Aire Industries Group, Ltd. in
exchange for $2,500,000 plus 4,040,375 shares of the Company's common stock, or
approximately 23% of the issued and outstanding Shares of the Company at such
time.
On October 16, 2002, Regency redeemed all of the shares of our common
stock owned by Statesman pursuant to the terms of a Redemption Agreement, dated
October 16, 2002, between Regency and Statesman. We funded the redemption from
the proceeds of an aggregate of $4,750,000 borrowed from Royalty Holdings LLC
("Royalty"), an affiliate of current management, in exchange for two notes - a
$3,500,000 5% Convertible Promissory Note due October 16, 2012 and a $1,250,000
9% Promissory Note due October 16, 2007. Both notes allowed interest to accrue
without current payment. The principal and interest under the Convertible
Promissory Note were convertible into shares of our common stock at a conversion
rate of $2.00 per shares. On November 7, 2002, Royalty converted $1,495,902 of
the principal amount of the Convertible Promissory Note plus accrued interest
into 750,000 shares of our common stock. On July 3, 2003, Royalty converted the
remaining principal amount of the note and the $71,378 of accrued and unpaid
interest thereon into 1,037,738 shares of our common stock. On the same date,
the Company prepaid the full $1,250,000 principal amount of, and all accrued and
unpaid interest under, the 9% Promissory Note in accordance with the mandatory
prepayment provisions of such note. Also on July 3, 2003, the Company repaid all
amounts outstanding under a $300,000 working capital loan facility from Royalty
established in March 2003, and terminated such facility. The payment amount
consisted of $180,000 of principal and $2,910 of accrued and unpaid interest.
In connection with the redemption of our common stock owned by Statesman,
we acquired from Statesman a three year option to purchase the 20% stock
interest in NRDC held by Statesman. To exercise the option, we must deliver to
Statesman for cancellation a $2.44 million note issued to Regency by Statesman
in October 2001. As consideration for the option, we (i) paid Statesman
$250,000, (ii) amended the note and related pledge agreement to limit our
recourse under the note and (iii) transferred to Statesman certain office
furniture and equipment that we owned. As part of the redemption, we also
entered into an agreement with Statesman providing for (i) an amendment to the
Certificate of Designations of the Series C Preferred Stock for Regency and (ii)
certain limitations on the ability of Statesman to issue or transfer shares or
other beneficial interests in Statesman or to sell, transfer, purchase or
acquire any capital stock of Regency, in each case without first receiving our
written confirmation that such issuance or transfer would not adversely affect
our ability to utilize our tax loss carryforwards. We paid Statesman an
aggregate amount of $2,730,000 in consideration of the foregoing agreements.
In connection with the redemption of our common stock owned by Statesman,
effective October 28, 2002, each of our former directors resigned and the four
current directors were appointed to serve as the successor members of the Board
of Directors. In addition, simultaneously with the redemption, all of the
officers of Regency resigned and were replaced by designees of Royalty. At such
time, Regency entered into a Contingent Payment Agreement with William R.
Ponsoldt, Sr., the Company's former President and Chief Executive Officer,
whereby payment of $1,508,000 of accrued compensation owed to Mr. Ponsoldt by
Regency became subject to the satisfaction of certain conditions precedent. On
November 25, 2003, following satisfaction of the relevant conditions, we paid
Mr. Ponsoldt $1,225,234, such amount reflecting a mutually agreed upon discount
from the amount owed.
The loans, redemption, and other October 2002 transactions described above
are collectively referred to herein as the "Restructuring Transactions."
On September 23, 2003, the Company's Board of Directors authorized the
repurchase of our common stock in the aggregate amount not to exceed $1,000,000.
The shares may be repurchased from time to time in open market transactions or
privately negotiated transactions at the Company's discretion, subject to market
conditions and other factors. Under the program, no shares will knowingly be
2
purchased from the Company's officers or directors or from any such person's
affiliates. Through March 30, 2004 the Company has not repurchased any shares
under the repurchase plan.
NARRATIVE DESCRIPTION OF BUSINESS.
Security Land and Development Company Limited Partnership
On November 18, 1994, we acquired a limited partnership interest in
Security Land for an equity investment of $350,000. We have no obligation to
make any further capital contribution to Security Land. Security Land owns the
34.3-acre Security West complex at 1500 Woodlawn Drive, Woodlawn, MD consisting
of a two-story office building and a connected six-story office tower occupied
by the United States Social Security Administration Office of Disability and
International Operations. The buildings have a net rentable area of
approximately 717,000 square feet. The construction of the Security West
Buildings was completed in 1972 and the Social Security Administration has
occupied the building since 1972.
On November 30, 2000, we invested $10,000 for a 5% Limited Partnership
Interest in 1500 Woodlawn Limited Partnership, the General Partner of Security
Land.
During 1994, Security Land completed the placement of a $56,450,000
non-recourse project note, due November 15, 2003. The placement of the project
note was undertaken by the issuance of 7.90% certificates of participation and
was underwritten by Dillon Read & Co., Inc. The net proceeds received from the
sale of the certificates were used to refinance existing debt of Security Land
related to the project, to finance certain alterations to the project by
Security Land, to fund certain reserves and to pay costs of the project note
issue. The project note was a non-recourse obligation of Security Land, interest
and principal payments were payable solely from the lease payments from the U.S.
Government and the note was self-amortizing.
In March 2003, the General Services Administration agreed to extend the
term of its lease at the building owned by Security Land through October 31,
2018. The significant terms of the lease extension include fixed annual gross
rent of approximately $12,754,000 (or approximately $17.79 per sq. ft.).
Security Land is responsible for all operating expenses of the building.
Security Land is also responsible for upgrading some of the building's common
areas.
On June 24, 2003, US SSA LLC, a single purpose entity owned by Security
Land, borrowed $98,500,000 through a public debt issue underwritten by CTL
Capital, LLC. Proceeds of the refinancing were used to repay the outstanding
balance of Security Land's 1994 indebtedness, to establish reserves to make
capital improvements to the property, to provide reserves required by the new
debt, to pay costs and expenses related to issuing the debt, to pay fees related
to the lease extension with the General Services Administration and the
financing, and to make a distribution to the partners of Security Land. The debt
matures October 31, 2018, at which time the loan will have been paid down to a
balance of $10,000,000. Security Land has obtained residual value insurance for
approximately $10,000,000. The interest cost of the financing is 4.63%.
The Company received approximately $41,000,000 of net refinancing proceeds
from the Security Land distribution. In addition, under the terms of the
Security Land partnership agreement, as amended in April 2003 in contemplation
of the refinancing, the Company is entitled to (i) 95% of Security Land's
distributions of cash flow until the Company has received $2,000,000 of such
distributions, and thereafter 50% of such distributions and (ii) once the
Company has received $2,000,000 of cash flow distributions, a $180,000 annual
management fee from Security Land. The foregoing percentages are inclusive of
the Company's interest as a limited partner in 1500 Woodlawn, the general
partner of Security. In connection with the Security Land refinancing and
distribution, the Company was required to repay its KBC Bank loan. The payoff
amount was approximately $14,125,000, which included a release fee and
make-whole premium.
3
National Resource Development Corporation; Iron Mountain Resources, Inc.
Until December 2001, our wholly-owned subsidiary, NRDC had as its
principal asset approximately 70 million short tons of Aggregate located at the
site of the Groveland Mine in Dickinson County, Michigan. NRDC never consummated
sales of material amounts of Aggregate. In December 2001, the Aggregate was sold
to Iron Mountain, a 75% owned subsidiary of Regency. The purchase price was
$18,200,000 and is payable, with interest of 2.46%, in ninety-six equal payments
of principal and interest commencing December 2003. The intercompany gain on
this transaction has been eliminated in the consolidation process resulting in
the Aggregate being carried at its historical cost.
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.
Iron Mountain has not sold material amounts of Aggregate, and, as of March
30, 2004, Iron Mountain has not made any payments on the note as required. NRDC
is currently reviewing its options to address the non-payment, including
declaring a default under the note and foreclosing on the Aggregate.
Rustic Crafts International, Inc.
Rustic Crafts International, Inc., a wholly owned subsidiary of Regency,
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.
4
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, 2003, Regency and its subsidiaries employed two 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 the Security West
Building from uninsured acts of God or war could have a materially adverse
impact upon our investment in Security Land 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;
- We have had significant tax loss and credit carryforwards and no
assurance can be provided that the Internal Revenue Service would not attempt to
limit or disallow altogether our use , retroactively and/or prospectively, of
such carryforwards, due to ownership changes or any other reason. The
disallowance of the utilization or our net operating loss would severely impact
or financial position and results of operations due to the significant amounts
of taxable income that has been, and may in the future be, offset by our net
operating loss carryforwards;
- Royalty, an affiliate of the Company's management, beneficially owns
approximately 60% of our common stock. As a result, Royalty has the ability to
control the outcome of all matters requiring shareholder approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets;
- Regency does not expect to pay dividends in the foreseeable future; and
- There are many public and private companies that are also searching for
operating businesses and other business opportunities as potential acquisition
or merger candidates. The Company will be in direct competition with these other
companies in its search for business opportunities. Many of these entities have
significantly greater financial and personnel resources than the Company.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our Securities and
Exchange Commission filings are available to the public over the Internet at the
5
SEC's web site at http://www.sec.gov. You may also read and copy any material we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
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 Partership", which is incorporated
by reference herein, for more information on this property.
In March 1998, Rustic Crafts purchased a 117,000 square foot building
located at 40 Poplar Street in Scranton, Pennsylvania. The building was
renovated and occupied in early 1999. Approximately 75,000 and 14,000 square
feet in this building are leased to the purchaser of Rustic Crafts' operations
and another tenant, respectively. The purchase of this property was funded in
part by a $960,000 first mortgage loan from PNC Bank, which was guaranteed by
Regency. The loan was restructured in September 2002 in connection with the sale
of the Rustic Crafts assets and repaid in full on June 27, 2003. On January 12,
2004, we sold the building to the purchaser of Rustic Crafts and other tenants
for $531,500.
ITEM 3. LEGAL PROCEEDINGS
On December 14, 2001, we initiated a proceeding in The Circuit Court of
the Nineteenth Judicial Circuit in and for Martin County, Florida, case number
01-1087-CA against Larry J. Horbach, individually and L.J. Horbach & Associates.
Larry Horbach was a former interim CFO and Board member. We claim that Larry
Horbach, without appropriate authority, borrowed $100,050 from Mid City Bank in
the name of Regency. We further claim that Horbach converted all or part of the
proceeds from the loan for his benefit and breached his fiduciary duties as an
officer and director. Horbach filed a Motion for the Court to determine whether
the claims asserted against him were properly brought in Florida, or whether
they should have been filed in Nebraska. The matter was fully briefed, and the
Florida Court took the matter under advisement. The Florida Court has not yet
rendered its decision on this jurisdictional issue.
On February 7, 2002, a complaint naming Regency as defendant was filed in
the District Court of Douglas County, Nebraska, case number 1012. The Plaintiffs
are Larry J. Horbach, individually and L.J. Horbach & Associates and they are
demanding payment on a loan they purchased from Mid City Bank. The plaintiffs
are requesting payment of $82,512.57 plus accrued interest, costs and attorney
fees. We are vigorously defending this litigation.
On May 2, 2002, a lawsuit (the "Federal Action") was filed in the Federal
District Court for the District of Nebraska (the "Nebraska Court") by two
dissident Company shareholders, Edward E. Gatz and Donald D. Graham, captioned
Gatz et al. v. Ponsoldt, Sr., et al, against the former officers and directors
of the Company, Statesman and, as a nominal defendant only, the Company. In
December 2002, plaintiffs filed a seven-count Amended Complaint to add claims
against Royalty and Royalty's control persons. All Defendants moved to dismiss
all claims against them on jurisdictional and substantive grounds. On July 7,
2003, the Nebraska Court ruled that venue in the District of Nebraska was
improper and granted defendants' motions to transfer the case to the District of
Delaware. In connection with the transfer of the case to Delaware, the Court
denied as moot the other motions pending before it without prejudice to their
reassertion in the United States District Court for the District of Delaware
(the "Delaware Federal Court").
6
In September and October 2003, all defendants filed motions to dismiss the
Federal Action with the Delaware Federal Court and plaintiffs filed a motion for
permission to file an amended and supplemental complaint as well as a
preliminary injunction or status quo order seeking, among other things, to
prevent the Company from taking any actions outside the ordinary course of
business. On December 18, 2003, the Delaware Federal Court issued an opinion and
order which, among other things (i) granted defendants' motions to dismiss the
amended complaint with respect to certain claims, (ii) denied plaintiffs' motion
for leave to file a supplemental and second amended complaint, (iii) denied
plaintiffs' request for a preliminary injunction and a status quo order and (iv)
dismissed the remainder of the amended complaint for lack of subject matter
jurisdiction. As a result of the Delaware Federal Court's opinion and order, the
Federal Action was dismissed in its entirety.
