<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-KSB
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
<TABLE>
<C> <S>
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER
--------------------------
ROYAL FINANCIAL CORPORATION
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
NEVADA 13-3961109
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 EAST LAMAR BLVD., SUITE 290, ARLINGTON, TEXAS 76006
(Address of principal executive offices) (Zip Code)
</TABLE>
(817) 861-4000
Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
- ------------------- REGISTERED
---------------------------------------
None
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001
(TITLE OF CLASS)
------------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: $550,329
As of October 21, 1999, the aggregate market value of the 7,464,382 common
shares held by non-affiliates of the registrant was approximately $933,048,
based upon the closing price of $.125 on the OTC Bulletin Board.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes / / No / /
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 7,464,382
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act to 1933
("Securities Act"). The listed documents should be clearly described for
identification purposes (e.g., annual report to security holders for fiscal
year ended December 24, 1990).
Transitional Small Business Disclosure Format (Check one): Yes / /; No /X/
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company is a real estate financial holding company which invests in the
asset backed real estate and mortgage markets. The Company's investments
include ownership and operation of a manufactured housing retirement
community in Florida, land in Florida zoned for future development as a
manufactured housing subdivision, residential and commercial non-performing
mortgages, distressed residential properties purchased at foreclosure sale
auctions, and tax lien certificates which result from unpaid property taxes
owed to municipal and county taxing authorities.
HISTORY OF THE COMPANY
The Company was originally organized as Davenport Ventures, Inc.
("Davenport") in the state of Nevada on August 18, 1993. In June 1998,
controlling interest in the Company was acquired by certain shareholders of
Royal Mortgage Corporation. On August 10, 1998 the shareholders of Davenport
and Royal Mortgage Corporation, a Texas corporation ("RMC") approved the
terms of a Restated and Amended Agreement and Plan of Merger between the two
entities. As a result of the merger, the total number of common shares
outstanding as of August 18, 1998 (the effective date of the merger) was
7,464,382. The Company changed its name from Davenport Ventures, Inc. to
Royal Financial Corporation and changed its year end from December 31 to
August 31.
In March 1999, the Company's Form 10-SB was approved by the
Securities and Exchange Commission and the Company became a reporting company
under the Securities Exchange Act of 1934, as amended.
During 1997, Royal Mortgage Corporation's primary business consisted
of purchasing non-performing and under-performing mortgage loans
collateralized by single-family, multi-family and commercial real estate
properties. These loans were purchased at a discount from the principal
balances of the loans. Royal Mortgage Corporation also invested in tax lien
certificates.
During 1998 and prior to the merger, Royal Mortgage Corporation's
investment activities consisted primarily of acquiring non-performing
mortgage loans collateralized by single-family residential properties, and
purchasing distressed single-family residential properties at foreclosure
sales.
Davenport was an inactive public entity until June, 1998 when it
acquired Walden Woods Retirement Village (the "Park"), a manufactured housing
community in Homosassa, Florida for a purchase price of approximately
$1,611,000. This acquisition was financed by Royal Mortgage Corporation. This
was a stock purchase of all of the outstanding capital stock of Walden Woods
of Sugarmill, Inc. ("Walden Woods") whose sole asset is the Park.
During fiscal year 1999, the Company focused on the manufactured
housing segment of its business and invested approximately $838,000 in
expansion and improvement of the Park, purchased 80 acres of raw land in
Punta Gorda, Florida for approximately $986,000 and paid a deposit of
$112,500 on an adjacent 30 acres, and purchased fourteen model homes for a
total of approximately $995,000 (three of which were sold in 1999). In
addition, the Company acquired single-family residential properties at
foreclosure sales non-performing mortgage loans and tax lien certificates.
THE COMPANY'S BUSINESS
As of August 31, 1999, the Company's assets and operations were
composed of two operating segments:
/ / Manufactured Housing;
/ / Residential and Commercial Properties
Within these segments, the Company, together with its subsidiaries,
owned the following real estate assets as of August 31, 1999:
/ / Manufactured Housing Segment includes the Park, which
contains approximately 217 homesites on a 65 acre site in
Florida.
/ / Residential and Commercial Properties Segment consists
of the Company's mortgage loan portfolio, real estate
portfolio and tax lien certificate investments. The
mortgage loan portfolio is comprised of 13 non-performing
mortgage loans collateralized by residential and
commercial properties. The real estate portfolio consists
of six single-family residential properties located in
Florida. At August 31, 1999 the Company held 25 tax lien
certificates with the underlying properties located in
Louisiana (23), Iowa (1) and Indiana (1).
3
<PAGE>
MANUFACTURED HOUSING SEGMENT
Revenues from the manufactured housing segment for the year ended
August 31, 1999 of $191,502 represent approximately 39% of consolidated
revenues.
This operating segment of the Company's business consists primarily
of operating the Park, a retirement manufactured housing community.
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 is a gated community in
which at least one resident in each household 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 States housing market.
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.
The Company generates revenue from its manufactured housing
community from three major sources:
(1) Land Leasing: The Company owns the manufactured housing 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.
MARKET CONDITIONS
The Park property reflects the Company's strategy of investing in
premier assets within markets that have significant potential for rental and
home sales growth. In selecting this property, the Company analyzed
demographic and economic data to focus on markets expected to benefit from an
influx of retirement-age residents. The state of Florida is one of the
fastest growing areas of the country for retirees, many of whom choose to
live in a manufactured housing community in the southern part of the United
States in the winter months, returning to their permanent home during the
summer months.
The Company has made substantial investments during 1998 and 1999 to
ensure that this property is superior to other parks in the area. It is the
newest park in the area, including Hernando and Citrus counties.
The new Veteran's Memorial Expressway will put the Park within 40
minutes of Tampa, Florida. The area around the Park is growing. US 19, which
runs by the Park, has recently been resurfaced and widened to plan for
increased traffic.
Model home sales are very seasonal with the peak sales period being
from December to March. New lot rentals are a function of home sales, as
potential new residents would not begin renting a homesite until they
purchased and had installed a manufactured home, unless it was a resale of an
existing home.
RESIDENTIAL AND COMMERCIAL PROPERTIES SEGMENT
Revenues from this operating segment comprise approximately 40% of
consolidated revenues for the year ended August 31, 1999.
The principal business activities within this segment consist of the
following:
(1) Acquisition and resolution of sub and non-performing mortgage
loans;
(2) Acquisition of distressed properties at foreclosure sales; and
4
<PAGE>
(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 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. Mortgage
originations for the first two calendar quarters of 1999 were $732 billion.
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. Royal Mortgage Corporation 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 $2,384,794 or 28% of the Company's total assets, as of August
31, 1999.
LEVEL OF DISCOUNT
Royal Mortgage Corporation 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 Royal
Mortgage Corporation sells the loans. Non-performing loans offer no cash
flow, but the Company believes that they may offer capital gain potential
upon disposition. Royal Mortgage Corporation 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
Royal Mortgage Corporation 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.
DUE DILIGENCE
Whether purchasing performing or non-performing loans, Royal
Mortgage Corporation must carry out several due diligence steps. First and
foremost, Royal Mortgage Corporation must locate sources of these loans, then
Royal Mortgage Corporation evaluates and narrows its selections to pursue
only those mortgages that meet Royal Mortgage Corporation's investment
criteria. Generally, Royal Mortgage Corporation targets loans collateralized
by residential real estate, located in Texas and Florida, which are under or
non-performing. Royal Mortgage Corporation's due diligence procedures include
reviewing existing independent appraisals in the Seller's loan file,
obtaining lien searches, inspecting properties, and evaluating the market
data for comparable properties and consulting with local real estate agents.
