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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
Amendment No. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12 (b) or (g) of the Securities Exchange Act of 1934
ROYAL FINANCIAL CORPORATION
(Exact name of Small Business Issuer in its charter)
NEVADA 13-3961109
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 BALLPARK WAY, SUITE 210, ARLINGTON,
TX 76011 (Address of principal
executive office)
(817) 861-4000
(Issuer's telephone number)
Securities to be registered under Section 12 (b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.001
(Title of class)
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TABLE OF CONTENTS
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Page
PART I
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Item 1. Description of Business.................................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................................6
Item 3. Description of Property.................................................................................9
Item 4. Security Ownership of Certain Beneficial Owners and Management ........................................10
Item 5. Directors, Executive Officers, Promoters and Control Persons ..........................................11
Item 6. Executive Compensation.................................................................................13
Item 7. Certain Relationships and Related Transactions.........................................................13
Item 8. Description of Securities..............................................................................13
PART II
Item 1. Market price of and Dividends of the Registrant's Common Equity
and Other Shareholder Matters......................................................................14
Item 2. Legal Proceedings......................................................................................14
Item 3. Changes in and Disagreements with Accountants..........................................................15
Item 4. Recent Sales of Unregistered Securities................................................................15
Item 5. Indemnification of Directors and Officers..............................................................16
PART F/S
Financial Statements
PART III
Index to Exhibits
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Explanatory Note:
Unless otherwise indicated or the context otherwise requires, all
references herein to the "Company" are to Royal Financial Corporation, a Nevada
corporation, and its wholly-owned subsidiaries, Royal Mortgage Corporation,
Royal Mortgage Brokerage, Inc., Walden Woods of Sugarmill, Inc. and Walden Woods
of Sugarmill Sales, Inc.
The Company is filing this Form 10-SB voluntarily. The Company's Common
Stock has traded on the OTC Bulletin Board since May 1998 and the Company
believes the market for its stock will be enhanced by being a reporting company.
In addition, the Company intends to seek listing on the NASDAQ SmallCap Market
in the near future, for which a registration under the 1934 Act will be
required.
PART I
Item 1. Description of Business
General
Royal Financial Corporation (the "Company") is a real estate financial
holding company which invests in the asset backed real estate and mortgage
markets. The Company was incorporated in August 1993 as Davenport Ventures,
Inc. ("Davenport") and is duly organized and in good standing under the laws
of the State of Nevada. The Company has a limited operating history and has
experienced losses from inception through August 31, 1998. Future operating
results will depend on many factors, including, but not limited to, the
Company's ability to successfully integrate and expand its business
operations and the revenues generated from its acquired operations.
There can be no assurance that such losses will not continue. In early
1998, controlling interest in the Company was acquired by a former officer
and director of Davenport to initiate the business of purchasing, developing
and operating manufactured housing communities.
Davenport completed its first acquisition of a manufactured housing
community, located in Florida, on June 1, 1998 for a purchase price of
approximately $1,611,000 which was financed by Royal Mortgage Corporation.
There are currently 87 pad sites 95% of which are rented with an annual
revenue from rents of approximately $180,000. The business objective is to
increase the size of the community by increasing the number of pad sites to
approximately 215. Although there can be no assurances, Management
anticipates that this expansion will be completed by March 31, 1999. In
addition, the Company anticipates that the rents will be raised to
approximately $225 per month, per site, on January 1, 2000 from the current
rent of $175 per month. Once the community is fully rented, the Company
believes that the annual revenue from rents will be approximately $487,000
per year which the Company believes will substantially increase the value of
the community. Although there can be no assurances, the Company anticipates
that the community will be fully rented within three years. This property
acquisition was completed through the purchase of 100% of the outstanding
shares of common stock of Walden Woods of Sugarmill, Inc., a Florida
corporation ("Walden Woods"). Walden Woods and its subsidiary, Walden Woods
of Sugarmill Sales, Inc., a Florida corporation ("Walden Sales"), are now
wholly-owned subsidiaries of the Company.
Effective August 18, 1998, the Company acquired Royal Mortgage
Corporation, a Texas corporation ("RMC"), through an exchange offer on the
basis of one share of its common stock for one share of RMC's common stock.
RMC was founded in December 1994 to invest in U.S. mortgage instruments (not
including origination of mortgages), and to obtain safe, high yields and
capital gains on these investments. The approval of the shareholders of both
companies was received on August 10, 1998.
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The terms of the exchange offer required that the name of Davenport be
changed to Royal Financial Corporation and that the existing officers and
directors of RMC become the officers and directors of the Company. The
exchange offer also resulted in the Company and RMC changing their fiscal
year ends to August 31.
Principal Business Activities
The Company believes that RMC has identified several unique, secure sectors
of the real estate market on which to focus as follows:
(1) Acquisition and resolution of sub and non-performing mortgage loans;
(2) Acquisition of distressed properties and foreclosure sales; and
(3) Purchase of tax lien certificates resulting from unpaid mortgages or
unpaid property taxes owed to municipal and county taxing authorities.
Mortgage Loans
According to the Mortgage Banker's Association of America (October 1997)
the great majority of homes purchased within the U.S. are financed through
banks, savings and loans associations, credit unions and other financing
companies, with the dollar amount of homes financed each year within the U.S.
consistently exceeding $600 billion over the past six years. On average, 4% of
these mortgages become sub and non-performing loans, which has created a $160
billion niche within the mortgage paper market.
Existing mortgage loans can be purchased at a discount in the secondary
market of the U.S. mortgage market. The level of discount achieved will vary
depending upon numerous factors, including but not limited to, (i) payment
history of subject mortgage loan, (ii) how motivated the seller is to sell
the loan, (iii) the terms of the loan, (iv) the condition of the property and
(v) the location of the property. RMC has purchased loans at discounts
ranging from approximately 15 to 60 percent of the face value of the loan.
The Company's discounted loan portfolio totaled approximately $2,808,902 or
26% of the Company's total assets, as of August 31, 1998.
Level of Discount
RMC has acquired performing loans at discounts of approximately 10 to 15
percent and has acquired non-performing loans at discounts of approximately
40 to 60 percent. Performing loans offer cash flow as well as an opportunity
for a moderate capital gain when RMC sells the loans. Non-performing loans
offer no cash flow, but the Company believes that they may offer capital gain
potential upon disposition. RMC purchases discounted loans for the purpose of
realizing a capital gain within four to eighteen months of acquisition,
although no assurances of a capital gain can be given.
Source of Loans
RMC has acquired discounted mortgage loans from banks and other originators
of loans, large U.S. conglomerates that participate in the secondary mortgage
market and at public auctions. Performing loans are typically purchased from
originators and secondary market participants. Non-performing loans are
generally purchased from secondary market participants and at public auctions.
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Due Diligence
Whether purchasing performing or non-performing loans, RMC must carry
out several due diligence steps. First and foremost, RMC must locate sources
of these loans, then RMC evaluates and narrows its selections to pursue only
those mortgages that meet RMC's investment criteria. Generally, RMC targets
loans collateralized by residential real estate, located in Texas and
Florida, which are under or non-performing. RMC's due diligence procedures
include reviewing existing independent appraisals in the Seller's loan file,
obtaining lien searches, inspecting properties, and evaluating the market
values of properties by obtaining brokers' price opinions, reviewing market
data for comparable properties and consulting with local real estate agents.
The Investment Committee consists of three members, Michael J. Pilgrim --
President, Mark J. Teinert -- Secretary and David Wentsch -- Vice-President
of Legal Affairs of the Company.
Distressed Properties and Foreclosure Sales
When a property owner fails to pay property tax, school tax or other
taxes or to make mortgage payments to his or her mortgage company for an
extended period of time, that person's home can be placed on the auction
block by the mortgage company or local governmental authorities. As evidenced
by county foreclosure listings, this occurs on a regular basis in the U.S.
and creates an opportunity to purchase homes out of mortgage foreclosure. RMC
has had the opportunity to purchase homes in mortgage foreclosure sales for
as little as 40 to 60 percent of their fair market value. At August 31, 1998,
the Company's real estate owned, net, totaled approximately $1,357,744 or 12%
of the Company's total assets.
RMC also contacts lenders and major secondary market participants to look
at portfolios of loans that are slated for foreclosure. RMC may purchase several
loans at once and then foreclose on each loan as the holder of the unpaid
mortgage and potentially realize a capital gain when the property is resold.
These portfolios of loans, purchased just prior to foreclosure, are available at
discounts ranging from approximately 40 to 80 percent of the face value of the
unpaid loan. The same due diligence is performed on distressed properties and
foreclosure sales as the Company would perform on other assets acquired.
Tax Lien Certificates
The Company believes that RMC has identified a specific market niche
that offers a low-risk and high-yield opportunity: Tax Lien Certificates.
When property taxes are not paid promptly by the property owner, certain
local taxing authorities auction tax lien certificates for that particular
property. The sale of the certificates provides immediate funds to the taxing
authority. In certain states and counties in the United States, purchasers of
tax lien certificates are able to realize a rate of interest of approximately
17 to 24 percent on these certificates based on statutory rates set by the
local taxing authorities. Currently 31 states in the U.S. auction tax lien
certificates at the local government level.
According to Fitch Investor Service Inc. ("Fitch"), approximately 2 to 3
percent of all tax liens are not redeemed by the property owner and the
purchaser of the tax lien must wait until the property is sold at auction to
make a profit. However, in those instances when the taxes are not paid by the
property owner the property is sold at auction and the investor's lien is
ultimately satisfied.
To date, RMC has purchased approximately 250 tax lien certificates
yielding approximately 17 to 24 percent annually. The redemption rate the
Company has experienced is consistent with the findings of the research
conducted by Fitch. RMC purchased $553,915 in tax lien certificates in June
1997. As of August 31, 1998, $127,520 of these certificates were still
outstanding.
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Royal Mortgage Brokerage, Inc.
Royal Mortgage Brokerage, Inc., a Texas corporation, which is also
authorized to do business in Florida, arranges for individuals, partnerships,
trusts or corporations to obtain mortgages from outside mortgage lenders on
properties owned by or outside of the Company. Customarily, Royal Mortgage
Brokerage, Inc. obtains a financing "broker's" commission for each mortgage it
arranges. These fees range from 1 to 4% depending upon the size of the mortgage
and the "broker's" fee paid by a particular lender. Royal Mortgage Brokerage,
Inc. is a wholly-owned subsidiary of the Company.
Manufactured Housing
Davenport completed its first acquisition of a manufactured housing
community on June 1, 1998 when it purchased Walden Woods Retirement Village (the
"Park"), a manufactured housing community in Homosassa, Florida. The Park is a
45 acre site. 18 of the 45 acres are developed with approximately 87 pad sites.
The Company is currently developing an additional 20 acres. It is anticipated
that the development will be completed by March 1999 at which time the
Company believes the Park will contain an aggregate of approximately 215 pad
sites. The Company believes, although no assurances can be given, that once the
community is fully rented, the annual revenue from rents will be approximately
$487,000 per year which the Company believes will significantly increase the
value of the community.
This property acquisition was completed through the purchase of 100% of
the capital stock of Walden Woods. Walden Woods is now a wholly-owned
subsidiary of the Company.
A manufactured home community is designed and improved with sites for the
placement of manufactured homes and related infrastructure and amenities.
Manufactured homes are detached, single-family homes that are built off-site by
manufacturers and installed on sites within each community. The owner of each
home in the community leases the site on which the home is located. Modern
manufactured home communities are similar to typical residential subdivisions
containing centralized entrances, paved streets, curbs, gutters and parkways. In
addition, these communities often provide a clubhouse for social activities,
recreation and other amenities, which may include swimming pools, shuffleboard
courts, tennis courts, laundry facilities and cable television services. The
Park will be a gated community in which all residents must be age 55 or over.
The Park contains amenities which include, but are not limited to, a
clubhouse with full kitchen, heated outdoor pool, a detached billiards room,
shuffleboard courts, paved and curbed streets, parkways and lush landscaping
throughout.
According to the Manufactured Housing Institute, manufactured housing is
the fastest growing segment in the United Sates housing market. According to
the Manufactured Housing Institute, nearly one out of every three new homes
sold in the U.S. is a manufactured home and shipments of manufactured homes
have increased 20% annually since 1992.
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The Company generates revenue from its manufactured housing community from
three major sources:
(1) Land Leasing: The Company owns the manufactured home community,
including the land and any community developments thereon. The Company generates
revenue by leasing lots to home owners.
(2) Sale of manufactured homes: Through Walden Sales, the Company
intends to engage in the sale of manufactured homes, currently costing
approximately $50,000 to $125,000.
(3) Arranging third party mortgages: Through its wholly-owned subsidiary,
Royal Mortgage Brokerage, Inc., the Company arranges third party mortgage
financing for the homes which it sells. The earned commission results in a 2%
margin of profit for the Company.