On January 20, 2004, a purported derivative and class action lawsuit (the
"Delaware State Action") was filed by the same two individual shareholder
plaintiffs in the New Castle County Court of Chancery, Delaware, captioned Gatz
et al. v. Ponsoldt, Sr., et al, (C.A. No. 174-N) naming as defendants certain
current and former directors of the Company, Royalty and certain of its
affiliates, Statesman and, nominally, the Company. The complaint alleges, among
other things, breaches of fiduciary duties by the former director defendants and
Statesman in connection with (i) the exercise by Statesman in 2001 of an option
to acquire shares of our common stock, (ii) the 2001 sale of Aggregate by NRDC
to Iron Mountain and (iii) the October 2002 Restructuring Transactions. The
complaint also alleges breaches of fiduciary duties by the current director
defendants in connection with the payment by the Company in 2003 of accrued
compensation owed to William R. Ponsoldt, Sr. for periods prior to the October
2002 Restructuring Transactions. The complaint also alleges that Royalty and its
affiliates knowingly participated in the breaches of fiduciary duties by the
former director defendants relating to the October 2002 Restructuring
Transactions. In addition to other damages, plaintiffs seek unspecified
compensatory and/or rescissory damages against all defendants, a declaration
that all Company stock issued to Statesman, William R. Ponsoldt, Sr., Royalty
and any person affiliated with the foregoing is void, an order rescinding any
payments in any form made by the Company to William R. Ponsoldt, Sr. or any of
his affiliates or family members, an order rescinding the October 2002
Restructuring Transactions, and an order rescinding Statesman's 2001 option
exercise and rescinding the option itself. The Company, as a nominal defendant,
has not taken any position with respect to the merits of the Delaware State
Action. Each of the other defendants has moved to dismiss the Delaware State
Action and these motions are pending.
The defendants in the Federal Action and the Delaware State Action, other
than Statesman, are entitled to be indemnified by the Company for damages, if
any, and expenses, including legal fees, they may incur as a result of the
lawsuit, subject to certain circumstances under which such indemnification is
not available. In addition, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to stockholders at the Company's
November 18, 2003 Annual Meeting of Stockholders:
1. To elect four directors of Regency to serve until the next Meeting of
Stockholders. The vote for the respective nominees for election as directors was
as follows:
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DIRECTORS FOR AGAINST ABSTAIN
--------- --- ------- -------
Laurence S. Levy 2,611,350 0 24,678
Neil N. Hasson 2,611,354 0 24,674
Stanley Fleishman 2,611,354 0 24,674
Errol Glasser 2,611,371 0 24,657
2. To ratify the appointment of Rosenberg Rich Baker Berman & Company as
independent public accountants. The results of the vote to ratify the
appointment of Rosenberg Rich Baker Berman & Company as independent public
accountants was:
For: 2,611,815 Against: 24,039 Abstain: 174
On October 22, 2003, our Board of Directors approved an amendment to the
Company's Restated Certificate of Incorporation, as amended, to decrease the
number of shares of authorized stock from 30,000,000 shares to 10,000,000 shares
(consisting of 8,000,000 shares of common stock and 2,000,000 shares of
preferred stock) and submitted such proposed amendment to Royalty, the owner of
a majority of the outstanding common stock of the Company. On October 22, 2003,
Royalty executed a written consent approving the amendment.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
MARKET INFORMATION
Our common stock is traded in the over-the-counter market on the bulletin
board. The symbol for the listing is "RAFI.OB". The following table sets forth
the high and low bid prices for each calendar quarter during the last two fiscal
years of Regency. On April 13, 2004 the closing sale price of our common stock
was $6.40. As of April 13, 2004, there were approximately 2,375 common
stockholders of record.
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YEAR ENDED
DECEMBER 31, 2002 HIGH ($) LOW ($)
----------------- -------- -------
First Quarter* 3.30 2.50
Second Quarter 3.00 1.70
Third Quarter 1.90 1.25
Fourth Quarter 4.00 1.40
YEAR ENDED
DECEMBER 31, 2003 HIGH ($) LOW ($)
----------------- -------- -------
First Quarter 4.40 3.35
Second Quarter 8.00 4.20
Third Quarter 6.60 5.80
Fourth Quarter 6.40 5.95
----------
* First quarter 2002 prices are adjusted to reflect a one-for-ten reverse stock
split of our common stock, effective February 15, 2002.
DIVIDEND POLICY
We have not paid or declared cash dividends on our common stock during the
last two fiscal years. We have no present intention to pay cash dividends on our
common stock.
TRANSFER AGENT
In January 2001, Transfer On-Line, Inc. was named as transfer agent
replacing Horbach & Associates. Transfer On-Line, Inc. is located at 317 SW
Alder Street, Second Floor, Portland, Oregon 97204. Their telephone number is
(503) 227-2950 and their website is www.transferonline.com.
RECENT SALES OF UNREGISTERED SECURITIES
During 2003 the Company did not sell any equity securities that were not
registered under the Securities Act of 1933.
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
9
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 Security West
Building from uninsured acts of God or war could have a materially adverse
impact upon our investment in Security Land 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;
- We have had significant tax loss and credit carryforwards and no
assurance can be provided that the Internal Revenue Service would not attempt to
limit or disallow altogether our use , retroactively and/or prospectively, of
such carryforwards, due to ownership changes or any other reason. The
disallowance of the utilization or our net operating loss would severely impact
or financial position and results of operations due to the significant amounts
of taxable income that has been, and may in the future be, offset by our net
operating loss carryforwards;
- Royalty, an affiliate of the Company's management, beneficially owns
approximately 60% of our common stock. As a result, Royalty has the ability to
control the outcome of all matters requiring shareholder approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets;
- Regency does not expect to pay dividends in the foreseeable future; and
- There are many public and private companies that are also searching for
operating businesses and other business opportunities as potential acquisition
or merger candidates. The Company will be in direct competition with these other
companies in its search for business opportunities. Many of these entities have
significantly greater financial and personnel resources than the Company.
The following discussion and analysis of the financial condition and
results of operations of Regency should be read in conjunction with the
accompanying financial statements and related notes included in Item 7 of this
report.
GENERAL
The Company is committed to enhancing the value of the Company's Common
Stock by seeking opportunities to monetize its existing assets and by seeking
new business opportunities on an opportunistic basis. To date, the Company has
not entered into any binding agreements regarding any such transaction. The
Company does not propose to restrict its search for business opportunities to
any particular geographical area or industry, and may, therefore, acquire any
business, to the extent of its resources. The Company's discretion in the
selection of business opportunities is unrestricted, subject to the availability
of such opportunities, economic conditions, and other factors. No assurance can
be given that the Company will be successful identifying or securing a desirable
business opportunity, and no assurance can be given that any such opportunity
that is identified and secured will produce favorable results for the Company
and its stockholders.
Our Shareholders' Equity at December 31, 2003 was $20,106,287 as compared
to $20,340,702 on December 31, 2002, a decrease of 1.15%.
RESULTS OF OPERATIONS
2003 COMPARED TO 2002
Net sales were $0 in both 2003 and 2002.
Selling and administrative expenses increased by $3,806,640 or 302.64% in
2003 as compared to 2002. Increases in professional fees, costs related to
extinguishment of debt, and impairment of the Scranton property were offset by
reduction in executive compensation and related expenses. Sales and
administrative expenses in 2002 of the former operating subsidiaries are
included in discontinued operations.
Income from equity investment in Partnership decreased in 2003 by
$2,871,297 as compared to 2002 due to the increase in interest expenses on the
increased principal balance of debt on the Security Land property and an
increase in administrative expenses of Security Land.
Interest expense decreased by $460,003 in 2003 over 2002 due to the
extinguishment of all long-term debt.
Income tax expense increased $128,789 from 2002 due to an increase in
state income taxes and decrease in Federal tax benefits from 2002.
Net income decreased $5,010,868 or 186.10% in 2003 over 2002. The decrease
was primarily due the increase in selling and administrative expenses and
reduction in income from our equity investment in Security Land, offset by
reductions in interest expense and losses from prior year discontinued
operations.
10
2002 COMPARED TO 2001
Net sales decreased $14,512 compared to 2001, a 70% decrease. Gross
margins decreased $14,613 in 2002 over 2001, which is primarily attributable to
reduced sales of Aggregate. Revenue and Cost of Sales of the former operating
subsidiaries are included in discontinued operations.
Selling and administrative expenses were reduced by $268,132 or 12.5% in
2002 compared to 2001. Increases in professional fees were offset by reduction
in executive compensation and related expenses. Sales and administrative
expenses of the former operating subsidiaries are included in discontinued
operations.
Income from our equity investment in Security Land increased $747,213 over
2001 due to the reduction of interest expenses on the lower loan principal
balance or the Security Land property.
Interest expense decreased by $47,641 in 2002 over 2001 as a result of
reduced interest rates on outstanding loan balances of Rustic Crafts and
Regency.
Income tax expense decreased $238,065 due to a reduction of state income
taxes.
Net income decreased $981,154 or 26.7% in 2002 over 2001. The decrease was
primarily due to the elimination of goodwill resulting from the sale of the
operating assets of Rustic Crafts, increased loss from operations of
discontinued components, and a reduced gain on disposition of a subsidiary. The
goodwill attributable to Rustic Crafts was being amortized on a straight-line
basis over a period of 15 years. During the year ended December 31, 2002, we
recognized goodwill impairment of $487,757 resulting in a balance in goodwill of
$0 at year-end. Impairment was recognized due to the fact that the market price
of the major assets of the business (land, building, improvements) approximated
the historical cost basis of those assets and the net cash flows of future
operations were projected to be negative. These decreases were offset primarily
by increased income from our equity investment and a reduced tax burden.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2003, Regency had current assets of $19,640,905 and
Shareholders' Equity of $20,106,287. On December 31, 2003, Regency had
$18,946,274 in cash and marketable securities, total assets of $22,615,207 and
total liabilities of $2,508,920.
On June 24, 2003, US SSA LLC, a single purpose entity owned by Security
Land, borrowed $98,500,000 through a public debt issue underwritten by CTL
Capital, LLC. Proceeds of the refinancing were used to repay the outstanding
balance of Security Land's 1994 indebtedness, to establish reserves to make
capital improvements to the property, to provide reserves required by the new
debt, to pay costs and expenses related to issuing the debt, to pay fees related
to the lease extension with the GSA and the financing, and to make a
distribution to the partners of Security Land. The loan matures on October 31,
2018 at which time the loan will have been paid down to a balance of
$10,000,000. Security Land obtained residual value insurance for approximately
$10,000,000. The interest cost of the financing is 4.63%. The financing is
non-recourse to the Regency. Regency received approximately $41,000,000 from the
Security Land distribution. In addition, under the terms of the Security
partnership agreement, Regency is entitled to (i) 95% of Security Land's
distributions of cash flow until Regency has received $2,000,000 of such
distributions, and thereafter 50% of such distributions and (ii) once Regency
has received $2,000,000 of cash flow distributions, a $180,000 annual management
fee from Security Land. The foregoing percentages are inclusive of the Company's
interest as a limited partner in 1500 Woodlawn, the general partner of Security.
In connection with the Security Land refinancing and distribution, the Company
was required to repay its KBC Bank loan. The payoff amount was approximately
$14,125,000, which included a release fee and make-whole premium.
11
In order to satisfy the Company's working capital needs, in April 2003,
the Company obtained a loan facility from Royalty, an affiliate of Messrs. Levy
and Hasson, pursuant to which the Company could have borrowed up to an aggregate
of $300,000 from Royalty. Amounts borrowed were evidenced by a demand note
bearing interest of 8% per annum. On July 3, 2003, the Company repaid all
amounts outstanding under the $300,000 working capital loan facility from
Royalty, and terminated the facility. The payment amount consisted of $180,000
of principal and $2,910 of accrued and unpaid interest.
In the three months ended September 30, 2003, Royalty advanced $90,000 to
Regency. The principal amount and all accrued interest were repaid in full on
November 11, 2003.
Management believes that the Company's cash balances are adequate to fund
the Company's cash requirements for at least the next twelve months.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Financial Statements required by Item 7 of Part II of Form 10-KSB are
presented on page F1 and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company
carried out an evaluation, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective, as of the end of the period covered by
this report, to provide reasonable assurance that information required to be
disclosed in the Company's reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
No change occurred in the Company's internal controls concerning financial
reporting during the fourth quarter of the fiscal year ended December 31, 2003
that has materially affected, or is reasonably likely to materially affect, the
Company's internal controls over financial reporting.
12
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The following directors were elected at the annual meeting of the
stockholders held November 18, 2003 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, 47 Mr. Levy is Chairman of the Board of Directors, President, and Chief Executive Officer of the
Company. Mr. Levy is the co-founder of Hyde Park Holdings, Inc., an investment firm specializing
in leveraged buyouts. Mr. Levy acts as a principal investor at Hyde Park Holdings, Inc. and is
involved in identifying, financing, acquiring and managing companies operating in real estate,
manufacturing, infrastructure, parking and sub-assembly.
Neil N. Hasson, 38 Mr. Hasson is a Director and Chief Financial Officer of the Company. Mr. Hasson is currently a
private real estate investor. Previously, Mr. Hasson was the head of European Real Estate for
DLJ Real Estate Capital Partners, a $660 million real estate fund managed by Donaldson, Lufkin
and Jenrette ("DLJ"), where he was involved with the acquisition of real estate throughout the
world. Mr. Hasson joined DLJ as a Managing Director in New York in January 1995. Mr. Hasson
currently serves as a non-executive director of Sterling Centrecorp, a real estate company
listed on the Toronto Stock Exchange.
