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FORM 10-QSB
UNITED STATES
SECURIITES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended February 28, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number
ROYAL FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
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Nevada 13-3961109
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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1000 Ballpark Way, Suite 210, Arlington, Texas 76011
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(Address of principal executive offices)
(817) 861-4000
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(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changes since last
report)
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 No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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 ISSUERS
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
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Transitional Small Business Disclosure Format (Check one): Yes No X
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Interim unaudited consolidated financial statements as of February 28,
1999 and for the six month and three month periods ended February 28, 1998
and 1999 are attached hereto. These financial statements include the accounts
of the Company and all of its subsidiaries after eliminating all material
inter-company accounts and transactions. They reflect all adjustments that the
Company considers necessary for a fair presentation of the financial position at
such date and the results of operations and cash flows for those periods.
Results of operations for the six months ended February 28, 1999 are not
necessarily indicative of the results that may be expected for the entire year.
It is suggested that these financial statements be read in conjunction with the
consolidated financial statements and the related notes thereto included in the
Company's Form 10-SB as filed with the Securities and Exchange Commission in
November, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's unaudited financial statements and notes thereto included herein. 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 the 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.
OVERVIEW
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.
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 commercial non-performing mortgages, distressed residential properties
purchased at foreclosure sale auctions, tax lien certificates which result from
unpaid property taxes owed to municipal and county taxing authorities and
ownership and operation of a manufactured housing community in Florida.
SOURCES OF REVENUES
Currently, the majority of the Company's net revenues is derived from
net gains and/or losses from the disposition of investment properties and lot
rental income from the Company's manufactured housing community in Florida. In
addition, substantial revenues have been derived from interest earned on short
term investments. Due to the capital nature of many of the Company's
investments, the timing of cash flows from dispositions as well as funds needed
for investment opportunities which may arise has a certain degree of
uncertainty. Management has concluded that the most prudent use of
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the Company's cash reserves at this time is in low risk investments that are
readily convertible into cash. In addition to the current sources of revenue
discussed above, the Company will realize revenues from the sale of new
manufactured homes. As the Company completes expansion and development of
additional manufactured homesites, the Company will purchase model homes
directly from the Manufacturer and sell the homes to persons that decide to
live in the community and rent a lot from the Company.
RESULTS OF OPERATIONS - THREE MONTHS ENDED FEBRUARY 28, 1999 AND 1998
Total revenues increased approximately $186,000 or 357%, to $238,225
for the three months ended February 28, 1999, as compared to $52,117 for the
three months ended February 28, 1998. The increase in gain on sale of real
estate of approximately $155,000 is primarily attributable to: (i) the fact that
the Company did not yet have title to investment properties in early 1998 (they
were purchased as loans) and, therefore, was not in a position to market the
properties during the three months ended February 28, 1998; (ii) more direct
real estate purchases in 1998 (the Company obtains title to the properties at
the time of purchase) and (iii) the age of the portfolio - several loans
purchased in 1997 were foreclosed upon in 1998 and the properties sold in the
three months ended February 28, 1999. The increase in lot rental income of
$43,900 is attributable to the acquisition of Walden Woods Retirement Village, a
manufactured housing community in Florida, in June 1998, providing a new source
of revenue for the Company.
Total expenses decreased approximately $199,000 or 23%, to $648,676 for the
three months ended February 28, 1999, as compared to $847,741 for the three
months ended February 28, 1998. The decrease in interest expense of
approximately $292,000 is attributable to $8,560,000 of 8 1/2% Senior
Convertible Debentures due March 2000 being converted into common stock of the
Company during 1998. The increase in salaries and benefits of approximately
$78,000 is primarily attributable to four additional personnel being hired in
1998. Two of the additional personnel hired in 1998 were terminated in January
1999 due to a shift in the Company's investment strategy and utilization of
existing personnel. The decrease in professional fees of approximately $68,000
is primarily due to fees incurred during the three months ended February 28,
1998 to collect on a pool of loans purchased in 1997. Contract labor expense
decreased $31,700 due to an attorney being hired in 1998 who had previously been
paid on a contract basis. The increase in promotional expenses of approximately
$40,000 is primarily 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 quarter. Travel and lodging expense decreased approximately
$50,000 due to the shareholder meeting held in Florida in January, 1998. The
increase in general and administrative expense of approximately $27,000 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 quarter in 1998
due to the acquisition of Walden Woods in June 1998. Depreciation expense
increased approximately $19,000 due to the acquisition of Walden Woods as well
as leasehold improvements and other office furniture and equipment purchased in
1998. The increase in taxes - payroll and other is primarily due to the staffing
changes discussed above and real estate taxes incurred as holding costs on the
Company's real estate investments. Real property maintenance expense increased
approximately $33,000 due to the maintenance of Walden Woods which was acquired
in June 1998 and the maintenance of the Company's other investment properties
for a longer period in the current quarter than in the comparable prior year
quarter.