The Company, through its wholly-owned subsidiaries, Walden Woods and
Walden Sales, is currently analyzing several sites in Florida with the intent
to acquire and develop additional manufactured housing communities. The
Company plans on acquiring and beginning development on approximately three
additional sites sometime prior to December 31, 1999. Currently, the Company
has engaged Charlotte Engineering, an independent engineering firm located in
Port Charlotte, Florida to perform specific due diligence on the three sites
being considered for acquisition and development. The Company anticipates
being able to fully develop a site within 11 months of finalizing acquisition
of the land. Although there can be no assurances, once a site is fully
developed, the Company believes that it will realize revenues from the sale
of new homes, leasing of lots, mortgage brokerage activities and Company
controlled utilities within the development. Although there can be no
assurances that the Company will be successful or if successful that such
results will continue, the Company anticipates participation in the
manufactured housing industry to comprise approximately 30 to 40 percent of
its overall portfolio by the end of 1999.
Competition
The acquisition of discounted loans and tax lien certificates is highly
competitive due to the shear size of this segment of the mortgage and tax
lien industries and the competitive bidding that occurs in most transactions.
Although these segments make up a sizable portion of the Company's investment
portfolio, in relation to the overall market, the Company's discounted loan
and tax lien certificate holdings make up far less than one half of one
percent of the national market. While there can be no assurances, the Company
believes it will be able to successfully participate in these segments of the
industry by purchasing smaller packages that the industry giants do not
consider because of their small size.
The Company competes with companies that are much larger and have far
greater financial resources than the Company. While the Company focuses on
local markets, its competition would be able to extend greater resorces than
the Company to penetrate local markets if they so elected. However, while
there can be no assurances, the Company believes it is able to better
concentrate its efforts locally and has greater flexibility to spend as much
time as needed to familiarize itself with local market conditions than its
competitors.
Environmental Impact
The Company believes that none of its activities utilize any hazardous
materials or result in the discharge of any pollutants into the environment. The
Company believes it complies fully with all state and federal environmental laws
and regulations. In addition, the properties owned by the Company or for which
the Company holds a mortgage or tax lien generally have been subjected to a
Phase I or similar environmental audit (which involves general inspections
without soil sampling or ground water analysis) completed by independent
environmental consultants whose audits have not revealed, nor is the Company
aware of, any material adverse affect on the Company's business, results of
operations, financial condition or liquidity.
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Employees
The Company employs a total of ten full-time persons, two commission-based
personnel and several contract personnel who perform due diligence procedures
on behalf of the Company. None of the Company's employees, commission-based
personnel or contract personnel are represented by a union and the Company
believes its relationship with its employees is very good. There are no
employment contracts between the Company and any of its employees.
Regulation
The Company is subject to certain State of Florida regulations
concerning the resale of real estate, its mortgage brokerage activities and
its operation of manufactured housing communities. Presently the Company is
subject to oversight by the Florida Department of Banking and Finance for
mortgage brokering and licensing matters. The Company is required to exercise
supervision over the preparation and maintenance of required documentation
for its Florida real estate transactions, and it believes that it is in
compliance with all applicable rules and regulations.
Item 2. Management's Discussion and Analysis or Plan of Operation
General
The Company, through its wholly-owned subsidiaries:
(1) acquires sub and non-performing mortgage loans and real properties
that meet the Company's investment criteria;
(2) acquires tax lien certificates which result from property owners not
paying their property taxes. At a minimum, the Company receives statutory
interest yields which range from approximately 17 to 24%. Any tax lien
certificates which are not redeemed are converted into real estate assets;
(3) owns and operates a manufactured housing community in Florida.
Revenues and expenses for the eight months ended August 31, 1998 include
Walden Woods for only three months since its acquisition. The results of the
Company (formerly Davenport Ventures, Inc.) are included for the whole eight
month period presented. Revenues and expenses for the fiscal year ended
December 31, 1997 applied to RMC only. No results from the Company or Walden
Woods are included in the revenues and expenses for the year ended December 31,
1997.
For the three months ended November 30, 1998, the Company's revenues and
expenses include Walden Woods and the Company for the whole period. No results
from these two businesses are included in the comparable period for 1997.
SELECTED FINANCIAL DATA
The following table sets forth summary historical financial information
of the Company as of the dates and periods indicated in the following table.
The summary historical financial data for the eight months ended August 31,
1998 is derived from financial statements of the Company which have been
audited by Grant Thornton LLP, independent public accountants, appearing
elsewhere herein. The financial statement for the three month periods ended
November 30, 1997 and 1998, included herein, have not been audited, but are
believed by Management to contain all accruals and adjustments required for a
fair presentation of the financial condition and results of operations of the
Company in accordance with generally accepted accounting principles. The
summary historical financial data as of and for the years ended December 31,
1996 and 1997 is derived from the financial statements of RMC which have been
audited by William C. Spore & Company, P.C., independent public accountants.
The information below should be read in conjunction with the Financial
Statements and related notes thereto of the Company and RMC.
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Royal Mortgage Corporation Company
Year Ended Eight Months Three Months Ended
December 31, Ended November 30,
1996 1997 August 31, 1998 1997 1998
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Statement of Operations Data(1):
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Revenues $ 34 $ 277,031 $ 220,776 $ 121,267 $ 138,758
Expenses (493,162) (1,790,821) (2,406,304) (565,473) (552,550)
Other income (expense) -- (4,723) -- -- --
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Net loss $ (493,128) $ (1,518,513) $ (2,185,528) $ (444,206) $ (413,792)
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Net loss per share $ 0.24) $ (0.68) $ (0.40) $ (.19) $ (.06)
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Weighted average shares outstanding 2,050,000 2,266,437 5,450,599 2,380,700 7,464,382
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As of December 31, As of As of
1996 1997 August 31, 1998 November 30, 1998
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Balance Sheet Data:
Working capital (deficit) $ (265,398) $ 3,511,816 $ 4,008,714 $ 3,104,294
Investments -- 4,052,123 4,330,802 4,552,995
Property and equipment, net(2) 268,690 313,927 2,198,979 2,368,200
Total assets 329,358 9,058,000 10,755,724 10,278,107
Total long-term debt -- 50,000 1,290,000 1,290,000
Total liabilities 282,114 10,090,193 1,370,250 1,306,425
Stockholders' equity 47,244 (1,031,949) 9,385,474 8,971,682
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(1) To give effect to the August 1998 merger, the Statement of Operations Data
includes the operating results of RMC and the Company as though the entities had
been combined as of January 1, 1996. In addition, the Park was acquired on June
1, 1998. The Statement of Operations Data includes the operating results of the
Park for the period from June 1, 1998 to August 31, 1998.
(2) Property and equipment, net as of August 31, 1998 includes the land and
improvements, buildings and equipment obtained in connection with the
acquisition of the Park. The net balance of these assets as of August 31, 1998
was $1,771,391.
With respect to the information in Note K-- Commitments, on page F-16,
the Company terminated its agreement with said public relations firm in
December 1998. With respect to the information in Note M-- Additional
Financing, the Company believes said offering will close on or around
April 23, 1999.
Effective August 18, 1998, the Company acquired all of the outstanding
capital stock of RMC, in exchange for shares of the Company. See notes to the
"Consolidated Financial Statements."
The Company has a limited operating history and conducts its operations
through its wholly owned subsidiaries, Walden Woods, which owns a
manufactured housing community and Walden Sales, which sells manufactured and
modular homes, as well as its other subsidiaries, RMC and Royal Mortgage
Brokerage, Inc.
The Consolidated Financial Statements of the Company for the eight
months ended August 31, 1998, reflect the combined results of RMC and the
Company which includes manufactured housing operations and real estate
investment activities. Prior to the exchange offering, the Company and its
subsidiaries used December 31 as their fiscal year end. As a result of the
exchange agreement, the shareholders of both Davenport Ventures, Inc. and RMC
approved a change to an August 31 fiscal year end, as well as a name change
from Davenport Ventures, Inc. to Royal
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Financial Corporation. In addition, the existing officers resigned and the
officers and directors of RMC were approved by the shareholders of both
companies to become officers and directors of the Company.
RMC began its operations in May 1997 after the completion of a $9,850,000 8
1/2% convertible debentures offering. This gave RMC the ability to initiate its
operations in the market niches that the Company is currently exploiting today
in the acquisition and profitable disposition of mortgage and real estate
assets. As a whole, the Company has successfully used its market niches to
obtain investment returns that management believes were and are available.
Although no assurances can be given, the Company intends to acquire an
increasing number of properties at daily and monthly judicial and
non-judicial foreclosure auctions in all major counties in Florida and Texas
through RMC. In addition, the Company intends to acquire and develop
additional manufactured housing communities. Management believes that this
will provide solid predictable growth patterns in this segment of the
Company's business for its wholly-owned subsidiaries, Walden Woods and Walden
Sales.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1997
REVENUES
Revenues increased by approximately 14% from $121,267 in the three
months ended November 30, 1997 to $138,758 in the three months ended November
30, 1998. This increase was primarily from the inclusion of revenues from
Walden Woods which totaled $43,321 for the three months ended November 30,
1998.
EXPENSES
Expenses decreased approximately 2% from $565,473 in the three months
ended November 30, 1997 to $552,550 in the three months ended November 30,
1998. The largest decrease was in interest expense which decreased from
$318,853 for the three months ended November 30, 1997 to $27,413 for the
three months ended November 30, 1998. This was due to $9,850,000 in 8 1/2%
Senior Convertible debentures that were outstanding in 1997. $8,560,000 of
these debentures were converted to common stock in 1998; therefore, no further
interest was payable on the converted debentures.
Offsetting the decrease in interest expense discussed above was an
increase in promotional expenses of $63,573 due to the Company's efforts to
raise additional capital. In addition, taxes, payroll and other, increased
from $9,421 for the three months ended November 30, 1997 to $137,570 for the
three months ended November 30, 1998 due to the Company incurring holding
costs related to its real estate investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity were the net proceeds from
the 8 1/2% Senior Convertible Debentures that were issued in 1997 and the net
proceeds from the sale of common stock during the eight months ended August 31,
1998. As of November 30, 1998 the Company had cash and cash equivalents of
approximately $2,754,000 and working capital of approximately $3,104,000.
This represents a decrease in cash and cash equivalents and working capital
from August 31, 1998 of approximately $1,158,000 and $904,000, respectively.
This decrease is due to additional real estate investments of approximately
$716,000, investment in the expansion of Walden Woods of approximately
$185,000 and the payment of approximately $99,000 in financing costs in the
three months ended November 30, 1998.
Future cash resources available to the Company are expected to come from
the proceeds of future issuances of debt and/or equity securities and from
operations of current businesses as well as planned acquisitions and
development of manufactured housing communities.
The Company's cash flow and working capital requirements are primarily
affected by the timing of receipt of proceeds from sales of investment
properties, redemption of tax lien certificates, receipt of payments from
tenants of Walden Woods, payment of operating expenses and servicing of the
Company's indebtedness.
Year 2000 Compliance
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four year digits, to indicate the year. Such
computer systems will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to disruptions of
a company's operations.
The Company has developed a plan to ensure its computer programs are
compliant with system requirements to process transaction after the year 1999.
In June 1998, the Company installed a new Y2K compliant computer system and the
Company obtained a certificate of Y2K readiness from the software vendor. As a
result, although no assurances can be given, the Company does not expect that
any costs relating to the Y2K issue will be material to its financial condition
or result of operations.
The Company is working with its suppliers and processing banks to ensure
that their systems will be Y2K compliant. Such compliance costs will be borne by
those suppliers and processing banks. In the event that such suppliers or
processing banks are unable to convert their systems appropriately, the Company
anticipates, although no assurances can be given, that it will switch suppliers
and/or processing banks to new suppliers and/or processing banks which are fully
Y2K compliant.
Forward Looking Statements
Statements that are not historical facts included in this registration
statement are "forward-looking statements" (as that term is defined in the
Private Securities Litigation Reform Act of 1995) and involve risks and
uncertainties that could cause actual results to differ from projected results.
Such statements address activities, events or developments that the Company
expects, believes, projects, intends or anticipates will or may occur, including
such matters as future capital, business strategies, expansion and growth of the
Company's operations and future net cash flows. Factors that could cause actual
results to differ materially ("Cautionary Disclosures") are described throughout
this registration statement. Cautionary disclosures include, among others:
general economic conditions, the markets for and market price of the Company's
acquired properties, the Company's ability to find, acquire, market and sell
properties, the
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strength and financial resources of the Company's competitors, the Company's
ability to find and retain skilled personnel, the results of financing efforts,
and regulatory developments and compliance. All forward-looking statements
attributable to the Company are expressly qualified in their entirety by the
Cautionary Disclosures. The Company disclaims any obligation to update or revise
any forward-looking statement to reflect events or circumstances occurring
hereafter or to reflect the occurrence of anticipated or unanticipated events.