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 in mortgage foreclosure sales
for as little as 40 to 60 percent of their fair market value. At August 31,
1999, the Company's real estate owned, net, totaled approximately $748,962 or
9% of the Company's total assets.
Royal Mortgage Corporation also contacts lenders and major secondary
market participants to look at portfolios of loans that are slated for
foreclosure. Royal Mortgage Corporation 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 Royal Mortgage Corporation 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
5
<PAGE>
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, Royal Mortgage Corporation 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 search conducted by Fitch. Royal Mortgage Corporation purchased
$553,915 in tax lien certificates in June 1997. As of AUGUST 31, 1998,
$127,520 of these certificates were still outstanding.
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 "BROKERS" commission for each mortgage it
arranges. These fees range from 1 to 4 percent depending upon the size of the
mortgage and the "BROKER'S" fees paid by a particular lender. Royal Mortgage
Brokerage, Inc. is a wholly-owned subsidiary of the Company.
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 can 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 resources
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.
EMPLOYEES
The Company employs a total of eight full-time persons, one
commission-based person and one contract person who monitors the maintenance
of the Company's residential properties in Florida. 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.
6
<PAGE>
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-KSB, THE
FOLLOWING IMPORTANT FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT
IMPACT ON THE COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
HISTORY OF LOSSES. The Company incurred net losses of $2,292,326,
$2,185,528 and $1,518,513 for the year ended August 31, 1999, eight months
ended August 31, 1998 and year ended December 31, 1997, respectively, and as
of August 31, 1999 the Company's current liabilities exceeded its current
assets by $30,785. Although a substantial portion of the net losses for such
periods is due to non-operating charges to earnings, the Company expects that
losses will continue until such time, if ever, that the Company can
substantially increase its investment in income-producing properties, expand
the manufactured housing segment of its business and increase its inventory
of other real estate investments for capital gains income.
NEED FOR ADDITIONAL FINANCING. The Company's offering of up to
$50,000,000 8 1/2% Senior Notes due 2002, ("Notes") under Regulation S of the
Securities Act of 1933, which was scheduled to close in May 1999, was
unsuccessful. Obtaining this financing was critical to the Company's success.
A significant component of the Company's growth strategy is the acquisition
and development of manufactured housing retirement communities, the purchase
of model homes as well as other real estate related investments. The Company
believes that the proceeds from the ongoing dispositions of loans, real
estate properties and model homes, as a part of the Company's normal business
operations, along with existing cash will be sufficient to meet the Company's
working capital needs for a least the next twelve months. However, in order
to finance certain strategic acquisition and development opportunities, the
Company will require additional funding sources and is currently pursuing
alternative sources of financing. There can be no assurance that the Company
will be successful in implementing its growth strategy or that adequate
sources of capital will be available in the future as needed on terms
acceptable to the Company.
LIMITED PRIOR PUBLIC MARKET; POTENTIAL LIMITED TRADING MARKET. There
has only been a public market for the Company's stock since May 1998 and
there can be no assurance that an active trading market in the Company's
stock will be established or maintained. In the absence of such a market, an
investor may find it more difficult to sell common shares of the Company.
ITEM 2. PROPERTIES
The Company moved into new executive offices at 2000 E. Lamar Blvd.,
Suite 290, Arlington, Texas on September 10, 1999. The premises are leased
from an unaffiliated party at a rate of $4,745 per month. The lease has a
five year term. The Company has been released from any and all obligations
under the previous lease agreement for the office space at 1000 Ballpark Way,
Suite 210, Arlington, Texas.
The Company also maintains an office in Naples, Florida and
subleases space from an unaffiliated party for approximately $3,672 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.
INVESTMENT PROPERTIES
The Company considers all of its investment properties to be held
for sale. All of the Company's improved properties are covered by property
and casualty insurance, which the Company believes is adequate.
MANUFACTURED HOUSING PROPERTIES
Undeveloped Acreage
The book value of the Company's investment in undeveloped land at
August 31, 1999 was approximately $1,100,000, which was approximately 13% of
consolidated assets at August 31, 1999. The Company's investment in
undeveloped acreage consists of a 100% interest in approximately 80 acres
located in Punta Gorda, Florida and a deposit of $112,500 paid in connection
with a contract to purchase an adjacent 30 acres. Upon closing of the
contract, which is subject to the resolution of certain contingencies, an
additional payment of $217,500 will be required. The zoning and density for
this acreage to be developed as a manufactured housing community have been
approved by the Board of County Commissioners of Charlotte County, Florida.
The Company purchased this land with the intent to develop it into another
retirement manufactured housing community. However, due to the inability to
raise additional capital in the Company's most recent securities offering,
the Company will begin marketing this investment as a package of
approximately 110 acres upon closing the pending contract for $217,500. Punta
Gorda has been named one of the ten best cities to live by Money Magazine the
last three years.
7
<PAGE>
Developed acreage
This property consists of Walden Woods Retirement Village (the
"Park"), a gated 55+ retirement community in Homosassa, Florida approximately
45 minutes north of Tampa. The book value of real property related to the
Park at August 31, 1999 was approximately $2,674,000, which was approximately
32% of consolidated assets at August 31, 1999. The Park consists of Phase I,
II, III and the Estates on approximately 60 acres. Phases I and II contain 92
developed sites. The occupancy rate of Phase I and II at 8/31/99 was 100%.
Lot rents are currently $175 per month increasing to $210 effective January,
2000.
Over the past year, the Company has invested approximately $1
million in developing an additional 20 acres into Phase III and the Estates,
which will add approximately 125 homesites bringing the total homesites in
the Park to 217. Phase III and the Estates are substantially complete at
8/31/99. Base lot rent in Phase III is $225 per month and $295 per month in
the Estates. The Company currently has nine model homes in Phase III, four of
which are furnished, and three model homes in the Estates, one of which is
furnished.
Other improvements made during the current year include installing
an entrance gate with an electronic security system, emergency exit and
security gate at the back of the Park, new landscaping, over-sized expansion
of the community water and sewer systems, new clubhouse roof, new pool
surface, tile and heaters, new gazebo / mail center in the Estates,
resurfacing of the shuffleboard courts, remodeling the library and card room
gazebo.
COMMERCIAL MORTGAGE
This property consists of several brick mill-type buildings with a
total of approximately 213,000 square feet on approximately eight acres of
land. This site consists primarily of office space in a variety of
configurations. There is substantial parking on-site.
The property is located three blocks from Exit 27 of Interstate 95
in the downtown area of Bridgeport, Connecticut. There are a number of major
redevelopment programs underway in the Bridgeport area that are improving the
image and desirability of the city. Last year the new Bluefish baseball
stadium opened within three blocks of this property with great success.
The Company holds two notes on the property described above. The
primary note originated December 29, 1992 in the amount of $6,788,778 with
interest of 5.98% per annum, compounded monthly from January 1, 1993 until
maturity. This note matured on April 30, 1999. There is a secondary note in
the amount of $600,000, also originated December 29, 1992. The carrying value
of these notes at August 31, 1999 was approximately $1,500,000. The Company
has begun foreclosure proceedings on this property.