RESULTS OF OPERATIONS - SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998
Total revenue increased approximately $208,000, or 120%, to $380,972
for the six months ended February 28, 1999, as compared to $173,384 for the six
months ended February 28, 1998. A decrease in interest income of approximately
$77,000 is primarily attributable to less idle cash due to increased investment
activities including the acquisition and expansion of Walden Woods , the
purchase of model manufactured homes and other investment activities. The
increase in gain on sale of real estate of approximately $190,000 is primarily
due to: (i) the fact that the Company did not yet have title to investment
properties in early 1998 (they were purchased as loans) and , therefore, was not
in a position to market the properties during the six months ended February 28,
1998; (ii) more direct real estate purchases in 1998 (the Company obtains title
to the properties at the time of purchase) and (iii) the age of the portfolio -
several loans purchased in 1997 were foreclosed upon in 1998 and the properties
sold in the six months ended February 28, 1999. The increase in lot rental
income of $87,571 is attributable to the acquisition of Walden Woods Retirement
Village, a manufactured housing community in Florida, in June 1998, providing a
new source of revenue for the Company.
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Total expenses decreased approximately $227,000 or 16%, to
$1,186,445 for the six months ended February 28, 1999, as compared to
$1,413,214 for the six months ended February 28, 1998. The decrease in
interest expense of approximately $571,000 is attributable to $8,560,000 of 8
1/2% Senior Convertible Debentures due March 2000 being converted into common
stock of the Company during 1998. The increase in salaries and benefits of
approximately $132,000 is primarily attributable to four additional personnel
being hired in 1998. Two of the additional personnel hired in 1998 were
terminated in January 1999 due to a shift in the Company's investment
strategy and utilization of existing personnel. The decrease in professional
fees of approximately $45,000 is primarily due to fees incurred during the
six months ended February 28, 1998 to collect on a pool of loans purchased in
1997. Contract labor expenses decreased $54,000 due to an attorney being
hired in 1998 who had previously been paid on a contract basis. The increase
in promotional expenses of approximately $111,000 is primarily 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. Travel and
lodging expense decreased approximately $75,000 primarily due to the
shareholder meeting held in Florida in January, 1998. The increase in general
and administrative expense of approximately $32,000 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 $52,000 due to the acquisition of Walden Woods as well as
leasehold improvements and other office furniture and equipment purchased in
1998. The increase in insurance expense of approximately $23,000 is due to:
(i) insurance carried on Walden Woods; (ii) insurance on both the Arlington,
Texas and Naples, Florida offices during the current year and (iii) insurance
carried on more investment properties for a longer period of time in the
current year. The increase in taxes payroll and other of approximately
$113,000 is primarily due to the staffing changes discussed above and real
estate taxes incurred as holding costs on the Company's real estate
investments. Real property maintenance expense increased approximately
$53,000 due to the maintenance of Walden Woods which was acquired in June
1998 and the maintenance of the Company's other investment properties for a
longer period in the current year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $1.4 million and $3.9 million at
February 28, 1999 and August 31, 1998, respectively. The decrease is
attributable to approximately $1.6 million of cash used in operating activities,
approximately $716,000 and $119,000 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 $350,000 to
certain consulting firms who have been engaged to assist the Company in
obtaining financing and establishing a market presence, and purchases of model
manufactured homes for Walden Woods totalling approximately $419,000. The
Company utilized $716,000 of cash flow primarily in the following investing
activities: (i) the purchase of residential and commercial properties ($1.2
million); (ii) the purchase of mortgage loans ($437,000); (iii) expansion of the
Walden Woods park development ($566,000); (iv) investment in Florida tax lien
certificates ($232,000) and (v) deposits made on the purchase of land in
Florida ($111,000) on which the Company plans to develop additional manufactured
housing communities.
The Company has entered into certain agreements and/or letters of
intent, as discussed below, to purchase various parcels of land in the state of
Florida. The Company intends to develop this land into manufactured housing
retirement communities over the next six to nine months.