Item 3. Description of Property
The Company maintains its principal executive offices at 1000 Ballpark
Way, Suite 210, Arlington, Texas. The premises are leased from an
unaffiliated party at a current rate of approximately $7,600 per month. Total
lease expense for the eight months ended August 31, 1998 was $95,931. The
lease expires in February 2005 and contains rent escalation clauses, which
are based on pre-determined rent increases specified in the lease agreement.
The Company also maintains an office in Naples, Florida and subleases space
from an unaffiliated party for approximately $3,700 per month. This lease
expires in October, 2000 with an option to renew for two years.
The Company believes that these facilities are adequate for its current
needs and anticipated future needs.
The Company invests in various types of real estate, primarily residential,
but also including commercial and multi-family properties. Whenever the
Company invests in property, the ultimate goal is to realize a specific
targeted capital gain, although no assurances can be given that the Company
will be successful in achieving this goal.
Certain of the Company's investments consist of non-performing loans. Most
of the mortgage loans purchased by the Company are first liens. The Company
believes, although no assurances can be given, that generally, the turnover of
mortgage loan investments is fairly quick at an average holding period of four
to nine months.
The Company also owns Walden Woods Retirement Village (the "Park"), a
manufactured housing community in Homosassa, Florida. The Park is a 45-acre
site. 18 of the 45 acres are developed with approximately 87 home sites. The
Company is currently developing an additional 20 acres. It is anticipated that
the development will be completed by December 1998 at which time the Company
believes the Park will contain an aggregate of approximately 215 home sites.
Upon completion of the development, new sites will rent for $225 per month. Rent
for existing cites is $175 per month. This increase will be made in January
2000. The current occupancy level at the Park is approximately 95%. The book
value of assets related to the Park at August 31, 1998 was approximately
$1,771,000, which was approximately 16% of consolidated assets at August 31,
1998.
Most of the Company's investment properties, as well as the Park discussed
above, are located in the state of Florida. The Company also owns properties,
or loans on properties, in the States of California, Connecticut and Texas.
Currently, the Company is conducting due diligence on several tracts of land
in Florida which may be purchased and developed as manufactured housing
communities. The Company intends to purchase and begin development, as
manufactured housing communities, on a minimum of three tracts of land prior
to the end of 1999. These tracts of land and the ensuing development will be
financed via existing capital and conventional financing.
All of the Company's properties are covered by property and casualty
insurance, which the Company believes is adequate.
9
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of August 31, 1998 with
respect to persons known to the Company to be the beneficial owners of more than
5% of its voting common stock and with respect to the beneficial ownership of
such common stock by each director of the Company and by all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares Number of Shares
(Assuming No Exercise (Assuming Exercise
Name and Address of of Options of Options
Beneficial Owner by Holder (1) Percent by Holder (1) Percent
- ------------------------ ----------------------------- ------- ---------------------- -------
<S> <C> <C> <C> <C>
Bank of Liechtenstein 454,545 6% -- --
c/o Brown Brothers
Harriman & Co.
59 Wall Street
New York, NY 10005
Swiss Bank Corp. 977,955 13% -- --
2 Bahnhof Plotz
Zurich, Switzerland
Von Graffenried Private Bank 567,727 8% -- --
Marktgass Passage 3
Portfach 3000
Bern 3, Switzerland
Michael J. Pilgrim 231,667 3% 541,667 7%
1000 Ballpark Way, Suite 210
Arlington, Texas 76011
Mark J. Teinert 221,667 3% 521,667 7%
1000 Ballpark Way, Suite 210
Arlington, Texas 76011
David E. Wentsch -0- -- 120,000 1%
1000 Ballpark Way, Suite 210
Arlington, Texas 76011
Richard Bergner -0- -- 10,000 --
1000 Ballpark Way, Suite 210
Arlington, Texas 76011
Dr. Raymond Wicki -0- -- 10,000 --
1000 Ballpark Way, Suite 210
Arlington, Texas 76011
Susan M. Stein -0- -- 10,000 --
1000 Ballpark Way, Suite 210
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Arlington, Texas 76011
Directors and executive 453,334 6% 1,223,334 14%
officers as a group
( 6 persons)
</TABLE>
- ------------------------------------
(1) Messrs. Pilgrim, Teinert and all executive officers and directors as a
group beneficially own options exercisable at an average exercise price of $2.34
for 310,000, 300,000 and 770,000 shares of common stock, respectively.
The Company is not aware of any arrangement which might result in a change
in control in the future.
Item 5. Directors, Executive Officers, Promoters and Control Persons
The following table sets forth certain information about the directors,
executive officers and significant employees of the Company.
<TABLE>
<CAPTION>
Name Age Position with Company
<S> <C> <C>
Michael J. Pilgrim 45 President and Chief Executive Officer, Chairman
Mark J. Teinert 44 Secretary and Treasurer
David E. Wentsch 46 Vice President-Legal Affairs and Director
Richard Bergner 68 Director
Raymond Wicki 55 Director
Susan M. Stein 39 Vice President - Finance
</TABLE>
Mr. Michael J. Pilgrim has been President and C.E.O. of the Company since
August 1998. Prior to such time and since 1994, Mr. Pilgrim as a co-founder of
RMC, where he serves as President and C.E.O. Mr. Pilgrim's duties include, but
are not limited to, supervising the Company's operations, serving on the
Company's mortgage evaluation and acquisition team and leading the Company's
manufactured housing activities. From 1992 to present, Mr. Pilgrim has been and
currently is a principal of Rockford Management Inc., which manages an
investment partnership, Gladiator Partners L.P. Mr. Pilgrim's employment history
also includes three years with the accounting firm of Arthur Young, five years
with Merrill Lynch, where he served as Senior Vice President and three years as
Vice President with Prudential Bache Securities. Mr. Pilgrim is a Licensed
Mortgage Broker in Florida and currently serves as the Principal Mortgage Broker
for Royal Mortgage Brokerage, Inc. Mr. Pilgrim received a Bachelor of Business
Administration degree from the University of Missouri in 1975.
Mr. Mark J. Teinert has been Secretary and Treasurer of the Company since
August 1998. Prior to such time and since 1994, Mr. Teinert was a co-founder of
RMC, where he served as Secretary and Treasurer. Mr. Teinert's duties include,
but are not limited to, serving on the Company's mortgage evaluation and
acquisition team, providing financial analysis, tax lien certificate acquisition
and
11
<PAGE>
coordinating auction activities. Mr. Teinert's employment history includes eight
years as a financial analyst for Dorchester Oil & Gas (a Fortune 500 Company),
three years with Merrill Lynch, where he served as Vice President of Retail
Equity sales, four years with California Federal Savings Bank where he oversaw
various home mortgage activities and four years as Vice President with
Professional Practice Insurance Brokers. Mr. Teinert received a Bachelor of
Business Administration degree from Texas Tech University.
Mr. David E. Wentsch has been Vice President of the Company since August
1998. Prior to such time and since April 1998, Mr. Wentsch served as Vice
President of RMC, where he served on the Company's mortgage evaluation and
acquisition team. From April 1997 to April 1998, Mr. Wentsch was engaged on a
contract basis to provide various legal services relating to the Company's
mortgage acquisition activities. Prior experience includes working as a trust
banker and practicing law in the areas of real estate, tax and bankruptcy
matters. Mr. Wentsch is a Florida Licensed Mortgage Broker. Mr. Wentsch received
a Bachelor of Business Administration from the University of Texas El Paso and
Jurist Doctor degree from the University of Texas School of Law.
Mr. Richard Bergner has been a director of the Company since August 1998.
Prior to such time and since April 1998, Mr. Bergner was a director of RMC. Mr.
Bergner has a general civil law practice in Houston, Texas which includes
business litigation in federal and state courts, corporation, general and
limited partnerships, including formation, stock issuance, acquisitions,
mergers, and liquidation and commercial and residential real estate
transactions. Mr. Bergner served in the United State Marine Corps from 1948
through 1952. Mr. Bergner received a B.A. and law degree from the University of
Texas.
Dr. Raymond Wicki has been a director of the Company since August 1998.
Prior to such time and since April 1998, Dr. Wicki was a director of RMC. From
1990 to present, Dr. Wicki has been and currently is the CEO of Bank Von
Graffenried, a family-owned private bank in Berne, Switzerland. From 1983 to
1990, Dr. Wicki focused on private and industrial portfolio management. This
included the assignment to build and manage the institutional asset management
business of a large Swiss bank. In the late 1970's, Dr. Wicki pioneered the
venture capital industry in Europe when, together with two partners, he
established one of the first venture capital funds that invested in the U.S. and
in Germany and Switzerland. Prior to such time and for eight years Dr. Wicki was
with the industrial organization of Aga Khar where he served as Head of Finance.
Dr. Wicki started his professional career in the investment department of
Hoffmann-La Roche, a Swiss pharmaceutical group. Dr. Wicki received a business
administration degree and a Ph. D. in finance and taxation from the University
of Berne, Switzerland. He also holds an MBA degree from Kent State University in
Ohio.
Mrs. Susan Stein has been Vice President of Finance of the Company since
August 1998. Prior to such time and since April 1998, Mrs. Stein was the
Controller of RMC. From 1994 to 1997, Mrs. Stein was with Arthur Andersen LLP in
Dallas, Texas where she served as engagement manager for a variety of public and
privately-owned client companies in the real estate and financial services
industries. Mrs. Stein's employment history includes five years with Coopers &
Lybrand, where she served as engagement manager for several clients including a
trust company, savings & loan, commercial banks and the FDIC. Mrs. Stein also
worked in the banking industry for three years. Mrs. Stein received a Bachelor
of Business Administration degree in Accounting from Baylor University.
Directors serve for a term of one year or until their successors are
elected and qualified.
Executive officers are appointed by and serve at the will of the Board of
Directors. There are no family relationships between or among any of the
directors or executive officers of the Company.
12
<PAGE>
Item 6. Executive Compensation
The following summary compensation and option grants in last fiscal year
tables set forth certain information regarding compensation paid to the
persons serving as the Company's chief executive officer and each executive
officer whose annual compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
Annual Compensation ------------
----------------------- Securities
Name and Principal Other annual Underlying
Position Year Salary Compensation Options (#)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Pilgrim 1998 $132,000 5,000 10,000
President & CEO 1997 75,000 5,000 260,000
Mark J. Teinert 1998 126,000 5,000 10,000
Secretary/Treasurer 1997 75,000 0 250,000
David E. Wentsch 1998 96,000 5,000 10,000
Vice President & Director 1997 55,333 5,000 110,000
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Percent of
Securities Total options
Underlying granted to Exercise or
Options Employees in base price Expiration
Name granted (#) fiscal year ($/Sh) Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Pilgrim 10,000 20% $4.25 March 2003
Mark J. Teinert 10,000 20% 4.25 March 2003
David Wentsch 10,000 20% 4.25 March 2003
</TABLE>
Options were granted to individuals by RMC pursuant to individual stock
option grants. Such options will be ratified by the Company. The Company is
in the process of adopting a stock option plan for 1999.
There is no employment agreement with any executive officer.
Item 7. Certain Relationships and Related Transactions
The Company has entered into a long-term lease agreement for its Arlington,
Texas office. The premises are leased from an unaffiliated party at a current
rate of approximately $7,600 per month. The lease expires in February 2005
and contains rent escalation clauses which are based on predetermined rent
increases specified in the lease.
Item 8. Description of Securities
The authorized capital stock of the Company consists of 50,000,000 shares
of common stock, par value $.001 per share (the "Common Stock"), of which
7,464,382 shares were outstanding as of August 31, 1998.
Voting Rights. Each holder of shares of Common Stock is entitled to one
vote for each share of Common Stock for the election of directors and on each
other matter submitted to a vote of the stockholders of the Company. The holders
of Common Stock have exclusive voting power on all matters at any time.
Liquidation Rights. Upon liquidation, dissolution or winding up of the
Company, holders of shares of Common Stock are entitled to share ratably in
distributions of any assets after payment in full or provision for all amounts
due creditors and provision for any liquidation preference of any other class or
series of stock of the Company then outstanding.
13
<PAGE>
Dividends. Dividends may be declared by the Board of Directors and paid
from time to time to the holders of Common Stock, on such record dates as may be
determined by the Board of Directors, out of the net profits or surplus of the
Company.
PART II
Item 1. Market Price of and Dividends on the Registrants Common Equity and Other
Shareholder Matters
Market Information
The Company's Common Stock began trading on the OTC Electronic Bulletin
Board (the "Bulletin Board") of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") under the symbol "ROYF" in May 1998. The
following table sets forth, for the periods indicated, the high and low sales
prices for the Common Stock since it was initially quoted in May 1998 until
August 31, 1998. The quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
BID ASK
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Third Quarter 1998 (May only) .85 .40 1.15 .65
Fourth Quarter 1998 2 15/16 1.20 3 1/16 1 1/2
First Quarter 1999 2 1/2 1 9/16 2 7/8 1 27/32
</TABLE>
Holders
As of December 31, 1998, there were approximately 93 holders of record
of the Company's common stock.