Currently, the property is being marketed for sale or lease by the
owner.
REMAINING INVESTMENT PROPERTIES
The remaining investment properties in the Company's portfolio at
August 31, 1999 have an aggregate book value of approximately $1,650,000,
which was approximately 20% of consolidated assets at August 31, 1999.
This group of properties are made up primarily of the following:
<TABLE>
<CAPTION>
Book Value
at August 31, 1999
------------------
<S> <C>
/ / Six single-family residential properties located in Florida $748,962
/ / Four mortgage loans collateralized by commercial properties 120,311
/ / Eight single-family residential mortgage loans with underlying properties
located in Florida 710,561
/ / 25 tax lien certificates with underlying properties
located in Louisiana (23), Iowa (1) and Indiana (1) 22,060
</TABLE>
ITEM 3. 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.
8
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock began trading on the Over-the-Counter
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, quotations for the
high and low bid prices for the Company's common stock since it was initially
quoted in May 1998 until August 31, 1999. The quotations reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
BID
-----------------------------------
HIGH LOW
----------- ---------
<S> <C> <C>
Third Quarter 1998 (May only) .85 .40
Fourth Quarter 1998 2 15/16 1.20
First Quarter 1999 2 1/2 1 9/16
Second Quarter 1999 1 31/32 1
Third Quarter 1999 1 15/32 3/8
Fourth Quarter 1999 .50 5/32
</TABLE>
HOLDERS
As of August 31, 1999 there were approximately 67 individual holders
of record of the Company's common stock, representing 3,295,017 shares, and
4,169,365 shares of cede stock.
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),
9
<PAGE>
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. changed its name to Royal Financial Corporation.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto, appearing in Item 7 of this report,
and discussion of risk factors included elsewhere in this report. Historical
results and percentage relationships set forth in the financial statements
included in Item 7 and this section should not be taken as indicative of
future operations of the Company. Capitalized terms used but not otherwise
defined herein, shall have the meanings ascribed to those terms in Item 1
through 5 of this 10-KSB.
In connection with, and because it desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward looking
statements in the following discussion and elsewhere in this report and in
any other statement made by, or on behalf of the Company, whether or not in
future filings with the Securities and Exchange Commission. Forward looking
statements are statements not based on historical information and which
relate to future operations, strategies, financial results or other
developments. Forward looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business
decisions, are subject to change. These uncertainties and contingencies can
affect actual results and could cause actual results to differ materially
from those expressed in any forward looking statements made by, or on behalf
of, the Company. The Company disclaims any obligation to update forward
looking statements.
COMPARISON OF YEAR ENDED AUGUST 31, 1999 TO EIGHT MONTHS ENDED
AUGUST 31, 1998
As discussed previously herein, in 1998 the Company changed its year
end from December 31 to August 31. As a result, the audited consolidated
statements of operations included in this report cover a twelve month period
for 1999 and an eight month period for 1998. Only reasons for material
changes from 1998 to 1999 other than simply a different number of months will
be included in the following discussion.
REVENUES
Total revenues from operations increased approximately $444,000 or
420%, to $550,329 for the year ended August 31, 1999, as compared to $106,004
for the eight months ended August 31, 1998. The decrease in gain on sale of
loans of approximately $131,000 is primarily attributable to: (i) losses
incurred in 1999 on the disposition of mortgage loans collateralized by two
multi-family residential properties in California whereby another lien holder
had to be paid off and the properties were sold for 80% of the original
appraised amount; (ii) fewer loans in the portfolio due to more direct real
estate purchases in late 1998 and 1999 (the Company obtains title to the
properties at time of purchase) and less purchases of mortgage loans; and
(iii) the age of the portfolio - any properties remaining in the portfolio
which
10
<PAGE>
were originally purchased as loans would be foreclosed upon and reflected as
the sale of real estate upon disposition. The increase in gain on sale of
real estate of approximately $268,000 is primarily due to: (i) more real
estate properties in the Company's portfolio for the reasons noted above; and
(ii) losses incurred on two individual properties in 1998 whereby the Company
had to buy out the first lien holder prior to being able to sell the
properties. The increase in lot rental income of approximately $130,000 is
attributable to the acquisition of the Park in June 1998, providing a new
source of revenue for the Company. The increase in revenue from sales of
manufactured homes of $175,139 is due to this being a new source of revenue
for the Company in connection with the addition of 125 homesites and related
sale of manufactured homes to persons who decide to live in the Park.
EXPENSES
Total operating expenses increased approximately $1,127,000, or 84%,
to $2,479,865 for the year ended August 31, 1999, as compared to $1,352,554
for the eight months ended August 31, 1998. The increase in cost of
manufactured homes sold of $161,909 is due to this being a new line of
business in the current year in connection with the addition of 125 homesites
and related sale of manufactured homes to persons who decide to live in the
Park. The increase in salaries and benefits of approximately $270,000 is due
to an increased number of personnel in the current year over the comparable
period in the prior year and a related increase in health insurance costs.
During 1998, seven additional personnel were hired, two of which to operate
and manage Walden Woods. Four personnel were terminated in 1999 due to a
shift in the Company's investment strategy and utilization of existing
personnel. The increase in professional fees of approximately $110,000 is
primarily due to a consulting agreement entered into in 1999 to provide
financial and investment services to the Company and legal and accounting
fees incurred for various filings. The increase in promotional expenses of
approximately $133,000 is due to the Company taking steps to raise awareness
and establish a market presence by engaging certain investor relations firms,
establishing an internet web site, and other promotional activities during
the current fiscal year. In addition, the Company incurred advertising costs
related to Walden Woods, which were not incurred during 1998 due to the
acquisition of Walden Woods in June 1998 and expansion of developed homesites
in 1999. Travel and lodging expense decreased approximately $87,000 primarily
due to the shareholder meeting held in Florida in January, 1998 and several
preliminary meetings in Europe to arrange the $50,000,000 securities offering
which was not successful. The increase in general and administrative expense
of approximately $107,000 is primarily attributable to: (i) the corporate
office in Naples, Florida not being fully operational until February 1998;
and (ii) administrative expenses related to Walden Woods which were not
incurred during the comparable period in 1998 due to the acquisition of
Walden Woods in June 1998. Depreciation expense increased approximately
$110,000 due to the acquisition of Walden Woods as well as leasehold
improvements and other office furniture and equipment purchased in 1998. Real
estate holding costs increased approximately $55,000 due primarily to the
maintenance of Walden Woods which was acquired in June 1998. The increase in
taxes - payroll and other of approximately $95,000 is primarily due to the
staffing changes discussed above and real estate taxes incurred as holding
costs on the Company's real estate investments. Due diligence expenses
increased approximately $129,000 primarily due to engineering and
environmental studies that were done on parcels of land in Florida the
Company was interested in for potential manufactured housing development
sites.