The Company entered into an agreement on March 25, 1999 to purchase
approximately 65 acres in Charlotte County, Florida for $725,000. The
transaction is scheduled to close on May 17, 1999. The agreement contains a
provision that if the Company determines, at its discretion, that the property
is not suitable for its intended use, the Company has the right to terminate the
agreement.
The Company signed a letter of intent on March 18, 1999 to purchase 15
acres located in Punta Gorda, Florida. The purchase price is $172,500 and is
conditioned upon receiving the planning and zoning approvals for the Company's
planned use of the site. In addition, there is a 60-day due diligence period
during which time the Company has the right to cancel the letter of intent for
any reason.
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.
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The Company is currently offering up to $50,000,000 8 1/2% Senior Notes
due 2002, ("Notes") under Regulation S of the Securities Act of 1933. For each
$10,000 of Notes purchased, the Company will issue warrants to purchase 1,000
shares of common stock of the Company at $4.00 per share for no additional
consideration. Application has been made to list the Notes on the Luxembourg
Stock Exchange. The Company anticipates this offering to close on May 7, 1999.
Obtaining the above-mentioned financing is 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, if the above financing is successful, the net proceeds of
the offering along with existing cash will be sufficient to meet the Company's
acquisition, development, expansion, capital expenditure and working capital
needs for at least the next twelve months. In order to finance certain strategic
acquisition opportunities, the Company may from time to time incur additional
short and long-term bank indebtedness and may issue equity or debt securities,
the availability and terms of which will depend on market and other conditions.
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.
On March 23, 1999 the Company entered into agreements with certain
consulting firms to provide financial public relations and marketing and other
corporate advisory services geared to assist the Company and its growth. In
February, 1999 the Company granted the principals of one firm options to
purchase 150,000 shares of the Company's common stock at a price equal to the
closing price of the Company's stock on February 1, 1999. The options have a
term of five years. In addition, the Company will 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. In accordance with Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) the
Company will record a charge to earnings in an amount equal to the fair
value of the options at the dated granted over the term of the service
agreement.
PART II - OTHER INFORMATION
ITEM 1. 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 financial position or results of operations. To the best of
management's knowledge, there is no pending or threatened litigation against the
Company or any of its subsidiaries.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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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.*
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3.10 By Laws of Walden Woods of Sugarmill, Inc.*
3.11 Articles of Incorporation of Walden Woods of Sugarmill Sales, Inc.*
4.1 8 1/2% Convertible Senior Debenture due 2000 (filed herewith)
27 Financial Data Schedule (filed herewith)
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* filed as exhibits with the same numbers as indicated above on Form
10-QSB and incorporated herein by reference.
(b) No reports on Form 8-K have been filed during the period for
which this report is filed
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROYAL FINANCIAL CORPORATION
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(Registrant)
Date April 13, 1999 /s/ Michael J. Pilgrim
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Michael J. Pilgrim, President & CEO
Date April 13, 1999 /s/ Mark J. Teinert
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Mark J. Teinert, Secretary/Treasurer
Date April 13, 1999 /s/ Susan M. Stein
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Susan M. Stein, V.P. - Finance
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ROYAL FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
ASSETS
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February 28, August 31,
1999 1998
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(Unaudited)
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CURRENT ASSETS:
Cash and Cash Equivalents $1,442,429 $3,912,255
Prepaid Expenses and Other Current Assets 1,039,167 176,709
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Total Current Assets
2,481,596 4,088,964
INVESTMENTS:
Mortgage Loan Portfolio, net 3,045,674 2,808,902
Real Estate Portfolio, net 1,081,172 1,357,744
Other 261,172 164,156
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Total investments 4,388,608 4,330,802
PROPERTY AND EQUIPMENT, NET 2,830,422 2,198,979
OTHER ASSETS 230,494 136,979
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Total Assets $9,931,120 $10,755,724
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 61,117 $ 80,250
8 1/2% SENIOR CONVERTIBLE DEBENTURES DUE MARCH 2000 1,290,000 1,290,000
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Total Liabilities 1,351,117 1,370,250
COMMITMENTS
STOCKHOLDERS' EQUITY
Common Stock, $.001 par value; authorized 50,000,000 shares;
issued and outstanding, 7,464,382 shares $ 7,464 7,464
Additional Paid-In Capital 14,062,657 14,062,657
Accumulated Deficit (5,490,118) (4,684,647)
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Total Stockholders' Equity 8,580,003 9,385,474
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Total Liabilities and Stockholders' Equity $9,931,120 $10,755,724
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The accompanying notes are an integral part of these financial statements.