Dividends
Holders of Common Stock are entitled to dividends when, as and if declared
by the Board of Directors out of funds legally available therefor. The Company
has never paid cash dividends on its Common Stock. The Board of Directors does
not anticipate paying cash dividends in the foreseeable future as it intends to
retain future earnings to finance the growth of the Company's businesses. The
payment of future cash dividends will depend on such factors as earnings levels,
anticipated capital requirements, the operating and financial condition of the
Company and its subsidiaries and such other factors that the Board of Directors
of the Company may deem relevant.
Item 2. Legal Proceedings
The Company is currently involved as plaintiff in various lawsuits of a
nature regularly incurred in the ordinary course of the Company's business.
Neither the Company nor any of its subsidiaries is involved in any litigation,
arbitration or other proceedings relating to claims which are material to the
Company's results of operations nor, so far as the Company is aware, are any
such litigation, arbitration or other proceedings pending or threatened.
14
<PAGE>
Item 3. Changes in and Disagreements with Accountants
RMC, predecessor to the Company, terminated the services of its existing
accountant, William C. Spore & Company, P.C., on May 31, 1998. Mr. Spore's
audit report on the December 31, 1997 financial statements was unqualified,
and there were no disagreements between Mr. Spore and RMC.
The Company engaged Grant Thornton LLP, independent public accountants,
on September 3, 1998. This change was approved by the Board of Directors of
the Company on June 12, 1998.
Item 4. Recent Sales of Unregistered Securities
The following paragraphs set forth certain information for all securities
the Company sold during the past three years without registration under the
Securities Act of 1933 (the "Securities Act"). All transactions were effected in
reliance on the exemption from registration afforded by Rule 144 of the
Securities Act for transactions not involving a public offering.
Royal Mortgage Corporation
In March 1995, Royal Mortgage Corporation ("RMC") completed a Regulation D
Rule 506 offering of 800,000 shares at a price of $.75 per share, receiving
gross proceeds of $600,000 from 26 investors, all of whom were accredited
investors as defined by Rule 501 of Regulation D.
In September 1995, RMC completed a Regulation S offering in the amount
of $120,000. The Regulation S offering was in the form of a one year $3.00
convertible debenture with the $120,000 raised accruing interest at an annual
rate of 8.00%. Pursuant to Section 4(2), RMC elected to convert this debt
instrument in September 1996 at $3.00 per share plus the accrued interest to
the holder of the Convertible Debenture for a total of 43,210 shares.
In July 1996, RMC completed a $75,000 Regulation D Rule 506 offering of
37,500 shares at a price of $2.00 per share from three investors, all of whom
were accredited investors as defined by Rule 501 of Regulation D.
In August 1997, RMC completed a 250,000 share Regulation S offering at
$2.00 per share.
In September 1997, RMC completed a Regulation D Rule 506 offering raising
$9,850,000 through the sale of 8 1/2% Convertible Debentures due March 2000
to 15 investors, all of whom were accredited investors as defined by Rule 501
of Regulation D. Pursuant to Section 4(2), during the April-June 1998 time
periods, $8,560,000 of the $9,850,000 debenture holders voluntarily converted
their debentures into shares of RMC for a total of 1,556,363 shares at $5.50
per share at the option of the Debenture Holders.
In connection with the issuance of debt in 1997 and common stock in
1998, RMC issued warrants to purchase common stock expiring December 31, 2000
to the placement agent, which provided for the purchase of 223,864 shares of
common stock at $4.40 per share pursuant to Section 4(2). Pursuant
to an offer made by RMC in August 1998 and in reliance upon Section 4(2),
220,465 of these warrants were exchanged for 73,485 shares of common stock.
Davenport Ventures, Inc.
In May 1998, Davenport Ventures, Inc. issued 1,500,000 shares at $.05
per share for $75,000 pursuant to a Regulation D Section 504 Offering. In
early August 1998, Davenport Ventures, Inc. sold 440,000 shares at $2.00 per
share pursuant to a Regulation D 504 Offering.
Pursuant to the exchange offer by Davenport Ventures, Inc. to RMC's
shareholders a one-for-one share exchange was made and approved by both
company's shareholders on August 10,1998. Concurrent with the merger, Davenport
Ventures, Inc. charged its name to Royal Financial Corporation.
15
<PAGE>
Item 5. Indemnification of Directors and Officers
Article V of the Company's Bylaws provides for indemnification of officers
and directors against expenses incurred in connection with any legal action they
become a party to by reason of being or having been a director or officer of the
Company, unless such officer or director is adjudged to be liable for negligence
or misconduct in the performance of their duties.
Under Section NRS 78.7502 of the Nevada Law, a corporation may indemnify a
past or present director or officer against liability incurred in a proceeding
if (1) the director or officer conducted himself in good faith, (2) the director
or officer reasonably believed that his conduct was in, or not opposed to, the
corporation's best interest, and (3) in the case of any criminal action or
proceeding, the director or officer had no reasonable cause to believe his
conduct was unlawful; provided, however, that a corporation may not indemnify a
director or officer (1) in connection with a proceeding by or in the right of
the corporation in which the director or officer is adjudged liable to the
corporation, unless, and only to the extent that, the court in which the action
or suit was brought or other court of competent jurisdiction determines that the
director or officer is fairly and reasonably entitled to indemnification in view
of all the relevant circumstances.
In addition, pursuant to subsection 3 of Section NRS 78,7502 of the
Nevada Law, a corporation shall indemnify a director or officer who is wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which he is a party because he is or was a director or officer against
reasonable expenses incurred by him in connection with the proceeding.
16
<PAGE>
PART F/S
The following financial statements are filed as part of this
registration statement on Form 10-SB. The financial statements as of August
31, 1998 and for the eight months then ended have been audited by Grant
Thornton LLP, as stated in their report appearing herein. The financial
statement for the three month periods ended November 30, 1997 and 1998,
included herein, have not been audited, but are believed by Management to
contain all accruals and adjustments required for a fair presentation of the
financial condition and results of operations of the Company in accordance
with generally accepted accounting principles. The financial statements as of
December 31, 1997 and 1996 and for the years then ended have been audited by
William C. Spore & Company, P.C., independent auditors, as stated in their
reports appearing herein.
Index to Financial Statements
<TABLE>
<CAPTION>
August 31, 1998
<S> <C>
Report of Independent Certified Public Accountants..............................................................F-2
Consolidated Balance Sheet as of August 31, 1998 (audited) and
November 30, 1998 (unaudited)..............................................................................F-3
For the eight month period ended August 31, 1998 (audited) and for
the three month periods ended November 30, 1997 and 1998 (unaudited)
Consolidated Statement of Operations....................................................................F-4
Consolidated Statement of Changes in Stockholder's Equity...............................................F-5
Consolidated Statement of Cash Flows....................................................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
December 31, 1997
Report of Independent Certified Public Accountants.............................................................F-19
Consolidated Balance Sheet as of December 31, 1997.............................................................F-20
Consolidated Statement of Operations for the year ended December 31, 1997......................................F-22
Consolidated Statement of Changes in Stockholder's Equity for the
year ended December 31, 1997...................................................................................F-23
Consolidated Statements of Cash Flow for the year ended December 31, 1997......................................F-24
Notes to Consolidated Financial Statements.....................................................................F-27
December 31, 1996
Report of Independent Certified Public Accountants.............................................................F-35
Consolidated Balance Sheet as of December 31, 1996.............................................................F-36
Consolidated Statement of Operations for the year ended December 31, 1996......................................F-37
Consolidated Statement of Changes in Stockholders Equity for the
year ended December 31, 1996...................................................................................F-38
Consolidated Statements of Cash Flow for the year ended December 31, 1996......................................F-41
Notes to Consolidated financial Statements.....................................................................F-42
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Consolidated Statement of Changes in Stockholder's Equity for the
year ended December 31, 1997...................................................................................F-37
Consolidated Statements of Cash Flow for the year ended December 31, 1996......................................F-40
Notes to Consolidated Financial Statements.....................................................................F-41
</TABLE>
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
AUGUST 31, 1998
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Royal Financial Corporation
We have audited the accompanying consolidated balance sheet of Royal Financial
Corporation and subsidiaries as of August 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the eight
months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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 Royal
Financial Corporation and subsidiaries as of August 31, 1998, and the
consolidated results of their operations and their consolidated cash flows for
the eight months then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Dallas, Texas
September 17, 1998
F-2
<PAGE>
Royal Financial Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
August 31, November 30,
ASSETS 1998 1998
-------------------------- -----------------------------
(unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,912,255 $ 2,753,938
Prepaid expenses and other current assets 149,009 223,012
Manufactured home inventory 27,700 143,789
------- -------
Total current assets 4,088,964 3,120,719
INVESTMENTS
Mortgage loan portfolio, net $ 2,808,902 $ 2,865,315
Real estate portfolio, net 1,357,744 1,646,953
Tax lien certificates 127,520 40,727
Other investments 36,636 4,330,802 -- 4,552,995
------- -------
PROPERTY AND EQUIPMENT, NET 2,198,979 2,368,200
OTHER ASSETS
Deferred stock offering costs 35,000 35,000
Deferred debenture costs 79,340 79,340
Deposits and sundry assets 22,639 136,979 121,853 236,193
------- -------- ------- --------
Total assets $10,755,724 $10,278,107
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 80,250 16,425
8-1/2% SENIOR CONVERTIBLE DEBENTURES DUE MARCH 2000 1,290,000 1,290,000
---------- ----------
Total liabilities 1,370,250 1,300,425
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; authorized 50,000,000 shares;
issued and outstanding, 7,464,382 shares $ 7,464 $ 7,464
Additional paid-in capital 14,062,657 14,062,657
Accumulated deficit (4,684,647) 9,385,474 (5,098,439) 8,971,682
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $10,755,724 $10,278,107
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Royal Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Eight Months Ended November 30,
August 31, 1998 1997 1998
------------------------ --------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Interest $ 114,772 $ 101,554 $ 31,016
Gains (losses) on sales of
operating assets
Loans $ 82,073 -- --
Real estate (22,846) 19,713 67,407
Other repossessed assets -- 59,227 -- 19,713 (3,771) 63,636
-------- -------- --------
Lot rental income 46,777 -- 43,321
Other -- -- 785
--------- --------- ----------
Total revenue 220,776 121,267 138,758
Expenses
Interest 1,053,750 318,853 27,413
Salaries and benefits 272,111 68,020 121,380
Contract labor 26,000 22,300 --
Directors fees 25,000 -- --
Professional fees 215,633 20,342 45,244
Promotional 103,283 -- 63,573
Travel and lodging - operations 79,283 28,946 4,893
Travel and lodging - financing 43,372 -- --
General and administrative 129,788 31,246 31,629
Depreciation 61,290 13,408 28,984
Filing fees 4,498 -- 2,431
Office rent 85,687 24,951 33,939
Insurance 64,801 1,369 11,111
Taxes - payroll and other 120,393 9,421 137,570
Real estate property maintenance 58,501 -- 13,548
Due diligence expenses 62,914 2,406,304 26,617 565,473 30,846 552,550
------- ---------- ------- ---------- ------- ----------
Net loss $(2,185,528) $ (444,206) $ (413,792)
------------ ------------ ------------
------------ ------------ ------------
Loss per share - basic and diluted $(0.40) $(0.19) $(0.06)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding 5,450,599 2,380,700 7,464,382
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
Royal Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Eight months ended August 31, 1998
and the three months ended November 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Common stock Additional
-------------------- paid-in Accumulated
Shares Amount capital deficit Total
--------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1998,
as previously reported 520,000 $ 520 $ (520) $ - $ -
Merger with Royal Mortgage
Corporation (RMC) 2,380,700 2,381 1,464,789 (2,499,119) (1,031,949)
--------- ----- ---------- ---------- ----------
Balances at January 1, 1998,
restated 2,900,700 2,901 1,464,269 (2,499,119) (1,031,949)
RMC
Sale of common stock 892,500 893 3,168,818 - 3,169,711
Conversion of 8-1/2% senior
convertible debentures 1,556,364 1,556 8,558,444 - 8,560,000
Exercise of stock options 1,333 1 1,332 - 1,333
Conversion of warrants 73,485 73 (73) - -
Royal Financial Corporation
(formerly DVI)
Sale of common stock 1,940,000 1,940 864,967 - 866,907
Common stock issued for
services 100,000 100 4,900 - 5,000
Net loss - - - (2,185,528) (2,185,528)
--------- ------- ---------- ------------ -----------
Balance at August 31, 1998 7,464,382 $7,464 $14,062,657 $(4,684,647) 9,385,474
========= ===== ========== ========== ===========
Net loss (unaudited) - - - (413,792) (413,792)
--------- ------- ---------- ------------ -----------
Balance at November 30, 1998 (unaudited) 7,464,382 $7,464 $14,602,657 $(5,098,439) $(5,098,438)
========= ====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
Royal Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended
Eight Months November 30,
Ended ---------------------------------------------
August 31, 1996 1997 1998
----------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,185,528) ($444,206) ($413,792)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation $ 61,290 13,408 28,984
Amortization/write-off of debenture costs 781,559 109,548 --
Common stock issued for services 5,000 847,849 -- 122,958 -- 920,904
------ --------- -------
Changes in operating assets and liabilities
Prepaid expenses and other assets (43,445) (84,634) (190,135)
Accounts payable and accrued liabilities (159,937) (203,382) (120,944) (205,578) (66,960) ($257,095)
--------- --------- --------- --------- ------- ---------
Net cash used in operating activities (1,541,061) (526,828) ($641,903)
Cash provided by (used in) investing activities
Purchase of Walden Woods of Sugarmill, Inc. (1,611,625) -- --
Purchase of additional land (18,000) -- --
Principal collections on tax lien certificates 102,410 319,077 86,793
Purchases of property and equipment (177,921) (54,368) (12,057)
Purchases of loans (1,531,515) (2,134,079) (63,922)
Collections on loans 111,449 1,050 7,509
Disposition of loans 416,380 -- --
Sale of real estate and other assets 1,192,392 -- 402,091
Purchases of real estate properties (572,327) -- (652,440)
Investment in park development (138,798) (2,227,555) -- (1,868,320) (185,173) (417,199)
--------- ------- --------- ---------
Cash provided by (used in) financing activities
Sale of common stock, net of offering costs 4,057,904 -- --
Exercise of stock options 1,333 -- --
Financing costs on debt (100,027) (99,215)
Issuance of debentures 150,000 --
Additional stock offering costs (36,281) --
Other (8,639) 4,050,598 -- 13,692 (99,215)
---------- ---------- ------- --------- --------- ---------
Net increase in cash and cash equivalents 281,982 (2,381,456) (1,158,317)
Cash and cash equivalents, beginning of period 3,630,273 5,167,833 3,912,255
---------- --------- ---------
Cash and cash equivalents, end of period $ 3,912,255 3,786,177 2,753,938
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998
NOTE A - NATURE OF BUSINESS AND DESCRIPTION OF MERGER
Royal Financial Corporation ("Royal" or the "Company") is a financial
services company engaged primarily in the acquisition and resolution of
non-performing and under-performing mortgage loans and in various investment
activities including the acquisition of tax lien certificates and
single-family residential properties at foreclosure sales. In addition, the
Company owns and operates a manufactured housing community in Florida.