The decrease in interest expense of approximately $885,000 is
attributable to a lower principal balance outstanding in 1999 due to
$8,560,000 of 8 1/2% Senior Convertible Debentures due March 2000 being
converted into common stock of the Company during 1998. In addition, upon the
conversion discussed above, $665,029 of costs that had been deferred related
to obtaining this financing were charged to operations in 1998. The loss on
sale of fixed assets in 1999 of $121,168 occurred as a result of the Company
terminating the original Arlington, Texas office lease agreement and selling
furniture and fixtures and tenant improvements. The remaining net book value
of the assets sold of $121,168 was written off in August, 1999. The failed
offering costs of $179,520 occurred in connection with the Company's offering
of up to $50,000,000 8 1/2% Senior Notes due 2002, which was unsuccessful.
COMPARISON OF EIGHT MONTHS ENDED AUGUST 31, 1998 TO YEAR ENDED
DECEMBER 31, 1997
As discussed previously herein, in 1998 the Company changed its year
end from December 31 to August 31. As a result, the audited consolidated
statement of operations included in this report cover an eight month period
for 1998 and a twelve month period for 1997. Only reasons for material
changes from 1997 to 1998 other than simply a different number of months will
be included in the following discussion.
REVENUES
Total revenues increased approximately $86,000, or 438%, to $106,004
for the eight months ended August 31, 1998, as compared to $19,713 for the
year ended December 31, 1997.
The increase in gain on sale of loans of $82,073 is primarily due to
the age of the portfolio - the Company's original loan portfolio was
purchased in late 1997, therefore, resolutions did not occur until subsequent
fiscal periods. The decrease in gain on sale of real estate of approximately
$43,000 was primarily attributable to (i) the age of the portfolio mentioned
above; and (ii) losses incurred on two individual properties in 1998 whereby
the Company had to buy out the first lien holder prior to being able to sell
the properties. The increase in lot rental income of $46,777 is attributable
to the acquisition of Walden Woods in June 1998, providing a new source of
revenue for the Company.
11
<PAGE>
EXPENSES
Total operating expenses increased approximately $437,000 or 48%, to
$1,352,554 for the eight months ended August 31, 1998, as compared to
$915,694 for the year ended December 31, 1997. The increase in promotional
expenses of approximately $96,000 is primarily due to a television spot in
August 1998 on a business financial network and hiring a consulting firm in
August 1998 to provide financial public relations services. Real estate
holding costs increased by $67,946 due to the fact that the Company did not
hold title to any properties in 1997 and therefore incurred no related
holding costs. The increase in taxes - payroll and other of approximately
$87,000 is primarily attributable to an increased number of personnel in 1998
over 1997. During 1998, seven additional personnel were hired, two of which
to operate and manage Walden Woods.
The decrease in interest income of approximately $143,000 is
primarily attributable to more idle cash in 1997 caused by the lag time
between when funds were received from financings and stock sales and when the
Company was able to deploy those funds into various real estate investments.
The increase in interest expense of approximately $219,000 is due
primarily to the write off, in 1998, of $665,029 of costs that had been
deferred related to obtaining the portion of the 8 1/2% Senior Convertible
Debentures due March 2000 that were converted into common shares of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $.3 million and $3.9 million at
August 31, 1999 and August 31, 1998, respectively. The decrease is
attributable to approximately $2.5 million of cash used in operating
activities, approximately $936,000 and $149,000 used in investing and
financing activities, respectively. The outflow of cash from operating
activities is primarily attributable to corporate and property operations,
the payment of approximately $200,000 to certain consulting firms who were
engaged to assist the Company in obtaining financing and establishing a
market presence, increase in model manufactured homes inventory for Walden
Woods of approximately $804,000 offset by depreciation and amortization,
write-off of deferred financing/offering costs and loss on sale of fixed
assets. The Company utilized approximately $936,000 of cash flow primarily in
the following investing activities: (i) the purchase of residential and
commercial properties ($1.3 million); (ii) the purchase of mortgage loans
($671,000); (iii) expansion of the Walden Woods park development ($838,000);
(iv) investment in tax lien certificates ($232,000); and (v) investment in
land parcels in Florida ($1,100,000) which the Company purchased with the
intent to develop additional manufactured housing communities.
In December 1998, the Company paid a $112,500 deposit in connection
with a contract to purchase approximately 30 acres in Charlotte County,
Florida. Upon closing of the contract, which is subject to the resolution of
certain contingencies, an additional payment of $217,500 will be required.
The Company's offering of up to $50,000,000 8 1/2% Senior Notes due
2002, ("Notes") under Regulation S of the Securities Act of 1933, which was
scheduled to close in May 1999, was unsuccessful. Obtaining this financing
was critical to the Company's success. A significant component of the
Company's growth strategy is the acquisition and development of manufactured
housing retirement communities, the purchase of model homes as well as other
real estate related investments. The Company believes that the proceeds from
the ongoing dispositions of loans, real estate properties and model homes, as
a part of the Company's normal business operations, along with existing cash
will be sufficient to meet the Company's working capital needs for a least
the next twelve months. However, in order to finance certain strategic
acquisition and development opportunities, the Company will require
additional funding sources and is currently pursuing alternative sources of
financing. There can be no assurance that the Company will be successful in
implementing its growth strategy or that adequate sources of capital will be
available in the future as needed on terms acceptable to the Company.
The agreements that the Company had entered into on March 23, 1999
with certain consulting firms to provide financial public relations and
marketing and other corporate advisory services geared to assist the Company
and its growth were terminated in May 1999. In connection therewith, the
options to purchase 150,000 shares of the Company's common stock that were
issued the principals of one firm were cancelled. In addition, the obligation
to grant options to a second firm to purchase 300,000 shares of the Company's
common stock at $.01 per share in lieu of fees was also cancelled. The
Company no longer has any obligations under these agreements and in June
1999, received a partial refund of approximately $150,000 of amounts paid to
such consulting firms.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue relates to whether computer systems will
properly recognize date-sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. Systems that do
not properly recognize such information could generate erroneous information
or fail. The Company has developed a plan to ensure its mission critical
Information Technology ("IT") systems, such as in-house accounting, network
operating systems, and desktop software systems are compliant with system
requirements to process transactions after the year 1999. In June, 1998, the
Company installed a new financial accounting and reporting package. The
software utilized for these functions is licensed by third party vendors who
have warranted that their systems are Y2K
12
<PAGE>
complaint. 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 results of operations.
The Company believes that the greatest exposure lies with third
parties, such as its tenants, service providers, vendors, financial
institutions and the Company's transfer agent and other unaffiliated parties
the Company conducts business with. The Company depends on its tenants for
rents and cash flows, its financial institutions for availability of cash,
its transfer agent to maintain and track investor information, its service
providers and vendors for day-to-day services and other unaffiliated parties
to be able to close on real estate transactions. If any of these third
parties are unable to meet their obligations to the Company because of the
year 2000 problem, such a failure may have a material adverse effect on the
financial condition or results of operations of the Company. Although the
Company is in the process of working with such third parties in order to
attempt to eliminate its year 2000 concerns, the cost and timing of the third
party year 2000 compliance is not within the Company's control, and no
assurance can be given with respect to the cost and timing of such efforts or
the potential effects of any failure to comply. The Company anticipates,
although no assurances can be given, that it would be able to switch
suppliers, banks or service providers if any were unable to convert their
systems appropriately.