Stanley Fleishman, 52 Mr. Fleishman is a Director of the Company. Since 1992, Mr. Fleishman has been President and CEO
of Jetro Holdings Inc., a wholesale distributor of dry and perishable retail groceries and food
service items.
Errol Glasser, 50 Mr. Glasser is a Director of the Company. Since 1993, Mr. Glasser has been President of East End
Capital Management, Inc., a private investment and advisory company based in New York City.
Previously, Mr. Glasser was a Managing Director at Kidder, Peabody & Co. with responsibility for
its West Coast investment banking activity.
Carol Zelinski, 40 Ms. Zelinski is the Secretary of the Company. Since 1997, Ms. Zelinski has been an analyst at
Hyde Park Holdings, Inc., a private investment firm. Ms. Zelinski is not a Director of the
Company.
13
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 2003, was subject to the
reporting requirements of Section 16(a) with respect to Regency failed to meet
such requirements on a timely basis.
Code of Ethics.
We have adopted a Code of Ethics that applies to the Company's chief
executive officer and chief financial officer. A copy of the Code of Ethics will
be provided without charge to any person who requests it by writing to the
address set forth on the cover page to this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation
during the last three years for each of the Company's executive officers.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------------------------- ------------------------------------------
Restricted Securities
Other Annual Stock Underlying All other
Name and Principal Salary Bonus Compensation Award(s) Options Compensation
Position Year ($) ($) ($) (#) (#) ($)
-------- ---- --- --- --- --- --- ---
Laurence S. Levy 2003 181,250 0 0 0 75,000 0
President/CEO 2002 31,643 0 0 0 0 (1) 0
2001 N/A N/A N/A N/A N/A N/A
Neil N. Hasson 2003 56,250 0 0 0 75,000 0
CFO 2002 10,547 0 0 0 0 (1) 0
2001 N/A N/A N/A N/A N/A N/A
----------
(1) Pursuant to October 2002 employment agreements between Regency and each of
Mr. Levy and Mr. Hasson, we agreed to issue options to purchase 25,000
shares to each such individual at an exercise price of $1.35 per share.
These options were granted in April 2003 under our 2003 Stock Incentive
Plan.
OPTION/SAR GRANTS
The Option/SAR Grants Table below shows the individual grants of stock
options (whether or not in tandem with SARS) and freestanding SARS made during
the last completed fiscal year to any of the named executive officers.
14
OPTION GRANTS IN LAST FISCAL YEAR
NAME NUMBER OF PERCENT OF TOTAL EXERCISE MARKET PRICE EXPIRATION DATE
---- SECURITIES OPTIONS GRANTED TO PRICE ON DATE OF ---------------
UNDERLYING EMPLOYEES IN PER SHARE ($) GRANT
OPTIONS GRANTED FISCAL YEAR ------------- ($)
--------------- ----------- ---
Laurence Levy 25,000 16% 1.35 4.20 4/3/13
Neil N. Hasson 25,000 16% 1.35 4.20 4/3/13
Laurence Levy 50,000 34% 1.53 6.10 9/30/13
Neil N. Hasson 50,000 34% 1.53 6.10 9/30/13
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE
The Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values table shows there were no exercises of stock options (nor
tandem SARS) nor freestanding SARS during the last completed fiscal year by any
of the named executive officers.
OPTION VALUES AT DECEMBER 31, 2003
NAME SHARES VALUE EXERCISABLE NUMBER OF SECURITIES VALUE OF IN-THE-MONEY OPTIONS AT
---- ACQUIRED ON REALIZED UNDERLYING UNEXERCISED OPTIONS AT DECEMBER 31, 2003 (# OF
EXERCISE -------- DECEMBER 31, 2003 SHARES)
(# SHARES) (# OF SHARES) --------------------------------
---------- --------------------------------- EXERCISABLE UNEXERCISABLE
EXERCISABLE UNEXERCISABLE ----------- -------------
----------- -------------
Laurence S. Levy -0- -0- 75,000 -0- 369,750 N/A
Neil N. Hasson -0- -0- 75,000 -0- 369,750 N/A
INCENTIVE STOCK OPTION PLANS
Non Qualified Stock Options.
In April 2003, Messrs. Levy and Hasson were each granted options to
purchase 25,000 shares of our common stock at an exercise price of $1.35 per
shares in accordance with employment agreements entered into in October 2002 .
In October 2003, Messrs. Levy and Hasson were each granted options to purchase
50,000 shares of our common stock at an exercise price of $1.53 under the 2003
Stock Incentive Plan, as amended.
LTIP Awards.
There have been no awards under any long-term Incentive Plan during the
last completed fiscal year.
Defined Benefit Plans.
We have no defined benefit or actuarial plans.
15
COMPENSATION OF DIRECTORS
Pursuant to our 2003 Stock Incentive Plan adopted in March 2003,
non-management directors receive 250 shares of our common stock for every
quarter of a year of service completed. In April 2003, each existing
non-management director (Stanley Fleishman and Errol Glasser) was granted
options to purchase 15,000 shares of our common stock at an exercise price of
$2.40 per share (the approximate market price of the common stock as of the date
the aforementioned non-management directors began their service). One-third of
the options vest on each of December 31, 2003, 2004 and 2005. In April 2003
Messrs. Levy and Hasson were each granted options to purchase 25,000 shares of
our common stock at an exercise price of $1.35 per shares under the 2003 Stock
Incentive Plan in accordance with employment agreements entered into in October
2002. On October 1, 2003, Messrs. Levy and Hasson were each granted options to
purchase 50,000 shares of our common stock at an exercise price of $1.53 per
share under the 2003 Stock Incentive Plan, as amended. Also on October 1, 2003,
Messrs. Fleishman and Glasser were each granted options to purchase 2,500 shares
of our common stock at an exercise price of $1.53 under the 2003 Stock Incentive
Plan, as amended.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In connection with the Restructuring Transactions described in Item 1, we
entered into an Employment Agreement with Laurence S. Levy, our current
President and Chief Executive Officer, and with Neil Hasson, our current Chief
Financial Officer. Under each employment agreement, the executive's employment
commences on the date of the Restructuring Transactions and terminates upon the
date on which the executive attains retirement age, provided that the executive
may terminate his employment upon 30 days notice to Regency and he may be
removed from office upon death or disability or for just cause. The employment
agreements provides for a base annual salary of no less than $150,000 for Mr.
Levy and no less than $50,000 for Mr. Hasson, a discretionary bonus and other
customary benefits. The employment agreements also provide for the issuance to
each of Messrs. Levy and Hasson, of options to purchase 25,000 shares of our
common stock for $1.35 per share. Those options were issued in April 2003
pursuant to the Company's 2003 Stock Incentive Plan.
16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information.
Plan Category (a) (b) (c)
------------- Number of securities to be Weighted-average exercise Number of securities remaining
issued upon exercise of price of outstanding options, available for future issuance
outstanding options, warrants and rights under equity compensation plans
warrants and rights ------------------- (excluding securities reflected
------------------- in column (a))
--------------
Equity compensation plans 30,000 $6.51 N/A
approved by security holders
Equity compensation plans not 190,000 $1.62 60,000
approved by security holders (1)
Total 220,000 $2.29 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. Please see the
full terms of the 2003 Stock Incentive Plan, as amended, for more detailed
information. The 2003 Stock Incentive Plan, as amended, is attached as an
exhibit hereto and is incorporated by reference herein.
Security Ownership of Certain Beneficial Owners.
The following table sets forth information regarding ownership of
outstanding shares of our common stock by those individuals or groups who have
advised us that they own more than five percent (5%) of such outstanding shares.
17
Name and Address of Amount Beneficially Percent of Class
Beneficial Owner Owned as of March 7, 2004 ----------------
---------------- -------------------------
Royalty Holdings LLC and Royalty 1,823,738 (1) 60.41%
Management, Inc.
595 Madison Avenue
New York, New York 10022
Raffles Associates, L.P. 146,467 (2) 5.35%
450 Seventh Avenue
New York, New York 10123
----------
(1) Based on information contained in the Amended Statement on Schedule 13D
filed by such entities on October 3, 2003.
(2) Based on information contained in the amended Statement on Schedule 13G
filed by such entity on April 2, 2004.
The following table sets forth certain information as of March 30, 2004
(except as otherwise indicated) regarding the ownership of our common stock by
(i) each director, (ii) each individual named in the Summary Compensation Table
contained herein and (iii) all current executive officers and directors of
Regency as a group. Except as otherwise indicated, each such stockholder has
sole voting and investment power with respect to the shares beneficially owned
by such stockholder.
Name and Address of Beneficial Owner Amount Percent of Class
------------------------------------ Beneficially ----------------
Owned
-----
Laurence S. Levy (a) 1,898,738 (1) 61.37%
Neil N. Hasson (a) 75,000 (2) 2.42%
Errol Glasser (b) 12,500 (3) Less than 1%
Stanley Fleishman (c) 8,500 (3) Less than 1%
All current Directors and Executive Officers as 1,994,738 62.66%
a group
----------
(1) Comprised of (i) the shares that are beneficially owned by Royalty
Management, Inc., of which Mr. Levy is the President, sole director and
sole stockholder and (ii) 75,000 shares underlying currently exercisable
options granted to Mr. Levy under the Company's 2003 Stock Incentive Plan,
as amended.
(2) Comprised of 75,000 shares of our common stock underlying currently
exercisable options granted to Mr. Hasson under the Company's 2003 Stock
Incentive Plan, as amended.
(3) Includes 7,500 shares of our common stock underlying currently exercisable
options issued to such individual under the Company's 2003 Stock Incentive
Plan, as amended.
18
(a) The address of such beneficial owner is c/o Hyde Park Holdings, 595
Madison Avenue, New York, N.Y. 10022
(b) The address of such beneficial owner is 280 Madison Avenue, Suite 600, New
York, N.Y. 10016
(c) The address of such beneficial owner is 98 Rye Ridge Road, Harrison, N.Y.
10528
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Restructuring Transactions; Disposition of Assets
See "ITEM 1. BUSINESS - GENERAL DEVELOPMENT OF BUSINESS" for descriptions
of the Restructuring Transactions and the Rustic Crafts disposition which are
incorporated by reference herein.
Loan Facility
In order to satisfy the Company's working capital needs, in April 2003 the
Company obtained a loan facility from Royalty, an affiliate of Messrs. Levy and
Hasson, pursuant to which the Company could have borrowed up to an aggregate of
$300,000 from Royalty. Amounts borrowed were evidenced by a demand note bearing
interest of 8% per annum. On July 3, 2003, the Company repaid all amounts
outstanding under the $300,000 working capital loan facility from Royalty, and
terminated the facility. The payment amount consisted of $180,000 of principal
and $2,910 of accrued and unpaid interest.
License Agreement
Pursuant to a License Agreement entered into in March 2003, Royalty
Management, Inc., which is wholly-owned by Laurence S. Levy, the Company's
President, Chief Executive Officer and a director, provides New York City office
space, office supplies and office services to the Company for $100,000 per year.
Statesman Loan
Statesman is an international business corporation organized under the
laws of the Bahamas. Statesman's principal business is the making of investments
in the United States and elsewhere. Both its principal business and principal
office are located at Bay Street, Nassau, Bahamas. The Statesman Irrevocable
Trust dated April 15, 1991 is the controlling person of Statesman. The Statesman
Trust is an irrevocable trust for the benefit of William R. Ponsoldt, Jr., a
former director of Regency, Tracey A. Ponsoldt, now married and sometimes known
as Tracey A. Powers, and Christopher J. Ponsoldt, all children of William R.
Ponsoldt, Sr. The acting trustees of the Statesman Trust are Liedenhall Bank and
Trust, Nassau, Bahamas.
Pursuant to an agreement between the Company and Stateseman dated June 3,
1997, as amended and restated on March 24, 1998, among other things, Statesman
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. The Company accessed
the Statesman loan in July, August and October 2002 and, as of July 23, 2003,
the outstanding principal balance on such loans was $130,000. The loans bore
interest at the rate of 7% per annum. On July 23, 2003, the Company repaid the
full $130,000 principal amount plus $8,337 thereon.
Employment Agreements
See "ITEM 10. EXECUTIVE COMPENSATION - EMPLOYMENT CONTRACTS, TERMINATION
OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS" which is incorporated herein
by reference.
19
Other Arrangements
Marc Baldinger, the former Chief Financial Officer of the Company,
currently serves as a consultant to the Company. Mr. Baldinger was paid $40,000
for such services in 2003. In addition, as additional compensation for his
consulting services, on October 1, 2003 Mr. Baldinger was granted options to
purchase 5,000 shares of Common Stock at an exercise price of $1.53 pursuant to
the Company's 2003 Stock Incentive Plan, as amended.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
1. Financial Statements: Page
-------------------- ----
Independent Accountant's Report F-3
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-30
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).
20
Exhibit No. Description of Document
----------- -----------------------
3.1(i)(d) Certificate of Designation - Series B Preferred Stock,
$10 Stated Value, $.10 par value (filed as Exhibit to
Form 10-K dated June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of Designation, Series
C Preferred Stock, $100 Stated Value, $.10 par value
(filed as Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and incorporated
herein by reference).