Effective August 18, 1998, the Company (formerly Davenport Ventures, Inc.),
merged with Royal Mortgage Corporation ("RMC"). Concurrent with the merger,
Davenport Ventures, Inc. ("DVI") changed its name to Royal Financial
Corporation. DVI acquired all of the outstanding common stock of RMC in
exchange for DVI common stock on the basis of one share of RMC stock for one
share of DVI stock. The controlling shareholder group of both DVI and RMC
was substantially the same prior to the merger. As a result, the merger has
been treated as a combination of entities under common control. Accordingly,
the results of operations of the combined entities is reflected in the
accompanying consolidated statement of operations as though the entities had
been combined as of January 1, 1998. Prior to the merger, RMC was engaged in
the real estate investment activities discussed above. DVI was a public
shell company until June 1998 when it acquired the capital stock of Walden
Woods of Sugarmill, Inc. ("Walden Woods"). The sole asset of Walden Woods is
Walden Woods Retirement Village (the "Park"), a manufactured housing
community in Homosassa, Florida. The Park is a 45-acre site, 18 acres of
which are developed with approximately 85 homesites. The Company is
currently developing an additional 20 acres. It is anticipated that the
development will be completed by December 1998 at which time the Park will
contain approximately 210 homesites. The accompanying consolidated financial
statements include the revenue and expenses of the Park from the date of
acquisition (June 1, 1998) through August 31, 1998.
Separate results of operations for the period prior to the merger are as
follows:
<TABLE>
<CAPTION>
Eight months
ended
August 31, 1998
---------------
<S> <C>
Revenue
RMC $ 173,999
DVI 46,777
---------
Combined $ 220,776
---------
---------
Net (loss) earnings
RMC $(2,192,366)
DVI 6,838
-----------
Combined $(2,185,528)
------------
------------
</TABLE>
F-7
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Royal Mortgage Brokerage,
Inc. and Walden Woods of Sugarmill, Inc. All significant intercompany
accounts and transactions have been eliminated.
Risks and Uncertainties/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.
Most of the Company's investment properties, as well as the manufactured
housing community, are located in the state of Florida. The Company does
plan to acquire properties in other states which will diversify its
portfolio.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash in banks and highly
liquid investments purchased with an original maturity of three months or
less.
Mortgage Loan Investments
The Company purchases mortgage loans, for which the borrower is not current
as to principal and interest payments or which there is a reason to believe
the borrower will be unable to continue to make its scheduled principal and
interest payments, at a discount. All loans held at August 31, 1998 and for
the eight months then ended are deemed to be impaired. Income is recognized
only upon receipt of interest payments or the ultimate disposition of
collateral. The Company accounts for its initial investment in a pool of
loans based upon the pricing methodologies used to bid on the pool. The
acquisition cost is allocated to each loan within the pool when the bid
price was determined based upon an analysis of the expected future cash
flows of each individual loan Generally, loans in the Company's portfolio go
through foreclosure proceedings, the Company takes title to the property and
the property is sold on the open market. Loans are transferred to real
estate owned upon receipt of title to the property.
F-8
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Real Estate Investments
All real estate investments are held for sale. Properties acquired through
or in lieu of foreclosure are valued at the lower of the adjusted cost basis
of the loan or fair value less estimated costs of disposal of the property
at the date of foreclosure. Properties acquired directly at auction sales
are recorded at cost. Properties held are not depreciated and are
periodically re-evaluated to determine that they are being carried at the
lower of cost or fair value less estimated costs to dispose. Sales proceeds
and related costs are recognized with passage of title to the buyer. Holding
and maintenance costs are reported as period costs when incurred.
Property and Equipment
Property and equipment are carried at cost and, except for land, are
depreciated over their estimated useful lives on the straight-line method.
The estimated useful lives used in computing depreciation are as follows:
Furniture, fixtures and equipment 3-10 years
Land improvements and buildings 15-20 years
Leasehold improvements are amortized over the term of the related leases.
Deferred Debenture Costs
The deferred debenture costs represent the unamortized balance of
professional fees, commissions and other expenses that have been incurred to
obtain debenture financing. These costs are amortized as interest expense
over the life of the debentures using the effective interest rate method.
The amortized amount for the eight months ended August 31, 1998 was
$116,530. See Note L regarding write off of deferred debenture costs during
1998.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted only the disclosure provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" (SFAS 123), as well as the provisions of SFAS 123
as they relate to non-employee stock options.
F-9
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loss Per Share
In 1998, the Company adopted the provisions of Statement of financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). In accordance
with SFAS 128, the Company computes basic earnings (loss) per common share
based on the weighted average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted average number of
common shares outstanding plus the number of additional common shares that
would have been outstanding if dilutive potential common shares had been
issued. No effect has been given to convertible debentures, stock options or
warrants because the effect of assumed conversion or exercise is
anti-dilutive.
Other Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and
distributions to owners. SFAS No. 130 requires that comprehensive income be
presented beginning with net income, adding the elements of comprehensive
income not included in the determination of net income, to arrive at
comprehensive income. SFAS No. 130 is effective for fiscal years and interim
periods beginning after December 15, 1997. There were no elements of
comprehensive income which were not included in the determination of net
income for the eight months ended August 31, 1998. Accordingly, the adoption
of SFAS 130 had no impact on the presentation of the Company's results of
operations or financial position.
NOTE C - WALDEN WOODS ACQUISITION
Effective June 1, 1998, the Company acquired Walden Woods from an
unaffiliated third party for approximately $1.6 million in cash. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets acquired based
on their estimated fair values on the date of acquisition. The allocation
was made as follows:
<TABLE>
<S> <C>
Assets acquired:
Land $1,351,425
Land improvements and buildings 255,000
Furniture, fixtures and equipment 5,200
------
$1,611,625
----------
----------
</TABLE>
F-10
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE D - CASH FLOW INFORMATION
Supplemental information on cash flows and noncash investing and financing
transactions is as follows:
<TABLE>
<S> <C>
Supplemental Cash Flow Information:
Interest paid $ 439,973
Supplemental Schedule of Non-cash Investing Activities:
Real estate acquired through foreclosure of loans 2,062,487
Other assets acquired in settlement of loan 40,000
Supplemental Schedule of Financing Activities:
8-1/2% senior convertible debentures converted into common
shares 8,560,000
Receivable for 2,500 common shares issued 9,000
Warrants converted to common shares 73
</TABLE>
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
August 31,
1998
----------
<S> <C>
Land (Park) $1,369,425
Land improvements and buildings (Park) 255,000
Park development in progress 138,796
Furniture, fixtures and equipment 258,329
Leasehold improvements 335,063
--------
2,356,613
Less accumulated depreciation (157,634)
--------
Property and equipment, net $2,198,979
--------
--------
</TABLE>
F-11
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE F - OPERATING LEASES
The Company leases office space in Arlington, Texas, subleases space in
Naples, Florida and has various equipment operating leases. The Arlington
office lease expires in February, 2005. The Naples, Florida office lease
expires in October, 2000 with an option to renew for two years.
Future minimum payments following August 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $145,236
2000 157,794
2001 125,749
2002 117,717
2003 116,151
Thereafter 171,877
--------
$834,524
--------
--------
</TABLE>
Lease expense in 1998 was $95,931. The Arlington lease contains rent
escalation clauses which are based on pre-determined rent increases
specified in the agreement.
NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
mortgage loans, tax lien certificates, accounts payable and senior
convertible debentures payable. The methodologies used and key assumptions
make to estimate fair value, the estimated fair values determined and
recorded carrying values follow:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
Mortgage Loans
The mortgage loan portfolio consists of non-performing loans. On the
majority of these loans, the Company expects to foreclose on the underlying
collateral and ultimately sell the properties. Accordingly, fair values have
been determined based on the status of pending settlements between the
Company and borrower or by utilizing the fair value of the underlying
collateral.
F-12
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Tax Lien Certificates
The fair value is estimated based upon the discounted value of the future
cash flows expected to be received based on statutory rates established by
the taxing jurisdictions assuming all remaining certificates are redeemed.
It is possible that not all certificates will be redeemed in which case the
Company may obtain title to the property upon expiration of the statutory
holding period.
Accounts Payable
The carrying amount approximates fair value because of the short-term nature
of accounts payable.
Senior Convertible Debentures Payable
The fair value is estimated based upon the discounted value of the future
cash flows expected to be paid on such borrowings, using the current rate
obtainable by the Company on similar borrowings.
Real Estate Portfolio
Real estate, although not a financial instrument, is an integral part of the
Company's business. The fair value of real estate is estimated based upon
appraisals, broker price opinions and other standard industry valuation
methods, less anticipated selling costs.
The carrying amounts and estimated fair values of the Company's financial
instruments and real estate are as follows:
<TABLE>
<CAPTION>
August 31,
1998 Fair Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,912,255 $ 3,912,255
Mortgage loan portfolio, net 2,808,902 3,600,000
Tax lien certificates 127,520 144,633
Real estate portfolio, net 1,357,744 1,813,644
Financial liabilities:
Accounts payable (10,047) (10,047)
Senior convertible debentures
payable (1,290,000) (1,284,739)
</TABLE>
F-13
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE H - CONVERTIBLE SENIOR DEBENTURES PAYABLE
In 1997, the Company issued $9,850,000 of convertible senior debentures. The
debentures accrue interest at 8.5% which is payable semi-annually on October
1 and April 1. During 1998, $8,560,000 of these debentures were converted
into common stock of the Company at a price of $5.50 per share. The
remaining $1,290,000 of debentures outstanding at August 31, 1998 are due
and payable at maturity on March 31, 2000, and are convertible at a price
equal to 80% of the market price of the common stock at such time as the
Company does an initial public offering.
NOTE I - INCOME TAXES
Following is a reconciliation of the Company's income tax provision with the
amount of tax computed at the federal statutory rate:
<TABLE>
<S> <C>
Tax benefit at the federal statutory rate $ 743,080
Nondeductible expenses (3,560)
Other (5,425)
Change in valuation allowance (734,095)
--------
$ -
--------
--------
</TABLE>
Deferred tax assets consist of the following:
<TABLE>
<S> <C>
Net operating loss carryforward $ 1,496,931
Property and equipment 9,004
----------
1,505,935
Valuation allowance (1,505,935)
----------
Net deferred tax assets $ -
----------
----------
</TABLE>
The Company will file a consolidated federal income tax return with its
subsidiaries. For federal income tax purposes, the Company has cumulative
operating losses of approximately $4,400,000 which are being carried forward
to future years.