ITEM 7. FINANCIAL STATEMENTS
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Reports of Independent Certified Public Accountants 14
Consolidated Financial Statements:
Consolidated Balance Sheet as of August 31, 1999 16
Consolidated Statements of Operations for 17
the year ended August 31, 1999,
eight months ended August 31, 1998 and
year ended December 31, 1997
Consolidated Statements of Changes in Stockholders' Equity 18
for the year ended August 31, 1999,
eight months ended August 31, 1998 and
year ended December 31, 1997
Consolidated Statements of Cash Flows for 19
the year ended August 31, 1999,
eight months ended August 31, 1998 and
year ended December 31, 1997
Notes to Consolidated Financial Statements 20
</TABLE>
13
<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, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended and the eight months ended August 31, 1998. 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 audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Royal Financial Corporation and subsidiaries as of August 31, 1999, and
the consolidated results of their operations and their consolidated cash
flows for the year then ended and the eight months ended August 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Dallas, Texas
September 30, 1999
14
<PAGE>
[LETTERHEAD OF WILLIAM C. SPORE & COMPANY, PC.]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Royal Mortgage Corporation
We have audited the accompanying statements of operations and cash flows for
the year ended December 31, 1997 of Royal Mortgage Corporation (a Texas
corporation). 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 results of operations and the cash flows of
Royal Mortgage Corporation for the year ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ WILLIAM C. SPORE & COMPANY, PC
WILLIAM C. SPORE & COMPANY, PC
Certified Public Accountants
January 14, 1998
15
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1999
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 315,927
Prepaid expenses and other current assets 222,225
Manufactured home inventory 831,328
------------
Total current assets 1,369,480
INVESTMENTS
Land for future development or sale $ 1,098,997
Mortgage loan portfolio, net 2,384,794
Real estate portfolio, net 748,962
Tax lien certificates 22,060 4,254,813
------------
PROPERTY PLANT AND EQUIPMENT - MANUFACTURED HOUSING
COMMUNITY, NET 2,697,299
OFFICE PROPERTY AND EQUIPMENT, NET 128,845
OTHER ASSETS
Deferred debenture costs 29,231
Deposits and sundry assets 13,745 42,976
------------ ------------
Total assets $ 8,493,413
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 110,265
8 1/2% Senior Convertible Debentures 1,290,000
------------
Total current liabilities 1,400,265
COMMITMENTS --
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; authorized 50,000,000 shares;
issued and outstanding, 7,464,382 shares $ 7,464
Additional paid-in capital 14,062,657
Accumulated deficit (6,976,973) 7,093,148
------------ ------------
Total liabilities and stockholders' equity $ 8,493,413
============
</TABLE>
The accompanying notes are an integral part of this statement.
16
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended Year Ended
August 31, 1999 August 31, 1998 December 31, 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Revenues
Gains (losses) on sales of operating assets
Loans $ (48,658) $ 82,073 $ --
Real estate 245,474 (22,846) 19,713
Lot rental income 177,046 46,777 --
Sales of manufactured homes 175,139 -- --
Other 1,328 -- --
----------- ----------- ---------
550,329 106,004 19,713
Operating expenses
Cost of manufactured homes sold 161,909 -- --
Salaries and benefits 542,544 272,111 249,875
Professional fees 376,817 266,633 226,997
Promotional 236,607 103,283 6,966
Travel and lodging 35,552 122,655 100,391
General and administrative 241,505 134,286 110,875
Depreciation 171,350 61,290 43,288
Office rent 134,163 85,687 83,991
Insurance 59,236 64,801 28,715
Real estate holding costs 122,580 67,946 --
Taxes - payroll and other 205,713 110,948 23,701
Due diligence expenses 191,889 62,914 40,895
----------- ----------- ---------
2,479,865 1,352,554 915,694
----------- ----------- ---------
Operating loss (1,929,536) (1,246,550) (895,981)
Other Income (Expense)
Interest income 106,908 114,772 257,318
Interest expense (169,010) (1,053,750) (834,775)
Loss on sale of office property and equipment (121,168) -- (4,723)
Failed offering costs (179,520) -- (40,352)
----------- ----------- ---------
(362,790) (938,978) (622,532)
----------- ----------- ---------
Net loss $(2,292,326) $(2,185,528) $(1,518,513)
=========== =========== ===========
Loss per share - basic and diluted $ (0.31) $ (0.40) $ (0.67)
=========== =========== ===========
Weighted average shares outstanding 7,464,382 5,450,599 2,258,792
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
17
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- paid-in Accumulated
Shares Amount capital deficit Total
----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $2,630,700 $ 2,631 $ 1,025,219 $ (980,606) $ 47,244
RMC
Sale of common stock 250,000 250 439,070 -- 439,320
Net loss -- -- -- (1,518,513) (1,518,513)
Royal Financial Corporation
(formerly DVI)
Sale of common stock 20,000 20 (20) -- --
----------- ------------ ------------- ------------- ------------
Balances at December 31, 1997 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)
----------- ------------ ------------- ------------- ------------
Balances at August 31, 1998 7,464,382 7,464 14,062,657 (4,684,647) 9,385,474
Net loss -- -- -- (2,292,326) (2,292,326)
----------- ------------ ------------- ------------- ------------
Balances at August 31, 1999 7,464,382 $ 7,464 $ 14,062,657 $ (6,976,973) $ 7,093,148
=========== ============ ============= ============== ============
</TABLE>
The accompanying notes are an integral part of this statement.
18
<PAGE>
ROYAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended Year Ended
August 31, 1999 August 31, 1998 December 31, 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,292,326) $(2,185,528) $(1,518,513)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 171,350 61,290 43,288
Amortization/write-off of debenture/offering costs 242,612 781,559 316,919
Loss on sale of office property and equipment 121,168 -- 4,723
Common stock issued for services -- 5,000 --
Changes in operating assets and liabilities
Prepaid expenses and other assets (784,663) (43,445) (121,736)
Accounts payable and accrued liabilities 30,015 (159,937) 192,524
----------- ----------- -----------
Net cash used in operating activities (2,511,844) (1,541,061) (1,082,795)
----------- ----------- -----------
Cash used in investing activities
Purchase of Walden Woods of Sugarmill, Inc. -- (1,611,625) --
Purchase of additional land (1,098,997) (18,000) --
Principal collections on tax lien certificates 337,846 102,410 243,849
Purchases of tax lien certificates (232,386) -- --
Purchases of property and equipment (173,462) (177,921) (118,892)
Purchases of loans (671,118) (1,531,515) (4,322,535)
Collections on loans 121,140 111,449 1,099
Disposition of loans 751,018 416,380 --
Sale of real estate and other assets 2,152,437 1,192,392 34,212
Purchases of real estate properties (1,283,950) (572,327) --
Investment in park development (838,148) (138,798) --
----------- ----------- -----------
Net cash used in investing activities (935,620) (2,227,555) (4,162,267)
----------- ----------- -----------
Cash provided by (used in) financing activities
Sale of common stock, net of offering costs -- 4,057,904 439,320
Proceeds from borrowings -- -- 9,897,885
Repayments on borrowings -- -- (265,435)
Payments for deferred financing costs (148,864) -- (1,147,865)
Exercise of stock options -- 1,333 --
Other -- (8,639) (65,286)
----------- ----------- -----------
Net cash (used in)/ provided by
financing activities (148,864) 4,050,598 8,858,619
----------- ----------- -----------
Net (decrease)/increase in cash and cash equivalents (3,596,328) 281,982 3,613,557
----------- ----------- -----------
Cash and cash equivalents, beginning of period 3,912,255 3,630,273 16,716
----------- ----------- -----------
Cash and cash equivalents, end of period $ 315,927 $ 3,912,255 $ 3,630,273
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement
19
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS AND DESCRIPTION OF MERGER
Royal Financial Corporation ("Royal" or the "Company") is a real estate
investment company with a portfolio consisting of a manufactured housing
community in Florida, undeveloped land in Florida zoned for manufactured
housing development, single family residential properties and non-performing
mortgage loans collateralized by residential and commercial real estate
properties.