3.1(i)(f) Certificate of Designation - Series D Junior Preferred
Stock, $10 Stated Value, $.10 par value (filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated
herein by reference).
3.1(i)(g) Certificate of Designation - Series E Preferred Stock,
$100 Stated Value, $.10 par value (filed as Exhibit 4.1
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and incorporated
herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1,
Registration No. 2-86906, and incorporated herein by
reference).
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company (filed as
exhibit 3.1(ii)(b) to the Company's Form 10-Q dated
November 19, 2002, and incorporated herein by
reference).
10.1 2003 Stock Incentive Plan of the Company (filed as
Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the year ended 2002 filed on April 15, 2003
and incorporated herein by reference) *
10.2 Amendment No. 1 to 2003 Stock Incentive Plan (filed as
Exhibit 8 to Amendment No. 3 to Schedule 13D filed by
Royalty Holdings LLC, Royalty Management, Inc., Laurence
Levy and Neil Hasson on October 3, 2003, and
incorporated herein by reference.) *
10.3 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). *
10.4 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). *
21
Exhibit No. Description of Document
----------- -----------------------
10.5 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). *
10.6 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). *
10.7 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). *
10.8 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). *
10.9 Stock Option Agreement, dated October 1, 2003 between
the Company and Errol Glasser. *
10.10 Stock Option Agreement, dated October 1, 2003 between
the Company and Stanley Fleishman. *
10.11 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).
10.12 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).
10.13 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).
10.14 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).
22
Exhibit No. Description of Document
----------- -----------------------
10.15 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). *
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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). *
10.24 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). *
23
Exhibit No. Description of Document
----------- -----------------------
10.25 Employment Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and William R. Ponsoldt, Sr., and
Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and Statesman Group, Inc. (filed as
exhibits 10(a) and (b) to the Company's report on Form
8-K dated June 13, 1997, and incorporated herein by
reference). *
10.26 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).
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
24
Exhibit No. Description of Document
----------- -----------------------
10.33 Glas-Aire Redemption Agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 16, 2001).
10.34 Statesman exercise agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 25, 2001).
10.35 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).
10.36 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).
21 Schedule of Subsidiaries
23 Consent Letter from Rosenberg, Rich, Baker, Bermann &
Company
31.1 Chief Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Report of the Special Committee of the Company's Board
of Directors, dated May 10, 2003, and adopting
resolutions (filed as Exhibit 99.2 to Company's
Quarterly Report on Form 10-Q for the period ended March
31, 2003, and incorporated by reference herein).
----------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
b. The following reports on Form 8-K were filed by the Company during the
quarter ended December 31, 2003. No financial statements were filed in any
such reports.
Date Filed Item No.
---------- --------
December 19, 2003 5
25
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed by the Company's
independent auditor, Rosenberg, Rich, Baker, Berman & Company during fiscal
years ended December 31, 2003 and December 31, 2002.
Audit All
Audit Related Tax Other
Fees (a) Fees (b) Fees (c) Fees (d)
For the period ended $57,736 $ -- $18,267 $ --
December 31, 2003
For the period ended $81,230 $ 4,825 $38,695 $ --
December 31, 2002
----------
(a) Audit fees relate to professional services rendered in connection with the
audit of the Company's annual financial statements, quarterly review of
financial statements included in the Company's Forms 10-Q, and audit
services provided in connection with other statutory and regulatory
filings.
(b) Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or reviews of financial
statements and are not reported under "Audit Fees". These services include
consultations concerning financial accounting and reporting standards.
(c) Tax fees include professional services related to tax compliance, tax
planning and the preparation of federal and state tax returns.
(d) Consists of fees for products and services other than the services
reported above.
26
SIGNATURES REQUIRED FOR FORM 10-KSB
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENCY AFFILIATES, INC.
April 14, 2004 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President and CEO
April 14, 2004 By: /s/ Neil N. Hasson
Date ------------------------------------
Neil N. Hasson, CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
April 14, 2004 By: /s/ Laurence S. Levy
Date ------------------------------------
Laurence S. Levy, President,
Chief Executive Officer and Director
April 14, 2004 By: /s/ Neil N. Hasson
Date ------------------------------------
Neil N. Hasson, CFO and Director
April 14, 2004 By: /s/ Errol Glasser
Date ------------------------------------
Errol Glasser, Director
April 14, 2004 By: /s/ Stanley Fleishman
Date ------------------------------------
Stanley Fleishman, Director
27
INDEX TO EXHIBITS
1. Financial Statements: Page
-------------------- ----
Independent Accountant's Report F-3
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-30
2. Other Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1(i)(a) Restated Certificate of Incorporation of the Company
(filed as exhibit 3.1(i)(a) to the Company's Form 10-Q
dated November 19, 2002, and incorporated herein by
reference).
3.1(i)(b) Corrected Certificate of Amendment reflecting amendment
to Restated Certificate of Incorporation of the Company
(filed as exhibit 3.1(i)(b) to the Company's Form 10-Q,
dated November 19, 2002, and incorporated herein by
reference).
3.1(i)(c) Certificate of Amendment to Restated Certificate of
Amendment (filed as Exhibit A to the Company's
Information Statement on Schedule 14C filed on October
27, 2003).
3.1(i)(d) Certificate of Designation - Series B Preferred Stock,
$10 Stated Value, $.10 par value (filed as Exhibit to
Form 10-K dated June 7, 1993 and incorporated herein by
reference).
3.1(i)(e) Amended and Restated Certificate of Designation, Series
C Preferred Stock, $100 Stated Value, $.10 par value
(filed as Exhibit 99.4 to the Company's Current Report
on Form 8-K filed on October 18, 2002, and incorporated
herein by reference).
E-1
Exhibit No. Description of Document
----------- -----------------------
3.1(i)(f) Certificate of Designation - Series D Junior Preferred
Stock, $10 Stated Value, $.10 par value (filed as
Exhibit to Form 10-K dated June 7, 1993 and incorporated
herein by reference).
3.1(i)(g) Certificate of Designation - Series E Preferred Stock,
$100 Stated Value, $.10 par value (filed as Exhibit 4.1
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 at page E-1, and incorporated
herein by reference).
3.1(ii)(a) By-laws of the Company (filed as Exhibit 3.4 to the
Company's Registration Statement on Form S-1,
Registration No. 2-86906, and incorporated herein by
reference).
3.1(ii)(b) Amendment No. 1 to By-Laws of the Company (filed as
exhibit 3.1(ii)(b) to the Company's Form 10-Q dated
November 19, 2002, and incorporated herein by
reference).
10.1 2003 Stock Incentive Plan of the Company (filed as
Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the year ended 2002 filed on April 15, 2003,
and incorporated herein by reference) *
10.2 Amendment No. 1 to 2003 Stock Incentive Plan (filed as
Exhibit 8 to Amendment No. 3 to Schedule 13D filed by
Royalty Holdings LLC, Royalty Management, Inc., Laurence
Levy and Neil Hasson on October 3, 2003, and
incorporated herein by reference.) *
10.3 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). *
10.4 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). *
10.5 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). *
10.6 Stock Option Agreement, dated April 1, 2003, between the
Company and Neil Hasson (filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-KSB for the year
ended 2002 filed on April 15, 2003, and incorporated
herein by reference). *
E-2
Exhibit No. Description of Document
----------- -----------------------
10.7 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). *
10.8 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). *
10.9 Stock Option Agreement, dated October 1, 2003 between
the Company and Errol Glasser. *
10.10 Stock Option Agreement, dated October 1, 2003 between
the Company and Stanley Fleishman. *
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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). *
10.16 Amended and Restated Certificate of Designations of the
Series C Preferred Stock (filed as exhibit 99.4 to
Company's Current Report on Form 8-K filed October 18,
2002, and incorporated herein by reference).
E-3
Exhibit No. Description of Document
----------- -----------------------
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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). *
10.24 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). *
10.25 Employment Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and William R. Ponsoldt, Sr., and
Agreement dated June 3, 1997, between Regency
Affiliates, Inc. and Statesman Group, Inc. (filed as
exhibits 10(a) and (b) to the Company's report on Form
8-K dated June 13, 1997, and incorporated herein by
reference). *
E-4
Exhibit No. Description of Document
----------- -----------------------
10.26 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).
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 Glas-Aire Redemption Agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 16, 2001).
10.34 Statesman exercise agreement (incorporated herein by
reference to the Company's Current Report on Form 8-K
filed on October 25, 2001).
E-5
Exhibit No. Description of Document
----------- -----------------------
10.35 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).
10.36 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).
21 Schedule of Subsidiaries
23 Consent Letter from Rosenberg, Rich, Baker, Bermann &
Company
31.1 Chief Executive Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Report of the Special Committee of the Company's Board
of Directors, dated May 10, 2003, and adopting
resolutions (filed as Exhibit 99.2 to Company's
Quarterly Report on Form 10-Q for the period ended March
31, 2003, and incorporated by reference herein).
----------
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
E-6
Regency Affiliates, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2003 and 2002
F-1
Regency Affiliates, Inc. and Subsidiaries
Index to the Financial Statements
Page
Independent Auditor's Report F-3
Financial Statements
Consolidated Balance Sheets F-4 - F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-30
F-2
Independent Auditor's Report
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, 2003 and 2002 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Regency
Affiliates, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the
results of its consolidated operations, changes in shareholder's equity and cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 19, 2004
F-3
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
--------------------------
2003 2002
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 451,249 $ 101,041
Marketable securities 18,495,025 --
Accounts receivable, net of allowance 3,077 225
Loan receivable -- 250,000
Accrued receivables 299,324 164,374
Notes receivable - current 327,936 560,573
Income taxes receivable -- 11,149
Other current assets 64,294 14,710
----------- -----------
Total Current Assets 19,640,905 1,102,072
Notes receivable, net of current portion 801,335 546,427
Property, plant and equipment, net 489,972 2,037,277
Investment in partnerships 599,268 36,433,721
Other Assets
Aggregate inventory 832,427 833,611
Debt issuance costs, net of amortization -- 412,731
Deferred costs 250,000 250,000
Other 1,300 1,373
----------- -----------
Total Other Assets 1,083,727 1,497,715
----------- -----------
Total Assets $22,615,207 $41,617,212
=========== ===========
See notes to the consolidated financial statements.
F-4
Regency Affiliates, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
-----------------------------
2003 2002
------------ ------------
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term debt $ -- $ 13,353,260
Note payable - banks -- 798,938
Current portion of notes payable - other -- 130,036
Accounts payable 600,950 365,252
Accrued expenses 105,923 1,899,342
Taxes payable -- 183,571
------------ ------------
Total Current Liabilities 706,873 16,730,399
Notes payable - other, net of current portion -- 3,254,098
Long term debt, net of current portion -- 1,292,013
Deferred credit 1,802,047 --
Minority interest in consolidated subsidiaries -- --
Commitments and contingencies
Shareholders' equity
Serial preferred stock not subject to mandatory redemption
(Maximum liquidation preference $24,975,312 in 2003 and
2002) 1,052,988 1,052,988
Common stock, par value $.01; authorized 8,000,000 and
25,000,000 shares in 2003 and 2002, respectively
(see Note 10); issued 4,178,645 and 3,139,407 shares
in 2003 and 2002, respectively; outstanding 3,018,412
and 2,024,382 shares in 2003 and 2002, respectively 37,733 27,341
Additional paid-in capital 8,180,545 6,106,560
Readjustment resulting from quasi-reorganization at December 31, 1987 (1,670,596) (1,670,596)
Retained earnings 14,963,860 17,282,200
Note receivable - sale of stock (2,440,000) (2,440,000)
Treasury stock, 1,160,233 and 1,115,025 shares in 2003 and 2002,
respectively (18,243) (17,791)
------------ ------------
Total Shareholders' Equity 20,106,287 20,340,702
------------ ------------
$ 22,615,207 $ 41,617,212
============ ============
See notes to the consolidated financial statements.
F-5
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Operations
December 31,
---------------------------
2003 2002
----------- -----------
Net Sales $ -- $ --
Costs and expenses
Costs of goods sold -- --
Selling and administrative expenses 5,685,109 1,878,469
----------- -----------
5,685,109 1,878,469
----------- -----------
Loss from operations (5,685,109) (1,878,469)
Income from equity investment in partnerships 3,483,381 6,354,678
Gain on disposition of subsidiaries -- 245,346
Rental income 95,984 24,296
Interest and dividend income 185,844 156,692
Other income, net 387,263 2,615
Impairment of goodwill -- (487,757)
Interest expense (714,979) (1,174,982)
----------- -----------
Income before income tax expense and minority interest (2,247,616) 3,242,419
Income tax (expense) benefit (70,724) 58,065
Minority interest -- 20,491
----------- -----------
Income from continuing operations (2,318,340) 3,320,975
Gain/loss from operations of discontinued components, after gain
on disposal of $262,550 in September 2002 and loss on disposal of
$17,204 in October 2002, net of $0 in income tax effect in 2002 -- (628,447)
----------- -----------
Net Income (Loss) $(2,318,340) $ 2,692,528
=========== ===========
Net income (loss) per common share:
Basic
Continuing Operations $ (0.93) $ 1.74
Discontinued Operations -- (0.33)
----------- -----------
$ (0.93) $ 1.41
=========== ===========
Diluted
Continuing Operations $ (0.93) $ 1.00
Discontinued Operations -- (0.19)
----------- -----------
$ (0.93) $ 0.81
=========== ===========
See notes to the consolidated financial statements.