F-14
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE J - OPTIONS AND WARRANTS
The Company has issued stock options to directors, employees and others.
Options are granted at no less than fair value at date of grant, as
determined by the board of directors. Generally, the options vest at date
granted and expire in five years. Following is a summary of option
transactions for the eight months ended August 31, 1998:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
--------- ---------
<S> <C> <C>
Outstanding at January 1, 1998 - $ -
Options of RMC outstanding
at January 1, 1998 1,390,000 2.07
Granted
RMC 50,000 4.25
Royal (formerly DVI) 310,000 3.28
Exercised
RMC (1,333) 1.00
---------- ----
Outstanding at August 31, 1998 1,748,667 2.34
---------- ----
---------- ----
</TABLE>
The following table summarizes information about stock options at August 31,
1998:
<TABLE>
<CAPTION>
Outstanding and Exercisable
---------------------------
Weighted
average
remaining Weighted
contractual average
life exercise
Exercise price Shares (in years) price
-------------- ------ ----------- --------
<S> <C> <C> <C>
RMC
----
$1.00 198,667 1.50 $1.00
2.25 1,190,000 3.83 2.25
4.25 50,000 4.75 4.25
Royal
(formerly DVI)
--------------
$2.25 - 2.75 60,000 2.91 2.41
3.12 - 4.00 250,000 2.00 3.49
--------- ----
1,748,667 $2.34
--------- -----
--------- -----
</TABLE>
F-15
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE J - OPTIONS AND WARRANTS - Continued
The Company has adopted only the disclosure provisions SFAS 123. If the
Company had elected to recognize compensation expense based upon the fair
value at the option grant date consistent with the methodology prescribed by
SFAS 123, the Company's net loss would be increased to the pro forma amounts
indicated below:
<TABLE>
<S> <C> <C>
Net loss
As reported $2,185,528
Pro forma $2,246,628
Basic and diluted loss per share
As reported $.40
Pro forma $.41
</TABLE>
In connection with the issuance of debt in 1997 and common stock in 1998,
RMC has issued warrants expiring December 31, 2000, to purchase common
stock. The warrants issued in connection with the debt issuance were granted
to the placement agent and provide for the purchase of 223,864 shares of
common stock at $4.40 per share. Pursuant to an offer made by RMC in August
1998, 220,465 of these warrants were exchanged for 73,485 shares of common
stock. The following summarizes warrant transactions:
<TABLE>
<CAPTION>
Exercise
Shares price
-------- ----------
<S> <C> <C>
Outstanding at January 1, 1998 - -
Warrants of RMC outstanding at January 1, 1998 223,864 $ 4.40
Issued in connection with sale of common stock 178,500 6.00
Conversion to common stock (220,465) 4.40
-------- ----------
Outstanding at August 31, 1998 181,899 $4.40-6.00
-------- ----------
-------- ----------
</TABLE>
NOTE K - COMMITMENTS
On August 24, 1998, the Company entered into an agreement with a financial
public relations firm whereby the Company agreed to pay $15,000 per month
for twelve months beginning August 4, 1998 and issue 70,000 free-trading
shares of common stock upon filing of a Form S-1 with the Securities and
Exchange Commission.
See Note F regarding lease commitments.
F-16
<PAGE>
Royal Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 1998
NOTE L - CHARGE TO OPERATIONS
Due to the conversion of $8,560,000 of the 8 1/2 % Senior Convertible
Debentures due March 2000 during the current period, $665,029 of costs that
had been deferred related to obtaining this financing were charged to
operations in 1998.
NOTE M - ADDITIONAL FINANCING
The Company plans a securities offering of up to $50,000,000 under
Regulation S of the Securities Act of 1933. The proposed offering would
include units consisting of 8 1/2% debentures with a three-year term and
warrants to purchase common stock at an exercise price of $4.00. However,
there is no assurance that this offering will be successful.
F-17
<PAGE>
ROYAL MORTGAGE CORPORATION
FINANCIAL STATEMENTS
December 31, 1997
F-18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Royal Mortgage Corporation
We have audited the accompanying balance sheet of Royal Mortgage Corporation (a
Texas corporation) as of December 31, 1997, and the related statements of loss,
changes in stockholders' equity and cash flows for the year ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Royal Mortgage Corporation as
of December 31, 1997 and the results of its operations and its cash flows for
the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
WILLIAM C. SPORE & COMPANY, PC
Certified Public Accountants
January 14, 1998
F-19
<PAGE>
ROYAL MORTGAGE CORPORATION
BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash - Operating $ 1,258,354
Cash - Escrow & Custodial 2,371,919
Interest & Other Receivables 80,395
Prepaid Expenses 41,341
TOTAL CURRENT ASSETS 3,752,009
INVESTMENTS
Mortgage Investments 3,822,193
Tax Lien Certificates 229,930
TOTAL INVESTMENTS 4,052,123
PROPERTY & EQUIPMENT
Office & Transportation Equipment 198,098
Leasehold Improvements 212,173
410,271
Less - Accumulated Depreciation (96,344)
TOTAL PROPERTY & EQUIPMENT 313,927
OTHER ASSETS
Deposit - Stadium Bond 8,000
Security Deposit-Office Lease 6,000
Deferred Stock Offering Costs 65,286
Deferred Loan Costs-Net of Amortization 860,899
TOTAL OTHER ASSETS 940,185
TOTAL ASSETS $ 9,058,244
</TABLE>
F-20
<PAGE>
<TABLE>
<S> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 25,699
Accrued Interest & Payroll Taxes 214,494
TOTAL LIABILITIES 240,193
LONG-TERM DEBT
8 1/2% Senior Convertible Debenture
Due March 2000 9,850,000
TOTAL LIABILITIES 10,090,193
STOCKHOLDERS' EQUITY
Capital Stock ($.001 par value per share,
10,000,000 shares authorized, 2,380,710
shares issued & outstanding) 2,381
Additional Paid In Capital 1,464,789
Retained Earnings (2,499,119)
TOTAL STOCKHOLDERS' EQUITY (1,031,949)
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 9,058,244
</TABLE>
F-21
<PAGE>
ROYAL MORTGAGE CORPORATION
STATEMENT OF LOSS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
REVENUES
Interest Income $ 257,318
Gain on Sale of Real Estate 19,713
TOTAL REVENUES 277,031
OPERATING EXPENSES
Computer Software, Services & Supplies 36,629
Contract Services 82,083
Custodial Fees 23,485
Depreciation 43,288
Director Fees 15,000
Dues & Subscription Services 7,742
Insurance 28,715
Interest 834,775
Management Salaries 166,710
Salaries & Wages 83,165
Offering Costs 40,352
Office Expense & Postage 28,906
Professional Fees 147,323
Rent 83,991
Security Filing Fees 256
Seminars 2,147
Taxes - Payroll & Other 23,701
Telephone 26,305
Travel & Promotion 107,357
Utilities 8,891
TOTAL OPERATING EXPENSES 1,790,821
NET LOSS FROM OPERATIONS (1,513,790)
OTHER INCOME (EXPENSE)
Loss on Sale of Assets (4,723)
NET LOSS $(1,518,513)
EARNING (LOSS) PER COMMON SHARE (0.67)
</TABLE>
F-22
<PAGE>
ROYAL MORTGAGE CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
CAPITAL ADDITIONAL
STOCK PAID IN
AT PAR CAPITAL
----------- -----------
<S> <C> <C>
SHARES ISSUED BEGINNING 2,130,700
Shares issued July 1997 250,000
TOTAL SHARES ISSUED ENDING 2,380,700
CAPITAL RECEIVED BEGINNING $ 2,131 1,025,719
Shares issued July 1997 250 499,750
Less cost of issuance 0 (60,680)
TOTAL CAPITAL RECEIVED $ 2,381 $1,464,789
PRICE PER SHARE
Shares Issued July 1997 $ 2.00
RETAINED EARNINGS BEGINNING (980,606)
Loss January 1 to December 31, 1997 (1,518,513)
RETAINED EARNINGS ENDING (2,499,119)
</TABLE>
F-23
<PAGE>
ROYAL MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATIONS:
Interest Income Collected $ 193,834
Proceeds - Sale of Real Estate 40,067
Cash Paid for Operating Expenses (640,970)
Cash Paid for Wages and Benefits (304,449)
Cash Paid for Interest Expense (345,812)
Proceeds - Sale of Assets 8,747
TOTAL CASH USED IN OPERATIONS (1,048,583)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Paid for Stock Offering Costs (65,286)
Cash Paid for Debenture Offering Costs (1,147,865)
Proceeds of Debentures Issued 9,850,000
Proceeds of Notes Payable 47,885
Payments of Note Payable (265,435)
Proceeds of Stock Issued 500,000
Cash paid for Stock Issuance Costs (60,680)
CASH PROVIDED BY FINANCING ACTIVITIES 8,858,619
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal Collections on Tax Lien Certificates 243,849
Principal Collections on Investments 1,099
Investments Purchased (4,322,535)
Purchases of Property & Equipment (118,892)
CASH USED IN INVESTING ACTIVITIES (4,196,479)
NET INCREASE IN CASH 3,613,557
CASH - BEGINNING OF PERIOD 16,716
CASH - END OF PERIOD $ 3,630,273
</TABLE>
F-24
<PAGE>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
Net Loss $(1,518,513)
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 43,288
Amortization of Loan Costs 286,967
(Increase) in Interest & Other Receivables (80,395)
(Increase) in Prepaid Expenses (41,341)
Increase in Accounts Payable & Accruals 192,524
Stock Offering Costs Expensed 29,952
Cost of Real Estate Sold 65,465
Mortgage Receivable on Real Estate Sold (40,000)
Loss on Sale of Assets 13,470
CASH USED BY OPERATING ACTIVITIES $(1,048,583)
</TABLE>
NON-CASH ACTIVITIES:
In January 1997 the Company exchanged office equipment with a net cost of
$16,131 for an account payable of $16,896.
F-25
<PAGE>
ROYAL MORTGAGE CORPORATION
SCHEDULE OF MORTGAGE INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
MANAGEMENT
ESTIMATE
OF FMV OF
UNDERLYING
FACE COLLATERAL
INVESTMENT AMOUNT COST (UNAUDITED)
<S> <C> <C> <C>
90% Interest in a Pool of Notes $11,562,584 $ 1,614,870 $ 4,222,501
Three Mortgages - California 717,185 607,906 775,000
Twenty One Mortgages - Florida 1,874,020 1,559,466 2,396,240
Residential Mortgage - Florida 39,951 39,951 94,000
TOTAL $14,193,740 $ 3,822,193 $ 7,487,741
</TABLE>
F-26
<PAGE>
ROYAL MORTGAGE CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
Page - 1
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS: The Company was incorporated under the laws of the state of
Texas on December 1, 1994. The Company was formed to purchase residential
mortgages, seller financed mortgages and tax lien certificates. The Company does
not originate loans but may broker mortgages it has acquired.
The Company's books and records will be maintained on a calendar year
basis.
PROPERTY & EQUIPMENT: Property and Equipment is recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the term of the related
lease (ten years) and office equipment is depreciated over five to ten year
useful lives.
DEFERRED STOCK OFFERING COSTS: Costs directly related to 1997 stock
offerings have been capitalized and included in the December 31, 1997 balance
sheet as Deferred Stock Offering Costs. If the stock offerings are successful,
the proceeds of the offerings will be reduced by the deferred costs. If the
offerings are unsuccessful, the deferred costs will be expensed.
Costs directly related to the 1996 stock offering were capitalized and
included in the December 31, 1996 balance sheet as Deferred Stock Offering
Costs. The stock offering was unsuccessful and the deferred costs were expensed
in 1997.
DEFERRED LOAN COSTS: The deferred loan costs represents the unamortized
balance of professional fees, commissions and other expenses that were incurred
to obtain the debenture financing. These costs are amortized as interest expense
over the life of the debentures using the effective interest rate method. The
amortized amount for the period ended December 31, 1997 was $286,967.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
INCOME TAXES: For federal income tax purposes the Company has net
operating losses of approximately $2,250,000 and capital losses of $33,265;
which is being carried forward to future years.
FAIR VALUE OF FINANCIAL INVESTMENTS: The carrying value of cash,
receivables and payables approximates fair value due to the short maturity of
these instruments. The carrying value of mortgage investments and tax lien
certificates approximates market value as the investments were purchased at
auctions within sixty days of the balance sheet date. The fair value of
long-term debt is estimated based upon interests rates for the same or similar
debt offerings having the same or similar maturities and collateral
requirements. None of the financial instruments are held for trading purposes.
F-27
<PAGE>
NOTE 2: CASH - ESCROW AND CUSTODIAL:
The debentures issued by the Company during 1997 require the
establishment of escrow and custodial funds for depositing the proceeds of the
debenture. The escrow and custodial funds are held in checking accounts or
highly liquid, short term investments. The Company can draw on the escrow and
custodial funds as working capital or investment needs warrant.