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 are reflected in the
accompanying consolidated statements of operations as though the entities
had been combined as of January 1, 1997. Prior to the merger, RMC was
engaged 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. 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. At the time of purchase, the Park was a 45-acre site, 18
acres of which were developed with approximately 85 homesites. During 1998,
the Company purchased an additional 20 acres. During 1998 and 1999, the
Company completed a major expansion adding approximately 125 homesites. This
development was substantially complete at August 31, 1999. The accompanying
consolidated financial statements include the revenue and expenses of the
Park since the date of acquisition (June 1, 1998).
20
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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.
Certain amounts in prior year financial statements have been reclassified to
conform with current year presentation.
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, including the manufactured
housing community and undeveloped land, are located in the state of Florida.
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.
MANUFACTURED HOME INVENTORY
Inventories consist of finished homes that are purchased from the
manufacturer and are valued using the specific identification method.
Costs include set-up costs and costs to install such items as porches,
sheds, driveways and air conditioners. At August 31, 1999 the Company
had eleven homes in inventory.
PROPERTY PLANT AND EQUIPMENT - MANUFACTURED HOUSING COMMUNITY
Property Plant 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:
<TABLE>
<S> <C>
Land improvements and buildings 15 - 20 years
Furniture, fixtures and equipment 3 - 10 years
</TABLE>
Maintenance and repairs are charged to income as incurred and improvements
are capitalized.
LAND FOR FUTURE DEVELOPMENT OR SALE
Land for future development or sale consists of approximately 80 acres of
raw land in Punta Gorda, Florida zoned as manufactured housing subdivision.
Also included in the balance is a deposit of $112,500 on an additional
adjacent 30 acres. See Note L Commitments.
21
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
MORTGAGE LOAN INVESTMENTS
The Company has purchased 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,
1999 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.
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.
OFFICE PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are carried at cost. Depreciation for furniture,
fixtures and equipment (3 - 10 years) is computed using the straight-line
method. 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 year ended August 31, 1999, the eight months
ended August 31, 1998 and the year ended December 31, 1997 was $50,110,
$116,530 and $286,966, respectively. See Note M regarding write off of
deferred debenture costs.
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.
LOSS PER SHARE
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 antidilutive.
22
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OTHER RECENT ACCOUNTING STANDARDS
In March 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisitions," which
provides that internal costs of identifying and acquiring operating property
should be expensed as incurred. This pronouncement has no material impact on
the Company's financial statements.
For the fiscal year ended August 31, 1999, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
required that a public company report financial and descriptive information
about its reportable operating segments. Operating segments are components
of an enterprise about which separate financial information is available and
is used regularly by management in assessing segment performance and for
making operating decisions. This pronouncement is effective for financial
statements for periods beginning after December 15, 1997 (See Note O -
Segment Reporting).
In July 1999, the FASB issued Interpretation (FIN) 43, "Real Estate Sales
(An Interpretation of FASB Statement No. 66)", which defines real estate
more broadly than current practice. There is a very regimented threshold
under FASB 66 to achieve sale accounting (specifically, down payment
requirements, minimum investment provisions, absence of numerous forms of
continuing involvement, etc.). Under FIN 43, some transactions that would
have been accounted for as sales in the past will no longer be accounted for
as sales after June 30, 1999. All of the Company's investment properties
fall under the definition of real estate and thus are subject to FASB
Statement No. 66. Therefore, FIN 43 has no impact on the Company's financial
statements.
NOTE C - MANAGEMENT'S PLANS FOR CONTINUED EXISTENCE
As shown in the accompanying financial statements, the Company has
incurred net losses of $2,292,326, $2,185,528 and $1,518,513 for the year
ended August 31, 1999, the eight months ended August 31, 1998 and year
ended December 31, 1997, respectively, and as of August 31, 1999 the
Company's current liabilities exceeded its current assets by $30,785.
Management's plans to maintain sufficient future cash flows to meet its
future financial obligations and to continue funding activities, include
the sale of real estate properties in the normal course of the Company's
business, reducing general and administrative costs by reducing
personnel, moving to a smaller office space and other cost-cutting
measures. Management also believes that debt financing, if necessary, is
available. Accordingly, management believes that sufficient cash flow
will be provided to meet the Company's financial obligations through
fiscal year 2000.
23
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - 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>
<TABLE>
<CAPTION>
Year Eight Months Year
ended ended ended
August 31, 1999 August 31, 1998 December 31, 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
NOTE E - CASH FLOW INFORMATION
Supplemental information on cash flows and noncash investing and
financing transactions is as follows:
Supplemental Cash Flow Information:
Interest paid $109,650 $ 439,973 $345,812
Schedule of noncash investing activities:
Real estate acquired through foreclosure of loans 111,489 2,062,487 --
Other assets acquired in settlement of loan -- 40,000 --
Office equipment exchanged for an account payable -- -- 16,000
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>
24
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - PROPERTY PLANT AND EQUIPMENT
Property plant and equipment - manufactured housing community consists
of the following:
<TABLE>
<CAPTION>
August 31,
1999
------------
<S> <C>
Land $ 1,368,282
Land improvements and buildings 1,305,433
Furniture, fixtures and equipment 86,190
-----------
2,759,905
Less accumulated depreciation (62,606)
-----------
Investment property and equipment, net $ 2,697,299
===========
</TABLE>
Office property and equipment consist of the following:
<TABLE>
<S> <C>
Furniture, fixtures and equipment $ 177,999
Leasehold improvements 73,015
-----------
251,014
Less accumulated depreciation (122,169)
-----------
Office property and equipment, net $ 128,845
-----------
</TABLE>
NOTE G - OPERATING LEASES
The Company leases office space in Arlington, Texas, subleases space in
Naples, Florida and has various equipment operating leases. The Arlington
lease that had been in place was terminated in August, 1999. The Company has
no further obligations under this lease agreement. The Company entered into
a new lease agreement for a lesser amount of office space in Arlington,
Texas on August 31, 1999. This new lease has a five year term. The Naples,
Florida office lease expires in October, 2000 with an option to renew for
two years.
Future minimum lease payments following August 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $111,597
2001 68,104
2002 60,702
2003 58,506
2004 37,960
Thereafter --
---------
$336,869
=========
</TABLE>
Lease expense in 1999, 1998 and 1997 was $145,236, $95,931, $83,991,
respectively.
25
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
mortgage loans, tax lien certificates, and senior convertible debentures
payable. The methodologies used and key assumptions made 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.
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.
SENIOR CONVERTIBLE DEBENTURES
The carrying amount approximates fair value due to a maturity date of
March 2000.