F-6
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2003 and 2002
Preferred Stock Common Stock Additional
----------------------------- ----------------------------- Paid in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balance - January 1, 2002 605,291 $ 1,052,988 19,684,854 $ 7,788,120 $ 568,683
Reverse stock split, 1 for 10 -- -- (17,716,369) (7,768,435) 7,768,435
Common stock issued upon conversion of
note payable/accrued interest -- -- 750,000 7,500 1,492,500
Common stock issued for services -- -- 15,639 156 19,844
Redemption of shares pursuant to note
purchase agreement -- -- (709,742) -- (3,742,902)
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2002 605,291 1,052,988 2,024,382 27,341 6,106,560
============ ============ ============ ============ ============
Shares cancelled, returned to treasury (45,208) 452
Common stock issued upon conversion of
note payable/accrued interest -- -- 1,037,738 10,377 2,065,098
Common stock issued for services -- -- 1,500 15 8,435
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance - December 31, 2003 605,291 $ 1,052,988 3,018,412 $ 37,733 $ 8,180,545
============ ============ ============ ============ ============
Readjustment
Resulting Note Treasury Stock Total
from Quasi- Retained Receivable --------------------------- Stockholders'
Reorganization Earnings Sale of Stock Shares Amount Equity
-------------- ------------ ------------- ------------ ------------ -------------
Balance - January 1, 2002 $ (1,670,596) $ 14,589,672 $ (2,440,000) 4,052,825 $ (10,693) $ 19,878,174
Reverse stock split, 1 for 10 -- -- -- (3,647,542) -- --
Common stock issued upon conversion of
note payable/accrued interest -- -- -- -- -- 1,500,000
Common stock issued for services -- -- -- -- -- 20,000
Redemption of shares pursuant to note
purchase agreement -- -- -- 709,742 (7,098) (3,750,000)
Net income -- 2,692,528 -- -- -- 2,692,528
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2002 (1,670,596) 17,282,200 (2,440,000) 1,115,025 (17,791) 20,340,702
============ ============ ============ ============ ============ ============
Shares cancelled, returned to treasury 45,208 (452) --
Common stock issued upon conversion of
note payable/accrued interest -- -- -- -- -- 2,075,475
Common stock issued for services -- -- -- -- -- 8,450
Net loss -- (2,318,340) -- -- -- (2,318,340)
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 2003 $ (1,670,596) $ 14,963,860 $ (2,440,000) 1,160,233 $ (18,243) $ 20,106,287
============ ============ ============ ============ ============ ============
See notes to the consolidated financial statements.
F-7
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------
2003 2002
------------ ------------
Cash Flows from operating activities
Net income (loss) $ (2,318,340) $ 2,692,528
Adjustments to reconcile net income (loss) to net cash
used by operating activities
Minority interest -- (31,741)
Income from equity investment in partnerships (3,483,381) (6,354,678)
Distribution of earnings from partnership 41,119,881 104,303
Interest accretion on long-term debt 474,674 929,982
Depreciation and amortization 493,927 355,564
Issuance of common stock in lieu of cash 8,450 20,000
Unrealized gain on marketable securities (65,380) --
Impairment of property and equipment 1,466,109 --
Gain on retirement of debt and disposal of assets -- (245,346)
Impairment of goodwill -- 487,757
Deferred taxes -- --
Changes in operating assets and liabilities
Accounts receivable (2,852) 163,281
Loan receivable 250,000 (250,000)
Accrued receivables (158,884) (164,374)
Income taxes receivable 11,149 --
Inventory -- (153,916)
Other current assets (49,584) 65,672
Other assets 73 (9,668)
Accounts payable 235,698 538,222
Accrued expenses and taxes payable (1,904,429) 893,249
------------ ------------
Net cash provided by (used in) operating activities 36,077,111 (959,165)
------------ ------------
Cash flows from investing activities
Payments received on notes receivable 1,663 --
Purchases of marketable securities (18,429,645) --
Proceeds from (payments upon) disposition of subsidiaries -- (17,869)
Expenditures for property and equipment -- (201,004)
------------ ------------
Net cash used in investing activities (18,427,982) (218,873)
------------ ------------
Cash flows from financing activities
Proceeds from long-term debt -- 857,435
Payment of long-term debt (16,369,947) (780,467)
Proceeds from line of credit - bank -- --
Repayment of notes payable - bank (798,938) --
Repayment of notes payable - other (130,036) --
Net short-term proceeds -- 392,018
Proceeds from notes payable -- 500,000
------------ ------------
Net cash (used in) provided by financing activities $(17,298,921) $ 968,986
============ ============
Increase (decrease) in cash and cash equivalents $ 350,208 $ (209,052)
Cash and cash equivalents - beginning 101,041 310,093
------------ ------------
Cash and cash equivalents - ending $ 451,249 $ 101,041
============ ============
See notes to the consolidated financial statements.
F-8
Regency Affiliates, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
------------------------
2003 2002
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $4,393,983 $ 158,506
Income taxes 252,371 --
Supplemental disclosures of noncash investing and financing activities:
In 2003, $2,004,098 in convertible notes payable and $71,377 in accrued
interest thereupon were converted for 1,037,738 shares of common stock.
In 2003, the Company reached an agreement to restructure a note
receivable, whereby accrued interest receivable of $23,934 was converted
into part of the principal on the new note receivable.
In 2002, the Corporation's subsidiary, Rustic Crafts, sold a majority of
its net assets with a book value of $844,450 and obtained notes receivable
totaling $1,107,000. The resultant gain of $262,550 is reflected in the
financial statements as a reduction of loss from discontinued operations.
In 2002, the Company disposed of the net assets of its subsidiary, Neptune
Trading Corp., Inc. The resultant loss on disposal of $17,204 is reflected
in the financial statements as an increase to the loss from discontinued
operations.
In 2002, the Company issued notes payable to finance the redemption of a
shareholder's interest and other agreements, as follows:
Convertible note issued $ 3,500,000
Other note issued 1,250,000
Common stock redemption (1,020,000)
Letter agreement - reduction of paid-in capital (2,730,000)
Debt issuance costs (250,000)
Other deferred costs - call option (250,000)
-----------
Cash Proceeds $ 500,000
===========
In 2002, $1,495,902 in convertible notes payable and $4,098 in accrued
interest thereupon were converted for 750,000 shares of common stock.
In 2002, the stockholders approved a one-for-ten reverse stock split of
the Corporation's common stock, par value $0.40 per share, and a decrease
in the par value to $0.01 per share of common stock. This resulted in a
decrease in the value of common stock and corresponding increase in the
value of additional paid-in capital of $7,740,110. This transaction has
been given retroactive treatment for the year ended December 31, 2001 in
the accompanying financial statements.
See notes to the consolidated financial statements.
F-9
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
A. Principles of Consolidation and Nature of Business - The consolidated
financial statements include the accounts of Regency Affiliates, Inc. (the
"Company"), its wholly owned subsidiaries, Rustic Crafts International,
Inc. ("Rustic Crafts") through September 20, 2002 the date that it's
operating assets were disposed of, Neptune Trading Corp., Inc. ("Neptune")
from July 31, 2002, the date of formation, through October 14, 2002, the
date of disposition, and Speed.com, Inc. through March 1, 2003, the date
of dissolution, its 75% owned subsidiary, Iron Mountain Resources, Inc.
("IMR") since December 13, 2001, and its 80% owned subsidiaries, National
Resource Development Corporation ("NRDC"), RegTransco, Inc. ("RTI")
through March 1, 2003, the date of dissolution and Transcontinental
Drilling Company ("Drilling") through June 3, 2003, the date of
dissolution. All significant intercompany balances and transactions have
been eliminated in consolidation.
Regency Affiliates, Inc.'s share of consolidated net assets at December
31, 2003 and 2002 consists principally of cash and cash equivalents of
approximately $436,000 and $90,000 respectively, marketable securities of
approximately $18,500,000 and $0 respectively, investment in partnerships
of approximately $599,300 and $36,433,700, respectively, property, plant
and equipment of approximately $6,600 and $11,900, respectively, and
liabilities of approximately $2,500,000 and $18,700,000, respectively.
B. Revenue Recognition - The Company's subsidiaries recognize revenue from
the sale of goods upon shipment to their respective customers.
C. Earnings Per Share - Basic earnings per share are computed by dividing
net income attributable to common shareholders (net income less preferred
stock dividend requirements and periodic accretion if applicable) by the
weighted average number of common shares outstanding during the year.
Diluted earnings per share computations assume the conversion of the
Series B and Junior Series D preferred stock during the period that the
preferred stock issues were outstanding. If the result of these assumed
conversions is dilutive, the dividend requirements and periodic accretion
for the preferred stock issues are reduced (See Note 11). In addition,
diluted per share computations assume conversion of convertible debt and
stock options outstanding that are "in the money". On February 5, 2002 the
Company's stockholders approved a one-for ten reverse stock split of the
Company's common stock, par value $0.40 per share, and a decrease in the
par value to $0.01 per share. The computation of basic and diluted EPS has
been retroactively adjusted for the year ending December 31, 2002 to
reflect this change in capital structure.
The weighted average number of shares used in basic earnings per share
computations for 2003 and 2002 was 2,502,657 and 1,911,403, respectively.
The weighted average number of shares used in the computation of diluted
earnings per share for 2003 and 2002 was approximately 2,502,657 and
3,309,947, respectively. The Company's stock has been thinly traded in the
over-the-counter market on the NASDAQ bulletin board through December 31,
2003. In 2003, the effect of any conversion of preferred stock or options
has not been included as it would be anti-dilutive. In 2002, a market
price of $2.23 per share was utilized in the conversion formula for the
computation of diluted earnings per share. In 2002, if a market price of
$1.35 per share, the lowest bid price of the Company's common shares
during that year, was used in the conversion formula, the weighted average
number of shares utilized in the computation of diluted earnings per share
would amount to approximately 3,412,082, yielding diluted earnings per
share of $0.79.
D. Securities Issued for Services - The Company accounts for stock issued
for services under the intrinsic value method. For stock issued for
services, the fair market value of the Company's stock on the date of
stock issuance is used. The Company has adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The statement generally suggests, but does not require,
stock-based compensation transactions to be accounted for based on the
fair value of the
F-10
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
services rendered or the fair value of the equity instruments issued,
whichever is more reliably measurable. Securities issued for services
amounted to 1,500 in 2003 and 15,639 in 2002. The underlying fair value of
the common shares amounted to $5.63 and $1.28 per share, respectively.
E. Fair Value of Financial Instruments - The fair values of cash, accounts
receivable, accounts payable and other short-term obligations approximate
their carrying values because of the short maturity of these financial
instruments. The carrying values of the Company's long-term obligations
approximate their fair value. In accordance with Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," rates available at balance sheet dates to the Company are
used to estimate the fair value of existing debt.
F. Cash and Cash Equivalents - Cash and cash equivalents represent cash
and short-term highly liquid investments with original maturities of three
months or less. The Company places its cash and cash equivalents with high
credit quality financial institutions which may exceed federally insured
amounts at times.
G. Property, Plant and Equipment - Property, plant and equipment are
carried at cost. Depreciation is provided over the estimated useful lives
of the assets by the use of the straight-line and declining balance
methods. These items consist of the following at December 31, 2003 and
2002:
2003 2002
---------- ----------
Land $ 24,797 $ 100,000
Building 548,967 1,934,032
Leasehold improvements 4,516 10,357
Machinery and equipment 43,708 43,708
---------- ----------
621,988 2,088,097
Accumulated depreciation 132,016 50,820
---------- ----------
$ 489,972 $2,037,277
========== ==========
Depreciation expense for the years ended December 31, 2003 and 2002 was
$81,196 and $119,301, respectively.
At December 31, 2003, the Company owned land, building and related
leasehold improvements that were being held for sale. The Company assessed
the fair value of this property based on the selling price less costs to
sell resulting from an offer which was in negotiation at year-end. Based
on this assessment, it was determined that the carrying costs of this
property were impaired by $1,466,109. This impairment has been recognized
in the Selling and administrative expenses caption of the Consolidated
Statements of Operations and has proportionately reduced the value of the
land, building and leasehold improvements to a net carrying cost of
$483,415 after accumulated depreciation. The property was sold in 2004
(see Note 20).
F-11
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
H. Aggregate Inventory - Inventory, which consists of 70+ million short
tons of previously quarried and stockpiled aggregate rock located at the
site of the Groveland Mine in Dickinson County, Michigan, is stated at
lower of cost or market. The Company is also subject to a royalty
agreement which requires the payment of certain royalties to a previous
owner of the aggregate inventory upon sale of the aggregate.
In December, 2001 the aggregate inventory was sold to IMR, 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. Payments have not
yet been made on the intercompany note receivable, but the Company intends
to pursue the collection of this debt. The intercompany gain on this
transaction has been eliminated in the consolidation process resulting in
the aggregate inventory being carried at its historical cost.