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ROYAL FINANCIAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended Six Months Ended
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2/28/99 2/28/98 2/28/99 2/28/98
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Interest Income $ 39,790 $ 54,309 $ 78,382 $ 155,863
Gains (losses) on sales
of operating assets
Loans -- (2,192) -- (2,192)
Real Estate 155,415 -- 210,159 19,713
Lot rental income 43,900 -- 87,571 --
Other (880) 4,860
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TOTAL REVENUE 238,225 52,117 380,972 173,384
EXPENSES
Interest 49,191 340,945 89,131 659,798
Salaries and benefits 162,427 83,666 283,796 151,686
Professional fees 94,922 162,454 138,001 182,796
Contract labor -- 31,700 -- 54,000
Promotional 44,230 4,693 116,130 4,693
Travel and lodging 7,743 58,133 12,501 87,079
General and administrative 67,083 39,661 103,161 70,907
Depreciation 37,966 19,249 84,263 32,657
Office rent 33,938 36,543 67,877 61,494
Insurance 13,608 1,346 25,258 2,715
Taxes - payroll and other 64,904 22,872 145,691 32,293
Real property maintenance 34,625 1,740 54,306 1,740
Due diligence 38,039 44,739 66,328 71,356
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TOTAL EXPENSES 648,676 847,741 1,186,443 1,413,214
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NET LOSS $ (410,451) $ (795,624) $ (805,473) $(1,239,830)
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Loss per share - basic and diluted
$ (0.05) $ (.32) $ (0.11) $ (.51)
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Weighted average shares outstanding 7,464,382 2,484,923 7,464,382 2,446,252
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The accompanying notes are an integral part of these financial statements.
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ROYAL FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
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Six Months Ended
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2/28/99 2/28/98
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Cash flows from operating activities
Net loss $ ( 805,471) $(1,239,830)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 84,263 32,591
Amortization of debenture costs 25,055 41,407
Write off of loan --- 11,368
Gain on sale of real estate ( 210,159) ---
Gain on disposition of loans --- (9,177)
Changes in operating assets and liabilities
Prepaid expenses and other assets ( 709,869) ( 203,143)
Accounts payable and accrued liabilities ( 19,133) ( 252,001)
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Net cash used in operating activities (1,635,314) (1,618,785)
Cash provided by (used in) investing activities
Purchase of land ( 111,358) ---
Investment in park development ( 565,674) ---
Expenditures for property and equipment ( 38,674) ( 171,543)
Purchases of tax lien certificates ( 232,143) ---
Principal collections on tax lien certificates 97,901 385,713
Purchases of loans ( 437,127) (3,590,060)
Collections on loans 86,685 123,465
Sale of real estate properties 1,635,973 ---
Purchases of real estate properties (1,188,161) ---
Sale of other investments 36,636 ---
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Net cash used in investing activities ( 715,942) (3,252,425)
Cash provided by (used in) financing activities
Sale of common stock, net of offering costs --- 1,337,080
Additional stock offering costs --- (44,930)
Debentures issued --- 150,000
Expenditures for proposed offering ( 118,570) ---
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Net cash (used in) provided by financing activities ( 118,570) 1,442,150
Net decrease in cash and cash equivalents (2,469,826) (3,429,060)
Cash and cash equivalents, beginning of period 3,912,255 6,167,633
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Cash and cash equivalents, end of period $1,442,429 $2,738,573
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The accompanying notes are an integral part of these financial statements.
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ROYAL FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Royal Financial Corporation (RFC" or the "Company") is a diversified
real estate investment company specializing in the acquisition and
development of retirement manufactured housing communities, the acquisition
of single-family residential properties and tax lien certificates, and to a
lesser extent, the purchase of non-performing and under-performing mortgage
loans at a discount from the balances of the loans. Most of the Company's
current investment properties are located in the state of Florida.
The Company came into being in August 1998 when Royal Mortgage
Corporation and Davenport Ventures, Inc. merged and the name was changed to
Royal Financial Corporation. The controlling shareholder group of both companies
prior to the merger as substantially the same. Accordingly, the merger was
treated as a combination of entities under common control. The results of
operations reflected in the accompanying consolidated statements of operations
for 1998 include only Royal Mortgage Corporation due to Davenport Ventures, Inc.
having been a non-operating company until June, 1998 when it acquired Walden
Woods Retirement Village, a manufactured housing community in Homosassa,
Florida.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 (b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of
the unaudited interim financial statements have been included. Operating results
for interim periods reflected are not necessarily indicative of the results that
may be expected for a full fiscal year. These financial statements should be
read in conjunction with the financial statements and notes thereto for the year
ended August 31, 1998 included in the Company's Form 10-SB which was filed in
November, 1998.