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, listing agreements, sales contracts 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 at August 21, 1999:
<TABLE>
<CAPTION>
August 31,
1999 Fair Value
----------- -------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 315,927 $ 315,927
Mortgage loan portfolio, net 2,384,794 2,573,946
Tax lien certificates 22,060 29,272
Real estate portfolio, net 748,962 892,056
Financial liabilities:
Senior convertible debentures (1,290,000) (1,290,000)
</TABLE>
26
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - SENIOR CONVERTIBLE DEBENTURES
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, 1999 are due
and payable at maturity on March 31, 2000.
NOTE J - 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>
<CAPTION>
Eight months
Year ended ended Year ended
August 31, 1999 August 31, 1998 December 31, 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Tax benefit at the federal statutory rate $ 779,391 $743,080 $ 516,294
Nondeductible expenses (2,903) (3,560) (935)
Other (750) (5,425) (1,079)
Net operating losses carryforward (775,735) (734,095) (516,438)
----------- ------------ ---------
$ - $ - $ -
=========== ============ =========
Deferred tax assets consist of the following:
Net operating loss carryforward 2,023,573 $ 1,496,931 768,979
Property and equipment 1,160 9,004 2,861
----------- ------------ ---------
Gross deferred tax assets 2,024,732 1,505,935 771,840
Valuation allowance (2,024,732) (1,505,935) (771,840)
----------- ------------ ---------
Net deferred tax assets $ - $ - $ -
=========== ============ =========
</TABLE>
The Company files a consolidated federal income tax return with its
subsidiaries. For federal income tax purposes, the Company has cumulative
operating losses of approximately $5,950,000 which are being carried
forward to future years expiring through 2019. During 1999 the Company
revised its net operating loss carryforward, which resulted in a reduction
in gross deferred tax assets of approximately $258,000.
NOTE K - 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 since January 1, 1997:
27
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
------------- --------------
<S> <C> <C>
Outstanding at January 1, 1997 200,000 $ 1.00
Granted 1,190,000 2.25
--------- --------
Outstanding at December 31, 1997 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
--------- --------
Granted 150,000 2.00
Cancelled (400,000) 3.50
--------- --------
Outstanding at August 31, 1999 1,498,667 $ 2.15
========= ========
</TABLE>
The weighted average fair value per share of options granted in 1999,
1998 and 1997 was $.10, $.33 and $.48, respectively.
In February 1999, the Company granted options to a public relations firm to
purchase 150,000 shares of the Company's common stock at an exercise price
of $2.00 per share. In May 1999, these stock options were cancelled in
connection with the termination of the service agreement with such firm, as
further discussed in Note L.
An additional 250,000 options were cancelled in December 1998 in connection
with the termination of a service agreement with a financial public
relations firm, as further discussed in Note L.
28
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table summarizes information about stock options at August
31, 1999:
<TABLE>
<CAPTION>
Outstanding and Exercisable
--------------------------------------
Weighted
average
remaining Weighted
contractual average
Exercise price Shares life (in years) exercise price
- -------------- -------- -------------- --------------
<S> <C> <C> <C>
RMC
--------
$ 1.00 198,667 0.5 $ 1.00
2.25 1,190,000 2.83 2.25
4.25 50,000 3.75 4.25
Royal
(formerly DVI)
- --------------
$2.25 - 2.75 60,000 1.91 2.41
--------- --------
1,498,667 $ 2.15
========= ========
</TABLE>
The Company has adopted only the disclosure provisions of 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 and net loss per share amounts for years in
which options were granted would be increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss
As reported 2,292,326 $2,185,528 $1,518,513
Pro forma 2,307,326 $2,246,628 2,085,913
Basic and diluted loss per share ----------
As reported .31 $.40 $.67
Pro forma .31 $.41 .92
----------
</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, 1997 -- $ --
Issued 223,864 4.40
------- ----------
Outstanding at December 31, 1997 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 AND AUGUST 31, 1999 181,899 $4.40-6.00
======== ==========
</TABLE>
29
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - COMMITMENTS
The agreement that the Company had entered into on August 24, 1998 with a
financial public relations firm whereby the Company was to pay $15,000 per
month for twelve months beginning August 4, 1998, grant 250,000 options at
various exercise prices and issue 70,000 free-trading shares of common stock
upon filing of a Form S-1 was terminated in December, 1998. The Company no
longer has any obligations under this agreement.
The agreements that the Company had entered into on March 23, 1999 with
certain consulting firms to provide financial public relations and marketing
and other corporate advisory services geared to assist the Company and its
growth were terminated in May, 1999. In connection therewith, the options to
purchase 150,000 shares of the Company's common stock that were issued the
principals of one firm were cancelled. In addition, the obligation to grant
options to a second firm to purchase 300,000 shares of the Company's common
stock at $.01 per share in lieu of fees was also cancelled. The Company no
longer has any obligations under these agreements.
In December 1998, the Company paid a $112,500 deposit in connection with a
contract to purchase approximately 30 acres in Charlotte County, Florida.
Upon closing of the contract, which is subject to the resolution of certain
contingencies, an additional payment of $217,500 will be required.
See Note G regarding lease commitments.
NOTE M - UNUSUAL CHARGES TO OPERATIONS
The Company's offering of up to $50,000,000, 8 1/2% Senior Notes due 2002,
under Regulation S of the Securities Act of 1933, which was scheduled to
close in May 1999, was unsuccessful. Costs of approximately $180,000 related
to this offering, were written off in May 1999.
In connection with the termination of the original Arlington, Texas office
lease agreement, the Company sold furniture and fixtures and tenant
improvements at agreed upon percentages of the net book value of these
assets. The remaining balance of approximately $121,000 was written off in
August 1999.
Due to the conversion of $8,560,000 of the 8 1/2 % Senior Convertible
Debentures due March 2000 during 1998, $665,029 of costs that had been
deferred related to obtaining this financing were charged to operations in
1998.
NOTE N - SUBSEQUENT EVENTS
In September, 1999 the Company sold Royal Mortgage Brokerage, Inc. to an
individual for the approximate book value of net assets as of September 17,
1999.
Effective September 17, 1999 the Company sold all office furniture and
fixtures, computer and telephone equipment in the Naples, Florida office to
a third party for $10,000. The remaining balance of these assets of
approximately $26,000 was written off in September, 1999.
On October 1, 1999 the Company entered into a sublease agreement for
office space in Naples, Florida. The sublease agreement has the same
terms as the underlying lease agreement. See Note G.
NOTE O - SEGMENT REPORTING
The Company has adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information" for the year ended August 31, 1999. The
Company currently has two major operating segments: Manufactured Housing
Segment and the Residential Segment.
30
<PAGE>
NOTE O - SEGMENT REPORTING - CONTINUED
Management organizes the segments within the Company based on property
type for making operating decisions and assessing performance. The Company
uses the same measure of profit or loss for segments as that used for the
consolidated financial statements.
The Manufactured Housing Segment has two primary sources of revenue, rental
of homesites and the sale of manufactured homes. The primary source of
revenue for the Residential Segment is gain/loss upon disposition/sale of
mortgage loans and real estate properties. In computing income/(loss) by
operating segment, the following items were considered in the Corporate and
Other category: interest expense, payroll and administrative expenses not
directly attributable to other segments and financing costs. Corporate
assets are principally investment in land, cash, furniture, fixtures and
equipment, receivables and deferred charges.
Operating results and other financial data are presented for the principal
business segments of the Company for the year ended August 31, 1999 and
eight months ended August 31, 1998. The manufactured housing segment began
in 1998 with the acquisition of Walden Woods. Prior to that time, the
Company's real estate investment activities would be considered a single
segment. Accordingly, no segment information is presented for 1997.