I. Goodwill - Goodwill resulted from the acquisition of Rustic Crafts in
1997 and Glas-Aire in 1999. The goodwill attributable to Rustic Crafts was
being amortized on a straight-line basis over a period of 15 years. During
the year ended December 31, 2002, the Company recognized goodwill
impairment of $487,757 resulting in a balance in goodwill of $0 for the
year then ended. Impairment was recognized due to the fact that the market
price of the major assets of the business (land, building, improvements)
approximated the historical cost basis of those assets and the net cash
flows of future operations were projected to be negative. Accumulated
amortization was $0 at December 31, 2002.
J. Debt Issuance Costs - Debt issuance costs are recorded at cost and were
being amortized over 60-66 months, the life of the related loans using the
effective interest method. The balance of these costs were written off due
the settlement of the related debts in the year ended December 31, 2003.
Accumulated amortization was $0 and $199,580 at December 31, 2003 and
2002, respectively.
K. 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.
L. 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.
F-12
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
M. 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.
N. Restatement - Shareholders' Equity has been restated to reflect 28,611
(286,110 pre-split) common shares issued and outstanding as of January 1,
2002.
Note 2. Discontinued Operations
On November 26, 2002, the Company agreed to dispose of all the net assets
and common stock of its wholly-owned subsidiary, Neptune effective October
14, 2002 for nominal consideration, recognizing a loss on disposal of
$17,204.
The entity had been formed on July 31, 2002, and its operations consisted
of the purchase and sale of real estate and financing real estate as an
originating entity. The purchasers are former directors of the Company.
On September 30, 2002 the Company's subsidiary, Rustic Crafts, sold all of
its operating assets subject to the assumption of certain of its
liabilities, recognizing a gain on disposal of $262,550.
Rustic Crafts received as consideration:
1. A note for $707,000 with interest at five percent (5%) per annum
payable in sixty (60) equal monthly installments of principal and
interest, with payments contingent upon quarterly positive cash flows of
the buyer.
2. A note for $400,000 with interest at seven percent (7%) per annum with
principal and accrued interest payable on September 30, 2003 absent the
occurrence of certain events requiring repayment.
3. Payment of $100,000 against its line of credit.
4. Payment of $100,000 relating to certain equipment indebtedness.
Additionally, Rustic Crafts entered into a three year lease with the Buyer
for its land and building which it retained, requiring payments of $6,500
per month for a thirty six (36) month term.
The results of these businesses have been reflected as discontinued
operations in the accompanying financial statements. For the year ended
December 31, 2002, revenues and net income (loss) attributable to such
discontinued operations through the date of disposition amounts to
$1,829,242 and $(628,447), respectively.
Note 3. Marketable Securities
During the year ended December 31, 2003, the Company purchased marketable
securities for cash. The cost and fair value of the Company's investments
in marketable securities are as follows as of December 31, 2003:
F-13
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Marketable Securities (continued)
Trading securities: Amortized Gross Unrealized Gross Unrealized Fair Value
Cost Gains Losses
18,500,000 US Treasury bills $18,429,645 $ 65,380 $ -- $18,495,025
Note 4. Investment in Partnerships
In November 1994, the Company purchased, for $350,000, a limited
partnership interest in Security Land and Development Company Limited
Partnership ("Security"), which owns and operates an office complex. The
Company has limited voting rights and is entitled to allocations of the
profit and loss of Security and operating cash flow distributions, as
amended (see below).
Security was organized to own and operate two buildings containing
approximately 717,000 net rentable square feet consisting of a two-story
office building and a connected six-story office tower. The buildings were
purchased by Security in 1986 and are located on approximately 34.3 acres
of land which is also owned by Security. The buildings have been occupied
by the United States Social Security Administration's Office of Disability
and International Operations for approximately 30 years under leases
between the United States of America, acting by and through the General
Services Administration ("GSA"). Effective November 1, 1994, Security and
the GSA entered into a nine-year lease for 100% of the building. In March
2003, the General Services Administration agreed to extend the terms of
the lease through October 31, 2018. Security has received an opinion of
the Assistant General Counsel to the GSA that lease payments are not
subject to annual appropriation by the United States Congress and the
obligations to make such payments are unconditional general obligations of
the United States Government.
In April 2003, the Company entered into an amendment to the security
partnership agreement for Security. 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, a $180,000 annual
management fee from Security. The foregoing percentages are inclusive of
the Company's interest as a limited partner in 1500 Woodlawn, the general
partner of Security.
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.
F-14
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment in Partnerships (Continued)
For the years ended December 31, 2003 and 2002 the Company's income from
its equity investment in Security was $3,283,381 and $6,154,678,
respectively. These funds, however, are principally committed to the
amortization of the outstanding principal balance on Security's real
estate mortgage, as refinanced. Security does not currently provide
liquidity to the Company in excess of an annual management fee. For the
years ended December 31, 2003 and 2002, the Company earned $100,938 and
$104,303, respectively, for management services provided to Security.
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
investment in Security included in the Consolidated Balance Sheets at
December 31, 2003 and 2002 was $0 and $36,034,453, respectively. The total
amount of distributions made in excess of the Company's partnership basis
as of December 31, 2003 was $1,802,047, which is recorded as a deferred
credit on the accompanying financial statements. The undistributed
earnings from the Company's equity investment in the Partnership as of
December 31, 2002 amounted to $35,684,453.
Summarized financial information for Security is as follows:
2003 2002
------------ ------------
Balance Sheet Data
Cash and receivables $ 1,292,836 $ 1,288,550
Restricted cash 3,591,631 3,428,052
Real estate, net 39,298,935 41,364,823
Deferred charges, net 10,174,438 --
Other assets 619,081 544,482
------------ ------------
Total Assets 54,976,921 46,625,907
============ ============
Accounts payable and accrued expenses 407,182 388,503
Project note payable 95,970,491 8,364,643
Other liabilities 240,271 825,720
------------ ------------
Total Liabilities 96,617,944 9,578,866
Partners' capital:
Regency Affiliates, Inc. (40,502,870) 36,034,453
Other partners (1,138,153) 1,012,588
------------ ------------
Total Partners' Capital (41,641,023) 37,047,041
------------ ------------
Total Liabilities and Partner's Capital 54,976,921 46,625,907
============ ============
2003 2002
------------ ------------
Statement of Operations Data
Revenues $ 13,506,428 $ 13,622,613
Expenses 7,246,630 6,065,825
------------ ------------
Net operating income 6,259,798 7,556,788
Other expenses (2,803,607) (1,078,180)
------------ ------------
Net income $ 3,456,191 $ 6,478,608
============ ============
See Note 16. Contingencies, Risks and Uncertainties related to the
Company's investment in Security.
F-15
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Investment in Partnerships (Continued)
Effective November 30, 2000 the Company invested $10,000 for a 5% limited
partnership interest in 1500 Wood Lawn Limited Partnership, the general
partner of Security. The Company recognized income of $200,000 in 2003 and
2002 from this investment.
Note 5. Loan Receivable
On November 4, 2002, the Company paid $200,000 to PNC Bank in settlement
of closing costs that were the obligation of RCI Wood Products, Inc.
("RCI") as the buyer in connection with the sale of the operating assets
of Rustic Crafts. In addition, fees and reimbursable expenses were added
to the amount advanced, bringing the total amount receivable to $250,000
at December 31, 2002. The loan was paid in full during 2003.
Note 6. Notes Receivable
Pursuant to the sale of the net operating assets of the Company's
subsidiary, Rustic Crafts, on September 30, 2002, Rustic obtained notes
receivable. At December 31, 2003 and 2002, these notes consisted of the
following:
2003 2002
---------- ----------
Note receivable, 5% per annum, with monthly payments
of principal and interest of $13,342, due 9/30/07 $ 707,000 $ 707,000
Note receivable, 7.5% per annum, with monthly
payments of principal and interest of $5,032, with a
balloon payment due 9/8/06 422,271 400,000
---------- ----------
Total $1,129,271 $1,107,000
========== ==========
Payments on the 5% note are contingent upon the quarterly positive net
cash flows of the buyer, as defined by generally accepted accounting
principles. No payments have been made on this note as of December 31,
2003.
On August 8, 2003, the Company reached an agreement with regard to
restructuring the 7.5% note, which was in the original amount of $400,000,
bearing interest at 7% per annum with an original maturity of September
30, 2003. The Company agreed to the issuance of a judgment note receivable
in the amount of $423,934 (comprised of $400,000 original principal plus
interest accrued thereupon through August 8, 2003), bearing interest at a
rate of 7.5% based on actual days on a 360-day basis. Pursuant to the
execution of the new note, the Company obtained a security interest in the
accounts receivable inventory, fixed assets and other operating assets of
RCI. The judgment note is personally guaranteed by the president of RCI.
Accrued interest receivable at December 31, 2003 and 2002 is $43,700 and
$15,707, respectively.
Note 7. Notes Payable - Banks
The Company's subsidiary, Rustic Crafts, had established a $1,000,000 line
of credit with PNC Bank. The accounts receivable, inventory and other
assets, such as property and equipment, of Rustic Crafts were pledged as
collateral to secure the line of credit.
F-16
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Notes Payable - Banks (continued)
On July 31, 2002, the extended date of expiration for the line of credit,
the Company continued negotiations for further extension or renewal. On
November 4, 2002, the Company executed an agreement with PNC Bank, under
which the Company was obligated to pay $540,000 to the bank by December
15, 2002. Due to further default on this agreement, PNC Bank proposed to
allow the Company to cure this default; $165,000 of such amount was paid
as of December 31, 2002. The Company was obligated to pay down an
additional $375,000 by June 30, 2003 and to transfer 50% of proceeds from
notes receivable payments from RCI (see Note 6) to PNC Bank to pay down
additional debt (any such payments would reduce the balance due in June
2003). The balance of this debt was due (with accrued interest) on or
before September 30, 2003. In connection with Rustic Crafts sale all debt
outstanding under the line of credit together with the Scranton mortgage
(discussed in Note 9) and certain other indebtedness were restructured to
replace such indebtedness with five notes totalling $2,432,782 all of
which were due in June 2004, had a ten-year amortization schedule and bore
interest at 10.8%. In 2003, the Company paid this debt in full.
Due to the disposition of the net operating assets of Rustic Crafts in
September 2002, $100,000 was paid and any existing debt retained by Rustic
Crafts, as subsidiary, was secured by the land and building retained by
the subsidiary. The line bore interest at 9.75% at December 31, 2002, and
was guaranteed by the Company. At December 31, 2003 and 2002, the amounts
outstanding under the line of credit were $0 and $798,938, respectively.
These amounts are shown as current in the accompanying financial
statements as any principal is payable upon demand.
Note 8. Notes Payable - Other
To finance the redemption under the Redemption Agreement of October 16,
2002 whereby all shares owned by Statesman were redeemed, the Company
issued two notes to Royalty, an affiliate of current management,
consisting of the following:
5% Convertible Promissory Note, due 10/16/12,
accruing interest compounded annually $3,500,000
9% Promissory Note, due 10/16/07, accruing
interest compounded annually 1,250,000
----------
Total $4,750,000
==========
On November 7, 2002, $1,495,902 of the principal amount on the 5%
Convertible Promissory Note plus accrued interest was converted into
750,000 shares of common stock at $2.00 per share.
On July 3, 2003, the remaining principal and accrued interest of
$2,075,475 on the 5% Convertible Promissory Note was converted for
1,037,738 shares of common stock at $2 per share. The 9% Promissory Note
was repaid during 2003. At December 31, 2003, the balances of these notes
payable are $0.
F-17
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Notes Payable - Other (continued)
Total proceeds at October 16, 2002 from the above notes amounted to
$4,750,000 and were utilized as follows:
Payment to Statesman Group in redemption of shares of
common stock $1,020,000
Payment to Statesman Group under Letter Agreement for
modifications related to Statesman's ownership of preferred stock $2,730,000
Debt issuance costs 250,000
Payment to Statesman Group pursuant to call option to
purchase Statesman's 20% interest in NRDC 250,000
Net proceeds paid to Company 500,000
----------
Total Proceeds $4,750,000
==========
In connection with the redemption described above, the Company entered
into a Contingent Payment Agreement with William R. Ponsoldt, Sr., the
former President and Chief Executive Officer of the Company, whereby
payment of $1,508,000 of accrued compensation owed to Mr. Ponsoldt by the
Company became subject to the satisfaction of certain conditions
precedent. Payment of the accrued compensation under this agreement was
settled in 2003 (see Note 14).
At December 31, 2002, the Company had outstanding $130,036 of demand notes
bearing interest at 7%, with interest payable every 120 days and at date
of full repayment of principal. On July 23, 2003, the Company repaid the
full $130,036 balance plus accrued interest of $8,337 thereon.
Note 9. Long-Term Debt
KBC Bank Loan - On June 24, 1998, the Company refinanced the long-term
debt previously outstanding with Southern Indiana Properties, Inc.
("SIPI") and entered into a Loan Agreement (the "Loan") with KBC Bank N.V.
("KBC"). Under the terms of the Loan Agreement, KBC advanced $9,383,320.