NOTE 3: DEPOSIT - STADIUM BOND:
The Company owns four Arlington Sports Development Authority, Inc.
stadium bonds. The bonds were purchased to give the Company seat and ticket
options for Texas Rangers (an Arlington, Texas based Major League Baseball
franchise) season tickets. The bonds are non interest bearing, mature in 2008
and are non-transferable.
NOTE 4: MORTGAGE INVESTMENTS:
The Companies mortgage investments are as follows:
(A) In May 1997 the Company purchased a 90% interest in a loan pool.
The pool of loans includes mortgage loans that are first, second or third lien
mortgages, unsecured mortgages and mortgages in bankruptcy. The loan pool was
purchased at a discount and the mortgage investments are recorded at cost, which
management of the Company believes is less than the fair market value of the
receivables.
The remaining 10% interest in the loan pool is owned by TransFirst
Asset Services, Inc. (TransFirst), a company unrelated to Royal Mortgage
Corporation. The Company has an agreement with TransFirst whereby TransFirst
shall act as sole managing agent and shall receive a service fee equal to 10% of
any monies collected from the pool. After deducting the 10% service fees, all
net proceeds shall go to Royal Mortgage Corporation until such time as the
Company recoups its investment along with $379,000 interest and fees. At this
point TransFirst shall receive all net proceeds until it has recouped its
investment along with $21,781 interest and fees. After all initial investments,
accrued interest and fees have been recouped all net proceeds shall be split 60%
to Royal Mortgage Corporation and 40% to TransFirst.
(B) In September 1997 the Company purchased three mortgage notes
related to two apartment building in California. One of the mortgages is a first
lien and the other two are second liens. The first lien and one of the second
lien notes matured in September 1997 and the other second lien note is payable
on demand. The mortgages are collateralized by the underlying apartment
buildings. One of the properties has a first lien in the amount of approximately
$284,000.
(C) During September and October 1997 the Company purchased twenty one
residential mortgages in Florida from Ford Consumer Finance Company, Inc.
Eighteen of the mortgages are first liens and three of the notes are second
liens. All of the mortgages are currently in default.
(D) In August 1997 the Company purchased a residential property at a
deed of trust auction in Florida which it resold in September 1997. The sale of
the property included a seller financed note receivable of $40,000. The note
requires twenty three monthly payments of $308 with a final payment of $39,676
due in September 1999.
F-28
<PAGE>
The components of the Mortgage Investments are as follows:
<TABLE>
<S> <C>
Face Amount of Mortgages $14,193,740
Less Unearned Discount 10,371,547
Cost of Investment $ 3,822,193
</TABLE>
The unearned discount will be recognized as income ratably as principal
collections are made on the mortgages.
NOTE 5: TAX LIEN CERTIFICATES:
The Company has purchased tax lien certificates from local taxing authorities in
Iowa and Louisiana. Tax lien certificates result when local municipal and county
governments are not paid property taxes due them from property owners. The local
taxing authorities record the tax obligation and impose an interest charge of
eight to twenty five percent on the owner. If the property tax and interest is
not paid within an allotted time frame, the owner must forfeit their property.
Some local tax authorities want or need the taxes and interest quickly so they
issue a tax lien certificate which is then sold at an auction.
F-29
<PAGE>
The Company has purchased two pools of tax lien certificates through
December 31, 1997. The Company assumes the same rights to collect the tax and
interest as the local government had, and if the certificates remain unpaid the
Company has a more secure lien position than any other lien holder on the
property.
The tax lien certificates are recorded at cost, which management of the Company
believes is less than the fair market value of the certificates. Interest is
accrued monthly based upon each taxing entities laws and regulations. The
Company intends to sell any properties it acquires due to non payment of the tax
lien certificates.
NOTE 6: 8 1/2% CONVERTIBLE SENIOR DEBENTURE DUE 2000:
Through December 31, 1997 the Company has issued $9,850,000 of
convertible senior debentures as part of a $15,000,000 offering. The debentures
accrue interest at 8.5% which is payable semi-annually on October 1 and April 1.
The debentures mature on March 31, 2000. The Company and/or the Debenture Holder
have the right, exercisable at any time, to convert the debenture into common
stock of the Company at a price equal to a twenty percent discount to the
initial public offering price, or, if the Company is unable to complete an
initial public offering of its shares prior to maturity the debenture holder may
redeem his debenture or convert it into common stock of the private Company at a
price per share equal to a twenty percent discount to the value of the shares of
the private Company as determined by an independent arms length evaluation.
Future debt requirements are as follows:
<TABLE>
<S> <C>
1997 $ 0
1998 0
1999 0
2000 9,850,000
</TABLE>
F-30
<PAGE>
NOTE 7: LEASE COMMITMENTS:
The Company has signed a ten year operating lease agreement for office
space in Arlington, Texas and a three year operating lease agreement for office
space in Naples, Florida. The Arlington lease agreement expires in March 2005
and the Naples lease agreement expires in December 2000.
Future minimum lease commitments are as follows:
<TABLE>
<S> <C>
1998 135,756
1999 135,756
2000 135,756
2001 135,756
2002 135,756
Future Years 206,307
</TABLE>
During 1997 the Company has subleased part of its office space to another entity
and has received $11,250 of rent which has been recorded as a reduction rent
expense.
NOTE 8: STOCK OPTIONS:
On March 21, 1995 stock options were issued to the Company's officers
as follows:
<TABLE>
<S> <C>
Total Shares 200,000
Option Price 1.00 per share
Expiration Date March 2000
</TABLE>
The market price of the Company's stock on March 21, 1995 was $0.75 per
share, therefore, the option price exceeded the market price on the date the
options were granted and no compensation expense was created by issuing the
options.
On April 30, 1997 stock options were issued to certain Officers and
Directors of the Company as follows:
<TABLE>
<S> <C>
Total Shares 790,000
Option Price $2.25 per share
Expiration Date April 2002
</TABLE>
F-31
<PAGE>
The market price of the Company's stock on April 30, 1997 was $2.00 per
share, therefore, the option price exceeded the market price on the date the
options were granted and no compensation expense was created by issuing the
options.
At December 31, 1997 none of the options had been exercised.
NOTE 9: RELATED PARTIES:
The Company has a month to month agreement with Mr. David Wentsch, a
director of the Company, to provide legal services to the Company. The agreement
calls for a monthly fee of $6,000 plus any related expenses. Through December
31, 1997 the Company has paid Mr. Wentsch a total of $49,333. These fees have
been recorded as contract services in the statement of income.
Prior to June 30, 1997 the Company had an ongoing agreement with Mr.
David Parker to provide services to the Company related to investor relations,
corporate publicity, and securing additional financing for the Company. The
agreement called for a monthly fee of $6,250. In July 1997 the agreement with
Mr. Parker was canceled. Through December 31, 1997 Mr. Parker has been paid at
total of $18,750. These fees have been recorded as contract services in the
statement of income.
The Company has a custodial agreement with Boyd R. Branch to act as a
custodial agent to effectuate the Companies obligations and physical security
and safeguarding of documents and other negotiable instruments acquired by the
Company pursuant to its convertible debt offering. The agreement calls for a fee
of twenty-five basis points (.25%) of assets held by the Custodian payable on a
prorated monthly basis. The agreement continues as long as any funds remain in
the custody of the custodial agent. Through December 31, 1997 custodial fees of
$13,486 have been paid under this agreement.
In April 1997 the shareholders of the Company agreed to compensate the
board of directors of the Company $5,000 annually. Through December 31, 1997
directors fees of $15,000 have been paid to the directors of the Company.
F-32
<PAGE>
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
<S> <C> <C>
Assets:
Cash $3,630,273 $3,630,273
Mortgage Investments 3,822,193 3,822,193
Tax Lien Certificates 229,930 229,930
Liabilities:
Debenture Payable $9,850,000 $9,850,000
</TABLE>
NOTE 11: ACCRUED MANAGEMENT SALARIES:
During 1995 and 1996 management of the Company was required by the
S.E.C.'s interpretation of G.A.A.P. to include management salaries for the
officers of the Company in these financial statements. No cash was expended nor
an accrual established for management salaries as management of the Company did
not intend to seek compensation for the period covered by those financial
statements.
The S.E.C. interpretation of G.A.A.P. requires the Company to record
reasonable salaries for its officers and to record the value of the salaries as
additional paid in capital in the stockholders' equity section of the balance
sheet. The salaries recorded are as follows:
<TABLE>
<S> <C>
Michael J. Pilgrim, President, $4,000 per month
Mark J. Teinert, Vice President, $3,000 per month
G. William Barnett, II, Vice President, $3,000 per month
(Employment terminated June 28, 1996)
</TABLE>
Total management salaries of $102,000 in 1996 and $120,000 in 1995 were
included in expenses and additional paid in capital.
The Company began compensating its management during 1997 and no further
accruals are required.
F-33
<PAGE>
ROYAL MORTGAGE CORPORATION
FINANCIAL STATEMENTS
December 31, 1996
F-34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Royal Mortgage Corporation
We have audited the accompanying balance sheet of Royal Mortgage Corporation (a
Texas corporation) as of December 31, 1996, and the related statements of loss,
changes in stockholders' equity and cash flows for the periods January 1, 1996
to December 31, 1996 and December 1, 1994 thru December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Royal Mortgage Corporation as
of December 31, 1996 and the results of its operations and its cash flows for
the periods January 1, 1996 to December 31, 1996 and December 1, 1994 thru
December 31, 1996 in conformity with generally accepted accounting principles.
WILLIAM C. SPORE & COMPANY, PC
Certified Public Accountants
January 11, 1997
F-35
<PAGE>
ROYAL MORTGAGE CORPORATION
(A Development Stage Company)
BALANCE SHEET
December 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash in Bank $ 16,716
PROPERTY & EQUIPMENT
Office Equipment 132,156
Leasehold Improvements 198,174
330,330
Less - Accumulated Depreciation (61,640)
TOTAL PROPERTY & EQUIPMENT 268,690
OTHER ASSETS
Deposit - Stadium Bond 8,000
Security Deposit-Office Lease 6,000
Deferred Stock Offering Costs 29,952
TOTAL OTHER ASSETS 43,952
TOTAL ASSETS $ 329,358
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 217,550
Accounts Payable 43,091
Accrued Expenses 21,473
TOTAL LIABILITIES 282,114
STOCKHOLDERS' EQUITY
Capital Stock ($.001 par value per share,
10,000,000 shares authorized, 2,130,700
shares issued & outstanding) 2,131
Additional Paid In Capital 1,025,719
Deficit Accumulated during the
Development Stage (980,606)
TOTAL STOCKHOLDERS' EQUITY 47,244
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 329,358
</TABLE>
F-36
<PAGE>
ROYAL MORTGAGE CORPORATION
(A Development Stage Company)
STATEMENT OF LOSS
For the Period January 1, 1996 to December 31, 1996 and the Period
December 1, 1994 (Date of Inception) to December 31, 1996
<TABLE>
<CAPTION>
For the Period
For the Period December 1, 1994 1994 & 1995
January 1, 1996 (Inception)
OPERATING EXPENSES to December 31, 1996 to December 31, 1996
<S> <C> <C> <C>
Computer Software & Supplies $ 21,817 $ 39,506 17,689
Depreciation 37,366 61,820 24,454
Dues & Subscriptions 2,268 5,625 3,357
Escrow Fees 0 1,500 1,500
Insurance 28,228 53,205 24,977
Interest 16,386 20,881 4,495
Management Salaries 102,000 222,000 120,000
Office Expense & Postage 23,563 50,907 27,344
Outside Services - Paralegal 6,039 17,189 11,150
Taxes - Payroll & Other 6,900 10,769 3,869
Professional Fees 36,218 72,343 36,125
Rent 93,181 175,222 82,041
Security Filing Fees 2,479 15,088 12,609
Seminars 1,250 2,261 1,011
Telephone 23,643 47,139 23,496
Travel & Promotion 18,815 35,095 16,280
Utilities 8,891 15,419 6,528
Wages 63,798 103,326 39,528
Loss on Investments 320 33,585 33,265
TOTAL OPERATING EXPENSES 493,162 982,880 489,718
NET LOSS FROM OPERATIONS (493,162) (982,880) (489,718)
OTHER INCOME (EXPENSE)
Interest Income 34 2,274 2,240
NET LOSS $(493,128) $(980,606) (487,478)
EARNING (LOSS) PER COMMON SHARE (0.24) (0.51)
</TABLE>
F-37
<PAGE>
ROYAL MORTGAGE CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period January 1, 1996 to December 31, 1996 and the Period
December 1, 1994 (Date of Inception) to December 31, 1996
<TABLE>
<CAPTION>
CAPITAL ADDITIONAL
STOCK PAID IN
AT PAR CAPITAL
<S> <C> <C>
SHARES ISSUED
Issued December 1, 1994 1,250,000
Issued December 27, 1994 thru 800,000
September 30, 1995
Issued August 1996 - Debt Conversion 43,200
Issued August and September 1996 - Reg D 37,500
TOTAL SHARES ISSUED 2,130,700
CAPITAL RECEIVED
Issued December 1, 1994 $ 1,250 $ 0
Issued December 27, 1994 thru
September 30, 1995 800 599,200
Issued August 1996 - Debt Conversion 43 129557
Issued August and September 1996 - Reg D 38 74962
Value of Management Salaries 1995 0 120,000
Value of Management Salaries 1996 (Note 9) 0 102,000
TOTAL CAPITAL RECEIVED $ 2,131 $1,025,719
PRICE PER SHARE
Issued December 1, 1994 $ 0.001
Issued December 27, 1994 thru
December 31, 1995 $ 0.075
Issued August 1996 - Debt Conversion $ 3.00
Issued August and September 1996 - Reg D $ 2.00
</TABLE>
F-38
<PAGE>
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
<TABLE>
<S> <C>
Retained Earnings - December 1, 1994 $ 0
Loss for the period
December 1, 1994 thru December 31, 1994 (39,080)
Loss for the Period
January 1, 1995 thru December 31, 1995 (448,398)
Loss for the Period
January 1, 1995 thru December 31, 1996 (493,128)
ACCUMULATED LOSS DURING THE
DEVELOPMENT STAGE $(980,606)
</TABLE>
F-39
<PAGE>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
<TABLE>
<CAPTION>
For the Period
For the Period December 1, 1994
January 1, 1996 (Inception)
to December 31, 1996 to December 31, 1996
<S> <C> <C>
Net Loss $(493,128) $(980,606)
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 37,366 61,820
(Increase) Decrease in Prepaid Expenses (1,899) (1,899)
(Increase) in Deposits 0 (6,000)
Increase in Accounts Payable & Accruals 56,738 64,564
Increase in A.P.I.C. for Salaries 102,000 222,000
Capital Stock Issued for Interest Expense 9,600 9,600
Loss on Investments 2,520 35,785
CASH USED BY OPERATING ACTIVITIES $(286,803) $(594,736)
</TABLE>
NON-CASH ACTIVITIES:
In August 1996 the Company Issued $129,600 of Capital Stock In Payment of a
$120,000 Convertable Note Payable and $9,600 of Related Interest Expense.