<TABLE>
<CAPTION>
Year ended August 31, 1999
- --------------------------
Manufactured Corporate
Housing Residential and Other Consolidated
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Lot rental income $ 177,046 $ -- $ -- $ 177,046
Manufactured home sales 110,090 -- -- 110,090
Manufactured home cost of goods sold (96,859) -- -- (96,859)
Interest and other 1,225 -- 106,908 108,133
Loss on sale of loans -- (48,658) -- (48,658)
Gain on sale of real estate -- 245,474 -- 245,474
----------- ----------- ----------- -----------
Total revenue 191,502 196,816 106,908 495,226
Net income (loss) $ (97,344) $ 167,785 $(2,362,767) $(2,292,326)
Depreciation $ 62,606 $ -- $ 108,744 $ 171,350
Identifiable assets $ 3,530,992 $ 3,155,816 $ 1,806,605 $ 8,493,413
Capital expenditures $ 967,036 $ 2,187,454 $ 45,209 $ 3,199,699
</TABLE>
31
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - SEGMENT REPORTING - CONTINUED
<TABLE>
<CAPTION>
Eight Months ended August 31, 1998
- -----------------------------------
Manufactured Corporate
Housing Residential and Other Consolidated
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Lot rental income $ 46,777 $ -- $ -- $ 46,777
Interest and other -- -- 114,772 114,772
Gain on sale of loans -- 82,073 -- 82,073
Loss on sale of real estate -- (22,846) -- (22,846)
------------ ------------ ------------ ------------
Total revenue 46,777 59,227 114,772 220,776
Net income (loss) $ 22,110 $ 20,439 $ (2,228,077) $ (2,185,528)
Depreciation $ 8,000 $ -- $ 53,290 $ 61,290
Identifiable assets $ 1,819,768 $ 4,294,166 $ 4,641,790 $ 10,755,724
Capital expenditure $ 1,771,393 $ 2,103,842 $ 174,951 $ 4,050,186
</TABLE>
32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
RMC, predecessor to the Company, terminated the services of its
existing independent public 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 reportable 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. There have been no reportable
disagreements between the Company and Grant Thornton LLP.
PART III
ITEM 9. 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 46 President and Chief Executive Officer, Chairman
Mark J. Teinert 45 Secretary and Treasurer
David E. Wentsch 47 Director
Richard Bergner 68 Director
Raymond Wicki 55 Director
Susan M. Stein 40 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 analysis, tax lien certificate
acquisition and 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.
Dr. Raymond Wicki has been a director of the Company since August
1998. Prior to such time and since April 1998, Mr. Wicki was a director of
RMC. From 1990 to present, Dr. Wicki has been and currently is the C.E.O. of
Bank Von Graffenried, a family-owned private bank in Berne, Switzerland. From
1983 to 1990, Mr. 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
33
<PAGE>
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.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth the compensation paid and accrued and
options granted to 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 1999 $132,000 0 0
President & CEO 1998 132,000 5,000 10,000
1997 75,000 5,000 260,000
Mark J. Teinert 1999 126,000 0 0
Secretary/Treasurer 1998 126,000 5,000 10,000
1997 75,000 0 250,000
David E. Wentsch 1999 48,000 0 0
Vice President & Director 1998 96,000 5,000 10,000
1997 55,333 5,000 110,000
</TABLE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/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 E. Wentsch 10,000 20% 4.25 March 2003
</TABLE>
34
<PAGE>
No options were granted in 1999 that remain outstanding at August 31,
1999. Options were granted in 1998 to individuals by RMC pursuant to individual
stock option grants. Such options have been 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 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets fourth information as of August 31, 1999 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.
35
<PAGE>
<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
Michael J. Pilgrim 231,667 3% 541,667 6%
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Mark J. Teinert 221,667 3% 521,667 6%
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
David E. Wentsch -0- -- 120,000 1%
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Richard Bergner -0- -- 10,000 --
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Dr. Raymond Wicki 3,788 -- 10,000 --
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Susan M. Stein -0- -- 20,000 --
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Directors and executive officers as a group 457,122 7% 1,227,122 14%
(6 persons)
Cede & Co. (2) 4,169,365 56% -- --
</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.
(2) Common stock held in street name by various brokerage firms
The Company is not aware of any arrangement which might result in a change
in control in the future.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1994, Royal Mortgage Corporation entered into a ten year lease
agreement for its Arlington, Texas office. Two of the executive officers of the
Company personally guaranteed this lease agreement. However, in connection with
the Company's downsizing efforts, this lease agreement was terminated in August
1999. All obligations under this agreement, including the guarantees, were
cancelled.
36
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
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.*
4.1 Specimen Common Stock Certificate*
4.2 8 1/2% Convertible Senior Debenture due 2000 (filed as Exhibit 4.1 to
Form 10-QSB for the fiscal quarter ended February 28, 1999)
</TABLE>
* filed as exhibits with the same numbers indicated above on Form 10-SB
and incorporated herein by reference
(b) Reports on Form 8-K The
Company did not file any reports on Form 8-K during the fourth quarter
of fiscal 1999.
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ROYAL FINANCIAL CORPORATION
---------------------------
(Registrant)
By /s/ Michael J. Pilgrim
------------------------------------
Michael J. Pilgrim, President & CEO
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: November 15, 1999 /s/ Michael J. Pilgrim
------------------------------------
Michael J. Pilgrim, President & CEO
Date: November 15, 1999 /s/ Mark J. Teinert
------------------------------------
Mark J. Teinert, Secretary/Treasurer
Date: November 15,1999 /s/ Susan M. Stein
------------------------------------
Susan M. Stein, Vice President - Finance
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 315,927
<SECURITIES> 0
<RECEIVABLES> 2,384,794<F1>
<ALLOWANCES> 0
<INVENTORY> 831,328
<CURRENT-ASSETS> 1,369,480
<PP&E> 251,014<F2>
<DEPRECIATION> (122,169)
<TOTAL-ASSETS> 8,493,413
<CURRENT-LIABILITIES> 1,400,265
<BONDS> 1,290,000<F3>
0
0
<COMMON> 7,464
<OTHER-SE> 7,085,684
<TOTAL-LIABILITY-AND-EQUITY> 8,493,413
<SALES> 3,039,097<F4>
<TOTAL-REVENUES> 550,329
<CGS> 2,832,097<F5>
<TOTAL-COSTS> 2,832,097
<OTHER-EXPENSES> 2,842,655<F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169,010
<INCOME-PRETAX> (2,292,326)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,292,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,292,326)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
<FN>
<F1>INCLUDES MORTGAGE LOAN PORTFOLIO, NET
<F2>OFFICE PP&E ONLY
<F3>8 1/2% SENIOR CONVERTIBLE DEBENTURES DUE MARCH 2000
<F4>INCLUDES NET SALES PROCEEDS FROM INVESTMENT PROPERTIES AND MANUFACTURED HOME
SALES
<F5>INCLUDES THE COST BASIS AT DATE OF SALE OF INVESTMENT PROPERTIES AND
MANUFACTURED HOMES
<F6>INCLUDES OPERATING EXPENSES AND OTHER EXPENSES, NET
</FN>
</TABLE>