The due date of the Loan was November 30, 2003 with interest at the rate
of 7.5% compounded semi-annually on each June 1 and December 1, commencing
December 1, 1998. The interest could be paid by the Company in cash on
these semi-annual dates or the Company could elect to add the interest to
the principal of the Loan then outstanding. In June 2003, the Company
repaid its long term debt with KBC. The payoff amount was $14,145,410,
which included a release fee and make-whole premium (see Note 4). As of
December 31, 2003 and 2002, the amount outstanding under the Loan was $0
and $13,086,683, respectively, including $0 and $3,703,363 of interest,
through December 31, 2003 and 2002, respectively.
To facilitate the loan from KBC, the Company purchased a residual value
insurance policy through R.V.I. American Insurance Company ("RVI") which
secured the repayment of the outstanding principal and interest when due
with a maximum liability of $14 million. The costs related to the
insurance ($745,000) along with legal fees and other costs associated with
obtaining the Loan ($205,000) were capitalized as debt issuance costs and
were amortized over the life of the Loan using the effective interest
method.
F-18
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Long-Term Debt (continued)
Mortgage Loan - On March 25, 1998, Rustic Crafts purchased a building of
126,000 square feet located in Scranton, Pennsylvania. The purchase of
this facility was funded in part by a first mortgage term loan in the
amount of $960,000, guaranteed by the Company. The first mortgage term
loan was payable in consecutive monthly installments over 10 years with a
20 year amortization. The Company repaid this loan in full during 2003.
The balance outstanding at December 31, 2003 and 2002 was $0 and $856,276,
respectively.
Equipment Loans - In connection with the purchase of the building
described above, PNC Bank loaned the Company a total of $767,000 to
finance the acquisition of new equipment and to install such equipment in
the facility. Principal payments on one loan of $604,000 began in March
2000 and were to continue for 120 months in amounts sufficient to amortize
the outstanding balance over twenty years from March 2000. In March 2000
the interest rate changed to the average weekly yield on U.S. Treasury
Bills, plus 200 basis points. The remaining loan in the original amount of
$163,500 was payable in equal monthly installments of $2,518. The Company
repaid these loans in full during 2003. The outstanding balance of these
loans was $0 and $618,716 at December 31, 2003 and 2002, respectively.
In June 1999, Rustic Crafts obtained an additional loan from PNC Bank for
the purpose of funding additional equipment purchases and working capital
in the amount of $156,000. The loan was payable in equal monthly
installments, including principal and interest, of $3,153. The Company
repaid this loan in full during 2003. The outstanding balance was $0 and
$83,598 at December 31, 2003 and 2002, respectively.
Note 10. Modification of Authorized Shares and Repurchase of Stock
On October 22, 2003, the Company's Board of Directors approved an
amendment to the Company's Restated Certificate of Incorporation, as
amended, to decrease the number of shares of authorized stock from
30,000,000 to 10,000,000 shares (consisting of 8,000,000 shares of common
stock and 2,000,000 shares of preferred stock) and submitted such proposed
amendment to the Company's stockholders. On October 22, 2003, Royalty
Holdings LLC, the majority shareholder of the issued and outstanding
shares of the Company, executed a written consent in favor of the
amendment.
On October 22, 2003, Royalty Holdings LLC ("Royalty"), the majority
shareholder of the issued and outstanding shares of the Company, executed
a written consent in favor of amending the Company's Restated Certificate
of Incorporation, as amended, to decrease the number of shares of
authorized stock from 30,000,000 shares to 10,000,000 shares (consisting
of 8,000,000 shares common and 2,000,000 shares preferred) as authorized
by the Board of Directors.
In September 2003, the Company's Board of Directors authorized the
repurchase of the Company's common stock in the aggregate amount not to
exceed $1,000,000. The shares will be repurchased from time to time in
open market transactions or privately negotiated transactions at the
Company's discretion, subject to market conditions and other factors.
Under the program, no shares will knowingly be purchased from the
Company's officers or directors or from any such person's affiliates.
Note 11. Serial Preferred Stock
At December 31, 2003 and 2002, the Company had 2,000,000 and 5,000,000,
respectively, of authorized shares of $.10 par value serial preferred
stock (see Note 10). Serial preferred stock at December 31, 2003 and 2002,
all of which is convertible (other than Series C) and cumulative, consists
of:
F-19
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Serial Preferred Stock (continued)
Mandatory Redeemable Shares - Series E, $100 stated value, 12.5%
cumulative, 566,400 designated, none issued or outstanding at December 31,
2003 and 2002
Redeemable Shares at Company's Option
Shares Value
-------------------------- -----------------------------------------
2003 2002
----------- -----------
Designated Outstanding Carrying Liquidation Liquidation
----------- ----------- ----------- ----------- -----------
Series C, $100 stated
value, cumulative 210,000 208,850 $ 229,136 $20,885,000 $20,885,000 (a)
Series B, $10 stated
value, 6% cumulative 370,747 370,747 566,912 3,707,470 3,707,470
Junior Series, D, $10
stated value, 7%
cumulative 26,000 25,694 256,940 382,842 382,842 (b)
----------- ----------- ----------- ----------- -----------
606,747 605,291 $ 1,052,988 $24,975,312 $24,975,312
=========== =========== =========== =========== ===========
(a) This represents the estimated maximum possible liquidation value
of the Series C preferred shares, which is defined as the lesser of:
1) net proceeds of the assets of NRDC or 2) the redemption value
(defined below). In the event of liquidation, the Series C shares
are senior to all other shares of the Company's stock, with the
exception of the Series E shares.
(b) The liquidation value of the Junior Series D shares includes
accrued and unpaid dividends of $0 at December 31, 2002 and 2001.
Series C - The Series C shares were issued on July 7, 1993 as part of the
transaction to acquire an 80% interest in NRDC. The cumulative dividend
right is equal to 20% (not to exceed $500,000) of annual after tax
earnings of NRDC. At the Company's option, the Series C may be redeemed at
the lesser of (a) the stated value plus accrued and unpaid dividends or
(b) the fair market value of the common stock interest acquired by the
Company in NRDC. At the Company's option, the redemption price may be
satisfied by the delivery of the shares in NRDC owned by the Company.
Also, on October 16, 2002, the Company entered into agreements with
Statesman providing for the amendment to the Company's Series C Preferred
Stock and certain restrictions relating to Statesman's future ownership of
an interest in the Company and Statesman's ability to issue or transfer
beneficial interests in Statesman, in exchange for a payment to Statesman
of $2,730,000. The payment is recorded as a reduction in paid-in capital
in the accompanying financial statements.
F-20
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Serial Preferred Stock (continued)
Series B - The Series B shares were issued in 1991 as part of a
restructuring plan limited to senior lenders and was issued in exchange
for all obligations and any claims or causes of action relating to the
Company's obligations and guarantees. Such preferred stock includes, among
other provisions and preferences, the following:
(a) A 6% cumulative dividend right commencing on the 24th month from
the consummation of a defined "initial business combination
transaction" (which occurred with the acquisition of Rustic Crafts
in 1997 (see Note 6)) and if the Company has reached a defined ratio
of earnings to fixed charges. In addition, dividends accrue for a
period of 35 additional months without cash payment.
(b) At the Company's option, the shares may be redeemed, subject to
certain limitations, by cash payment or by exchanging shares of its
common stock at 77% of its stated value divided by the quoted market
value of its common stock.
(c) A contingent conversion provision which conversion right, and
the Company common shares to be issued in connection with the
conversion, would be based on the stated value divided by the
average bid and asked price for the 90 days preceding the conversion
date of the Company's common shares. In addition, the number of the
Company's common shares to be received upon conversion is subject to
certain limitations.
Junior Series D - The junior preferred stock was issued in 1992 in
exchange for the Company's Restructuring Serial Promissory Notes. This
preferred stock is redeemable, at the Company's option, at the stated
value plus accrued and unpaid dividends and is contingently convertible
into common at the fair market value of the common as determined by the
average of the bid and asked price for the thirty (30) day period
preceding the conversion date.
Generally, no dividends can be paid on the Company's common stock until
all cumulative dividends on the serial preferred stock have been paid.
Additionally, no dividends on the Company's common shares can be paid if
the Company is in default or in arrears with respect to any sinking or
analogous fund or any call or tenders or other agreement for the purchase,
redemption or other retirement of shares of preferred stock. No provision
for dividends has been made for the Company's Series B and C "increasing
rate preferred stock," as defined in Staff Accounting Bulletin Topic 5Q,
due to the contingent nature of dividends on such shares.
Generally the preferred shares have limited voting rights. However, in the
event dividends payable on the Series C and E shares, respectively, are
accumulated and unpaid for seven quarterly dividends (whether or not
declared and whether or not consecutive), the holders of record of the
Series C shares, shall thereafter have the right to elect two directors
(each) until all arrears in required cash dividends (whether or not
declared) on such shares have been paid.
F-21
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Stock Options/Stock Option Plans
Effective June 3, 1997, the Company issued options to purchase 6.1 million
(pre-2002 10-1 reverse split) shares of common stock to Statesman Group,
Inc. ("Statesman"). 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 exercised in full its option, which had
been granted in 1997, to acquire 610,000 post-reverse-split shares of the
Company's common stock. The exercise was made pursuant to an agreement
which provided for (1) a purchase price at $0.40 per share (par value)
rather than the formula price in the option, which would have yielded 25%
less to the Company, (2) the execution of a note from Statesman to the
Company in the principal amount of $2,440,000 payable in five years with
interest to accrue at the prevailing prime rate and (3) the obligation to
be collateralized by the 610,000 post-reverse-split common shares of the
Company purchased upon exercise of the option as well as the 20% remaining
interest in the Company's 80% owned subsidiary, NRDC.
On October 16, 2002, the Company redeemed the 754,950 shares of common
stock of the Company owned by Statesman for $1,020,000. As a result of
such transaction, Statesman is no longer a related party. The excess over
par value of these shares is treated as a charge against additional
paid-in capital in the accompanying financial statements. Shares above
that were cancelled and returned to treasury stock were 45,208 and 709,742
in 2003 and 2002, respectively.
Also, the Company acquired from Statesman a three year option to acquire
Statesman's 20% interest in NRDC exercisable by delivery to Statesman of
the aforementioned $2,440,000 note. The Company acquired the option by
paying Statesman $250,000, amending the note (and underlying pledge
agreement) to limit recourse and transferring to Statesman certain office
furniture and equipment. The payment has been recorded as a deferred cost
in the accompanying financial statements.
In 2003, the Company issued 190,000 non-qualified common stock options, as
follows: 30,000 at a per share exercise price of $2.40, one-third of which
become exercisable on December 31, 2003, 2004 and 2005, respectively,
through March 31, 2013; 50,000 at a per share exercise price of $1.35, as
amended, exercisable through April 3, 2013; 110,000 at a per share
exercise price of $1.53, exercisable through October 1, 2013. All
issuances are pursuant to the Company's 2003 Stock Incentive Plan, as
amended.
In 2002, the Company issued 5,000 non-qualified common stock options at a
per share exercise price of $1.60 (2002 options), in accordance with a
Director's Compensation Program approved by the shareholders in 1999. The
2002 options are fully vested, and are exercisable until August 5, 2007.
F-22
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Stock Options/Stock Option Plans (continued)
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for options. The Company has elected to
treat these option awards to directors as employee based compensation and
therefore has not recorded the estimated value of these options in the
accompanying statement of operations. The fair value of the Company's
stock-based compensation to directors was estimated using the
Black-Scholes option pricing model. The Black-Scholes model was developed
for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility. The Company's stock-based
compensation has characteristics significantly different from those traded
options and changes in the subjective input can materially affect the fair
value estimate. The fair value of the Company's stock awards was estimated
assuming the following assumptions: no expected dividends, risk free
interest rate of 3.5% expected average life of approximately 0.5 to 9.75
years and expected stock price volatility of 90% in 2003 and 90% in 2002.
The weighted average fair value of options granted was $5.57 during 2003
and $1.14 during 2002.
Had compensation cost for the options been determined based on the fair
value at the grant dates for the awards, net income and net income per
common share basic and diluted would have been as follows for 2003:
As Reported ProForma
------------- -------------
Net income $ (2,318,340) $ (3,459,240)
Net income attributable to common shares (2,318,340) (3,459,240)
Net income per common share:
Basic (0.93) (1.38)
Diluted (0.93) (1.38)
The following is a summary of the status of the Company's options for
2003:
Average
Exercise
Options Price
------- --------
Outstanding at beginning of year 30,000 $ 6.51
Issued 190,000 1.62
Cancelled -- --
------- ------
Outstanding at end of year 220,000 2.29
======= ======
The following table summarizes information about options outstanding at
December 31, 2003:
Number of outstanding and exercisable 200,000 shares
Average remaining contractual life 7.66 years
Exercise price 2.29 per share
F-23
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Stock Options/Stock Option Plans (continued)
Had compensation cost for the options been determined based on the fair
value at the grant dates for the awards, net income and net income per
common share basic and diluted would have been as follows for 2002:
As Reported ProForma
------------- -------------
Net income $ 2,692,528 $ 2,678,228
Net income attributable to common shares 2,692,528 2,678,228
Net income per common share:
Basic 1.41 1.40
Diluted 0.81 0.81
The following is a summary of the status of the Company's options for
2002:
Average
Exercise
Options Price
------- --------
Outstanding at beginning of year 25,000 $ 7.49
Issued 5,000 1.60
Cancelled -- --
------ ------
Outstanding at end of year 30,000 6.51
====== ======
The following table summarizes information about options outstanding at
December 31, 2002:
Number of outstanding and exercisable 30,000 shares
Average remaining contractual life 2.42 years
Exercise price 6.51 per share
Note 13. 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 related to depreciation and amortization and the
recognition of income tax carryforward items.