F-40
<PAGE>
ROYAL MORTGAGE CORPORATION
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Period January 1, 1996 to December 31, 1996 and the Period
December 1, 1994 (Date of Inception) to December 31, 1996
<TABLE>
<CAPTION>
For the Period
For the Period December 1, 1994
January 1, 1996 (Inception)
to December 31, 1996 to December 31, 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Cash Paid for Operating Expenses $(202,855) $(447,367) (244,512)
Cash Paid for Wages and Benefits (83,832) (148,198) (64,366)
Cash Paid for Interest Expense (2,670) (3,965) (1,295)
Proceeds - Sale of Investments 2,520 2,520 0
Cash Received from Interest Income 34 2,274 2,240
TOTAL CASH USED IN OPERATIONS (286,803) (594,736) (307,933)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Capital Stock 75,000 676,250 601,250
Cash Paid for Stock Offering Costs 0 (28,053) (28,053)
Proceeds of Note Payble/Capital Leases 217,550 371,201 153,651
Payments of Note Payble/Capital Leases 0 (33,651) (33,651)
CASH PROVIDED BY FINANCING ACTIVITIES 292,550 985,747 693,197
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property & Equipment 0 (333,030) (333,030)
Investments Purchased 0 (41,265) (41,265)
CASH USED IN INVESTING ACTIVITIES 0 (374,295) (374,295)
NET INCREASE IN CASH 5,747 16,716 10,969
CASH - BEGINNING OF PERIOD 10,969 0 0
CASH - END OF PERIOD $ 16,716 $ 16,716 10,969
</TABLE>
F-41
<PAGE>
ROYAL MORTGAGE CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
Page - 1
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS: The Company was incorporated under the laws of the state of
Texas on December 1, 1994. The Company was formed to purchase primarily
owner-financed mortgages. The Company does not originate loans or loan monies on
real estate.
The Company's books and records will be maintained on a calendar year
basis.
PROPERTY & EQUIPMENT: Property and Equipment is recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the term of the related
lease (ten years) and office equipment is depreciated over five to ten year
useful lives.
DEFERRED STOCK OFFERING COSTS: Costs directly related to the 1997 stock
offering have been capitalized and included in the December 31, 1996 balance
sheet as Deferred Stock Offering Costs. If the stock offering is successful, the
proceeds of the offering will be reduced by the deferred costs. If the offering
is unsuccessful, the deferred costs will be expensed.
Costs directly related to the 1996 stock offering were capitalized and
included in the December 31, 1995 balance sheet as Deferred Stock Offering
Costs. The stock offering was unsuccessful and the deferred costs were expensed
in 1996.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
INCOME TAXES: For federal income tax purposes the Company has net
operating losses of approximately $775,000 and capital losses of $33,265; which
is being carried forward to future years.
NOTE 2: DEPOSIT - STADIUM BOND:
The Company owns four Arlington Sports Development Authority, Inc.
stadium bonds. The bonds were purchased to give the Company seat and ticket
options for Texas Rangers (an Arlington, Texas based Major League Baseball
franchise) season tickets. The bonds are non interest bearing, mature in 2008
and are non-transferable.
NOTE 3: NOTE PAYABLE:
The Company has various demand notes payable as follows:
F-42
<PAGE>
<TABLE>
<S> <C>
Payable to Gladiator Partners, L.P., a Company
managed by certain stockholders of Royal
Mortgage Corporation; interest at 7%; $ 45,000
Payable to Four Star Partnership, a Company owned and managed by
certain stockholders of Royal Mortgage Corporation; interest at 7%;
10,150
Payable to certain stockholders of the
Corporation; interest at 7%; 137,400
Payable to an Individual; interest at 7%; 25,000
$217,550
</TABLE>
The notes are all non-secured demand notes.
At December 31, 1996 the Company has no senior debt.
In August 1995 the Company issued a convertible note payable to an
entity in Luxenbourg. The note beared interest at 8% and matured August 31,
1996. At that time the Company exercised it right, to convert this debenture
into common stock of the Company at the rate of one share of common stock for
each three dollars of principal of the debenture.
NOTE 4: DEVELOPMENT STAGE OPERATIONS:
The Company was formed December 1, 1994. Operations since December 1,
1994 have consisted primarily of raising capital, locating and acquiring office
lease space and negotiating contracts.
NOTE 5: LEASE COMMITMENTS:
The Company has signed a ten year operating lease agreement for office
space in Arlington, Texas. The lease agreement expires in March 2005.
The Company also has operating leases for a copy machine and a computer
service that expire in January 1998 and April 1997, respectively.
Future minimum lease commitments are as follows:
<TABLE>
<S> <C>
1997 86,792
1998 78,064
1999 77,848
2000 77,848
2001 77,848
Future Years 341,607
</TABLE>
F-43
<PAGE>
NOTE 6: STOCK OPTIONS:
On March 21, 1995 stock options were issued to the Company's officers
as follows:
<TABLE>
<S> <C>
Total Shares 200,000
Option Price $1.00 per share
Expiration Date March 2000
</TABLE>
The market price of the Company's stock on March 21, 1995 was $0.75 per
share, therefore, the option price exceeded the market price on the date the
options were granted and no compensation expense was created by issuing the
options.
At December 31, 1996 none of the options had been exercised.
NOTE 7: RELATED PARTIES:
One of the Company's officers and shareholders previously had a
retainer agreement with the Company to provide legal services to the Company.
The agreement provided that the Officer will provide legal services to the
Company related to (1) Acquisition and Closing of mortgage loans and (2) post
closing actions against parties to the mortgage loans.
The Company agreed to furnish the Officer office space, furniture and
equipment, and has agreed to reimburse the Officer for one half of the cost of
one full-time assistant.
This agreement was mutually canceled during August 1996.
During 1996 a total of $6,039 has been paid for the full time
assistant, $9,177 for office rent and $1,680 of other related office expenses.
At December 31, 1996 the Company had an account payable to this Officer
for reimbursement of office rent, the Company's share of the full-time assistant
and other related office expenses. In January 1997 the Company transferred the
office equipment and furniture it owns related to this office to the Officer in
complete settlement of this account payable.
NOTE 8: PROFESSIONAL FEES:
Since its inception the Company has paid professional fees as follows:
F-44
<PAGE>
<TABLE>
<CAPTION>
Since
1996 Inception
<S> <C> <C>
Legal - Security Services $ 8,154 $53,843
Legal - Incorporation Services 225 1,480
Legal - General Services 0 886
Auditing 650 2,900
Financial Consulting 0 13,234
Acquisition of Capital 20,000 20,000
$29,029 $92,343
</TABLE>
Of the above fees, $20,000 of capital acquisition costs are related to
the 1997 stock offering and are included in the deferred stock offering costs on
the balance sheet at December 31, 1996 and $25,689 of legal-securities services
and $1,500 of auditing services were related to the 1996 stock offering and were
included in the deferred stock offering costs on the balance sheet at December
31, 1995 and are included in professional fees expense during 1996.
NOTE 9: ACCRUED MANAGEMENT SALARIES:
Management of the Company is being required by the S.E.C.'s
interpretation of G.A.A.P. to include management salaries for the officers of
the Company in these financial statements. No cash has been expended nor an
accrual established for management salaries as management of the Company does
not intend to seek compensation for the period covered by these financial
statements.
The S.E.C. interpretation of G.A.A.P. requires the Company to record
reasonable salaries for its officers and to record the value of the salaries as
additional paid in capital in the stockholders' equity section of the balance
sheet. The salaries recorded are as follows:
<TABLE>
<S> <C>
Michael J. Pilgrim, President, $4,000 per month
Mark J. Teinert, Vice President, $3,000 per month
G. William Barnett, II, Vice President, $3,000 per month
(Employment terminated June 28, 1996)
</TABLE>
Total management salaries of $102,000 in 1996 and $120,000 in 1995 have
been included in expenses and additional paid in capital.
F-45
<PAGE>
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of Mortgage Investments is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information, except for the column "Management
Estimate of FMV of Underlying Collateral" which is marked "unaudited", and on
which we express no opinion, has been subjected to the same auditing procedures
applied in the audit of the basic financial statements; and, in our opinion, the
information is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
William C. Spore & Company, P. C.
January 14, 1998
F-46
<PAGE>
ROYAL MORTGAGE CORPORATION
SECURITIES OF MORTGAGE INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
MANAGEMENT
ESTIMATE
OF FMV OF
UNDERLYING
FACE COLLATERAL
INVESTMENT AMOUNT COST (UNAUDITED)
----------- ------ ---- -----------
<S> <C> <C> <C>
90% Interest In a Pool of Notes $11,562,584 $1,614,870 $4,222,501
Three Mortgages--California 717,185 607,906 775,000
Twenty One Mortgages--Florida 1,874,020 1,559,466 2,396,240
Residential Mortgage--Florida 39,951 39,951 94,000
---------- --------- ----------
TOTAL $14,193,740 $3,822,193 $7,487,741
---------- --------- ----------
---------- --------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-47
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of
1934, the registrant caused this Amendment No. 3 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized this 15th day of March 1999.
ROYAL FINANCIAL CORPORATION
BY: /s/ Michael J. Pilgrim
---------------------------------
President, Chief Executive
Officer and Chairman
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
2.1 Restated and Amended Agreement and Plan of Merger*
3.1 Articles of Incorporation, as amended of Davenport Ventures, Inc.*
3.2 By Laws of Davenport Ventures, Inc.*
3.3 Articles of Merger of Royal Mortgage Corporation into Davenport Ventures,
Inc.*
3.4 Articles of Incorporation, as amended, of Royal Mortgage Corporation*
3.5 By Laws of Royal Mortgage Corporation*
3.6 Articles of Incorporation, as amended, of Royal Mortgage Brokerage, Inc.*
3.7 By Laws of Royal Mortgage Brokerage, Inc.*
3.8 Authorization to Transact Business in Florida of Royal Mortgage Brokerage,
Inc.*
3.9 Articles of Incorporation of Walden Woods of Sugarmill, Inc.*
3.10 By Laws of Walden Woods of Sugarmill, Inc.*
3.11 Articles of Incorporation of Walden Woods of Sugarmill Sales, Inc.*
3.12 By Laws of Walden Woods of Sugarmill Sales, Inc.*
R>
4.1 Specimen Common Stock Certificate*
10.1 Texas Office Lease Agreement*
10.2 Florida Sublease Agreement*
10.3 Form of Option Agreement*
16.1 Letter of William C. Spore & Company, P.C.*
*Previously filed.