At December 31, 2003 and 2002, the Company's net deferred tax asset,
utilizing a 34% and 36% effective tax rate, respectively, consists of:
2003 2002
----------- -----------
Deferred tax assets:
Investment partnership earnings $ 1,461,000 $ 2,714,000
Net operating loss carry forward 942,500 1,111,000
Alternative minimum tax credits 493,000 493,000
Unrealized appreciation of marketable securities (22,000) --
Valuation allowance (2,874,500) (4,318,000)
----------- -----------
Subtotal $ -- $ --
=========== ===========
F-24
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Income Taxes (continued)
The valuation allowance was established to reduce the net deferred tax
asset to the amount that will more likely than not be realized. This
reduction is necessary due to uncertainty of the Company's ability to
utilize the net operating loss and tax credit carry forwards before they
expire.
For regular federal income tax purposes, the Company has remaining net
operating loss carryforwards of approximately $2,800,000. These losses can
be carried forward to offset future taxable income and, if not utilized,
will expire in varying amounts beginning in the year 2004. The Company's
tax returns have not recently been examined by the Internal Revenue
Service ("Service") and there is no assurance that the Service would not
attempt to limit the Company's use of its net operating loss and tax
credit carryforwards.
For the years ended December 31, 2003 and 2002, the tax effect of net
operating loss carryforwards reduced the current provision for regular
Federal income taxes by approximately $942,500 and $969,310, respectively.
At December 31, 2003 and 2002, the Company has provided $70,724 and
$(58,065), respectively, for taxes, which relate to federal taxes,
including alternative minimum tax liabilities (See Note 16) and state
income taxes.
The provision (benefit) for income taxes is as follows
2003 2002
-------- --------
Current $ 70,724 $(58,065)
Deferred -- --
-------- --------
$ 70,724 $(58,065)
======== ========
Note 14. Employment Agreements
On June 3, 1997, the Company entered into an Employment Agreement with
William R. Ponsoldt, Sr., which provided for a base salary in annual
installments, in advance, of $250,000 each, which salary was adjusted on
January 1 of every year by any increase since the previous January 1 in
the Consumer Price Index ("CPI") for All Urban Consumers, U.S. city
average, as published by the U. S. Department of Labor Bureau of Labor
Statistics. As additional salary, Mr. Ponsoldt was entitled to receive an
amount equal to 20% of the Company's increase in quarterly common stock
net worth, which is defined to be the difference between (i) total
shareholders' equity and (ii) any shareholders' equity accounts relating
to preferred stock. During 2003, the Company settled the amount due Mr.
Ponsoldt by payment through payroll of accrued wages of $1,225,234, which
included a reduction of $250,000 from the amount offered under the
Contingent Payment Agreement (see Note 15.). At December 31, 2003 and
2002, approximately $0 and $1,280,000, respectively, of additional salary
is included in accrued expenses in the consolidated balance sheets. The
Agreement provides that Mr. Ponsoldt will not compete with the Company for
a two year period following the termination of his employment and provides
for indemnification under certain circumstances. On October 16, 2002, Mr.
Ponsoldt resigned his position as director of the Company, and thereby
terminated the Employment Agreement. Any disputes between the Company and
Mr. Ponsoldt under the Agreement are to be resolved through arbitration.
In connection with the redemption of Statesman's interest, each of the
Company's directors resigned effective October 28, 2002 with successors
appointed by Royalty, the holder of certain notes payable (Note 8).
Simultaneously, all officers of the Company resigned and were replaced by
Laurence S. Levy (an affiliate of Royalty) as CEO and Neil Hasson (an
affiliate of Royalty) as CFO and Secretary. On October 16, 2002, the
Company entered into Employment Agreements with Mr. Levy and Mr. Hasson,
with terms as follows:
F-25
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Employment Agreements (continued)
Laurence S. Levy - base annual salary of no less than $150,000 per annum,
discretionary annual bonus, options to purchase 25,000 shares of common
stock at an exercise price of $1.35 per share, benefits, expense
reimbursement and insurance (including, but not limited to, life, travel
accident, health).
Neil Hasson - base annual salary of no less than $50,000 per annum,
discretionary annual bonus, options to purchase 25,000 shares of common
stock at an exercise price of $1.35 per share, benefits, expense
reimbursement and insurance (including, but not limited to, life, travel
accident, health).
On November 22, 2002, Mr. Hasson resigned as Secretary of the Corporation
and the position was filled by Carol Zelinski.
Note 15. Related Party Transactions
On July 3, 2003, Royalty, the holder of a $2,004,098 5% Convertible
Promissory Note of the Company due October 16, 2012 (the "Note"), elected
to convert the principal amount of the Note and the $71,377 of accrued and
unpaid interest thereon into 1,037,738 shares of the Company's Common
Stock. Royalty is an affiliate of Laurence S. Levy and Neil N. Hasson,
directors and executive officers of the Company. Also on July 3, 2003, the
Company prepaid the full $1,250,000 principal amount of, and all accrued
and unpaid interest under, the 9% Promissory Note held by Royalty in
accordance with the mandatory prepayment provisions of such note. The
Company also repaid all amounts outstanding under the $300,000 working
capital loan facility from Royalty which was established in April 2003,
and terminated the facility. This amount consisted of $180,000 of
principal and $2,910 of accrued and unpaid interest.
In September, 2003, Royalty Holdings LLC ("Royalty") advanced $90,000 to
the Company under an existing credit facility. The Company repaid this
advance and the accrued interest thereon of $2,584. At December 31, 2003,
there are no advances due to Royalty from the Company.
Pursuant to a License Agreement entered into in March 2003, Royalty
Management, Inc., which is wholly-owned by Laurence Levy, the Company's
President and a director, provides New York City office space, office
supplies and services to the Company for $100,000 per year.
Beginning with the fiscal quarter ended March 31, 2003, each non-employee
director is granted 250 shares of Common Stock at the end of each full
calendar quarter for which such individual has served as a director of the
Company. Compensation expense of $8,450 has been recognized for issuances
for the year ended December 31, 2003.
F-26
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Related Party Transactions (Continued)
On October 16, 2002, the Company redeemed all the shares of common stock
of the Company owned by Statesman pursuant to the terms of a Redemption
Agreement, dated October 16, 2002, between the Company and Statesman.
The Company funded the redemption from the proceeds of an aggregate of
$4,750,000 borrowed from Royalty Holdings, LLC ("Lender"), an affiliate of
Messrs. Levy and Hasson, in exchange for two notes - a $3,500,000 5%
Convertible Promissory Note due October 16, 2012 and a $1,250,000 9%
Promissory Note due October 16, 2007. Both notes allowed interest to
accrue without current payment. The principal and interest under the
Convertible Promissory Note were convertible into Common Stock at a
conversion rate of $2.00 per share. On November 7, 2002, the Lender
converted $1,495,902 of the principal amount of the Convertible Promissory
Note plus accrued interest into 750,000 shares of Common Stock. During
2003, the remaining principal & accrued interest were converted (see first
paragraph of this Note.). At December 31, 2003, the balances of theses
notes payable are $0.
In connection with the redemption, effective October 28, 2002, each of the
former directors of the Company resigned and the four current directors
were appointed to serve as the successor members of the Board of
Directors. In addition, simultaneously with the redemption, all of the
officers of the Company resigned and were replaced by designees of
lender.
In connection with the redemption, the Company acquired from Statesman a
three year option to purchase the 20% stock interest in NRDC held by
Statesman. To exercise the option, the Company must deliver to Statesman
for cancellation the $2.44 million note issued to the Company by Statesman
in October 2001. As consideration for the option, the Company (i) paid
Statesman $250,000, (ii) amended the note and related pledge agreement to
limit the Company's recourse under the note and (iii) transferred to
Statesman certain office furniture and equipment owned by the Company.
In connection with the redemption, the Company entered into a Contingent
Payment Agreement with William R. Ponsoldt, Sr., the former President and
Chief Executive Officer of the Company, whereby payment of $1,508,000 of
accrued compensation owed to Mr. Ponsoldt by the Company became subject to
the satisfaction of certain conditions precedent. The Company also entered
into an agreement with Statesman providing for (i) an amendment to the
Certificate of Designations of the Series C Preferred Stock for the
Company and (ii) certain limitations on the ability of Statesman to issue
or transfer shares or other beneficial interests in Statesman or to sell,
transfer, purchase or acquire any capital stock of the Company, in each
case without first receiving written confirmation from the Company that
such issuance or transfer would not adversely affect the Company's ability
to utilize its net operating loss carryforwards. The Company paid
Statesman an aggregate amount of $2,730,000 in consideration of the
foregoing agreements.
See Note 14 for a description of Employment Agreements entered into with
certain current and past members of the Company's management and Note 12
for a description of certain option grants and related transactions.
Note 16. 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:
F-27
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. Contingencies, Risks and Uncertainties (Continued)
(i) The Company currently lacks the necessary infrastructure at the
site of the Groveland Mine in order to permit the Company to make
more than casual sales of the aggregate (See Note 1.H).
(ii)A default in the Lease or sudden catastrophe to the Security
West Building from uninsured acts of God or war could have a
materially adverse impact upon the Company's investment in Security
Land and Development Company Limited Partnership and, therefore, its
financial position and results of operations (See Note 4).
(iii) On January 20, 2004, a purported derivative and class action
lawsuit (the "Delaware State Action") was filed by two dissident
Company shareholders, Edward E. Gatz and Donald D. Graham, in the
New Castle County Court of Chancery, Delaware, captioned Gatz et al.
v. Ponsoldt, Sr., et al, naming as defendants certain current and
former directors of the Company, Royalty and certain of its
affiliates, Statesman and, nominally, the Company. The complaint
alleges, among other things, breaches of fiduciary duties by the
former director defendants and Statesman in connection with (i) the
exercise by Statesman in 2001 of an option to acquire shares of the
Company's common stock, (ii) the 2001 sale of rock aggregate by the
Company to Iron Mountain and (iii) the October 2002 Restructuring
Transactions. The complaint also alleges breaches of fiduciary
duties by the current director defendants in connection with the
payment by the Company in 2003 of accrued compensation owed to
William R. Ponsoldt, Sr. for periods prior to the October 2002
Restructuring Transactions. The complaint also alleges that Royalty
and its affiliates knowingly participated in the breaches of
fiduciary duties by the former director defendants relating to the
October 2002 Restructuring Transactions. In addition to other
damages, plaintiffs seek unspecified compensatory and/or rescissory
damages against all defendants, a declaration that all Company stock
issued to Statesman, William R. Ponsoldt, Sr., Royalty and any
person affiliated with the foregoing is void, an order rescinding
any payments in any form made by the Company to William R. Ponsoldt,
Sr. or any of his affiliates or family members, an order rescinding
the October 2002 Restructuring Transactions, and an order rescinding
Statesman's 2001 option exercise and rescinding the option itself.
The Company, as a nominal defendant, has not taken any position with
respect to the merits of the Delaware State Action. Each of the
other defendants has moved to dismiss the Delaware State Action and
these motions are pending.
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-28
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. Contingencies, Risks and Uncertainties (Continued)
(iv)The Company has significant tax loss and credit carryforwards
and no assurance can be provided that the Internal Revenue Service
would not attempt to limit or disallow altogether the Company's use,
retroactively and/or prospectively, of such carryforwards, due to
ownership changes or any other reason. The disallowance of the
utilization of the Company's net operating loss would severely
impact the Company's financial position and results of operations
due to the significant amounts of taxable income (generated by the
Company's investment in Security) that has in the past been, and may
in the future be, offset by the Company's net operating loss
carryforwards (See Note 13).
Note 17. 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:
2004 16,790
2005 17,630
2006 18,511
2007 9,481
------
Total 62,412
======
Rent expense was $14,691 and $32,778 for the years ended December 31, 2003
and 2002, respectively.
Note 18. New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the entity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 is effective for new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June 15,
2003. The adoption of FIN 46 did not have a significant impact on the
Company's results of operations or financial position.
In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", which
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is effective for
contracts entered into or modified after June 30, 2003, except for certain
hedging relationships designed after June 30, 2003. Most provisions of
this Statement should be applied prospectively. The adoption of this
statement is not expected to have a significant impact on the Company's
results of operations or financial position.
F-29
Regency Affiliates, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18. New Accounting Pronouncements (Continued)
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities, if applicable. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. The adoption
of this statement is not expected to have a significant impact on the
Company's results of operations or financial position.
Note 19. Subsequent Event
On January 12, 2004, the Company sold its rental property located in
Scranton, PA for $531,500, less costs to sell of approximately $48,000. No
gain or loss was recognized on the transaction as the property was written
down to fair value at December 31, 2003.
F-30