NOTE B - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances,
excluding those resulting from investments by and distributions to owners. SFAS
No. 130 requires that comprehensive income be presented beginning with net
income, adding the elements of comprehensive income not included in the
determination of net income, to arrive at comprehensive income. SFAS No. 130 is
effective for fiscal years and interim periods beginning after December 15,
1997. There were no elements of comprehensive income which were not included in
the determination of net income for the six months ended February 28, 1999.
Accordingly, the adoption of SFAS 130 had no impact on the presentation of the
Company's results of operations or financial position.
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"
financial statements.
<PAGE>
NOTE C - LOSS PER SHARE
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). In accordance
with SFAS 128, the Company computes basic earnings (loss) per common share based
on the weighted average number of common shares outstanding. Diluted earnings
per share is computed based on the weighted average number of common shares
outstanding plus the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. No effect has
been given to convertible debentures, stock options or warrants because the
effect of assumed conversion or exercise is anti-dilutive.
<PAGE>
NOTE D - CASH FLOW INFORMATION
Supplemental information on cash flows and noncash investing and
financing transactions is as follows:
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Supplemental Cash Flow Information:
Interest paid $ 54,825
Supplemental Schedule of Non-cash
Investing and Financing Activities:
Real estate acquired through foreclosure of loans 111,489
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NOTE E - STOCK OPTION TRANSACTIONS
On February 1, 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. These options expire five years from date granted.
As of February 28, 1999 there were a total of 1,648,667
options outstanding at a weighted average exercise price of $2.14.
NOTE F - 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.
On March 23, 1999 the Company entered into agreements with certain
consulting firms to provide financial public relations and marketing and
other corporate advisory services geared to assist the Company and its
growth. In February, 1999 the Company granted the principals of one firm
options to purchase 150,000 shares of the Company's common stock, as
discussed in NOTE E above. The options have a term of five years. In
addition, the Company will 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. In
accordance with Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company will record
a charge to earnings in an amount equal to the fair value of the options at
the date granted over the term of the service agreement.
NOTE G - ADDITIONAL FINANCING
The Company is currently offering up to $50,000,000 8 1/2% Senior Notes
due 2002, ("Notes") under Regulation S of the Securities Act of 1933. For each
$10,000 of Notes purchased, the Company will issue warrants to purchase 1,000
shares of common stock of the Company at $4.00 per share for no additional
consideration. Application has been made to list the Notes on the Luxembourg
Stock Exchange. The Company anticipates this offering to close on May 7, 1999.
<PAGE>
EXHIBIT 4.1
DEBENTURE SERIAL NUMBER
000195
-----------------------
ROYAL MORTGAGE CORPORATION
8 1/2 % CONVERTIBLE SENIOR DEBENTURE DUE 2000
March 17, 1997
Royal Mortgage Corporation, a Texas Corporation organized and
existing under the laws of Texas of the United States of America (herein called
the "Company"), for value received, hereby promises to pay to the order of
______________________________________________ or registered assigns the
principal amount of One Hundred Thousand ($100,000.00) Dollars on March 31,
2000, in securities of the Company or in such coin or currency of the United
States of America as at the time of payment shall be legal tender for public and
private debts, at the principal office of the Company, in Arlington, Texas, USA
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) at said office, in like coin or currency, on the unpaid portion of said
principal amount from the date hereof, payable semi annually on October 1 and
April 1 at the rate of eight and one half (8.5%) percent per annum until March
31, 2000. This Debenture may be converted in whole or in part at the election of
either the Company or the Debenture Holder.
1
<PAGE>
ss. 1. The Agreement; Security; Exchanges and Transfers of the
Debenture.
ss. 1.1. The Agreement. This Debenture (herein called the
"Debenture") is issued pursuant to a Subscription Agreement dated April 18, 1997
(herein called the "Agreement") between the Company and
_______________________________________________ (Debenture Holder).
ss. 1.2. Register; Transfer or Exchange of Debentures. The Company
shall keep as its Company office maintained in Arlington, Texas a register in
which the Company shall provide for the registration of Debentures and for the
registration of transfer of Debentures.
ss. 1.3. Loss, Theft, Destruction or Mutilation of Debentures. Upon
receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of any Debenture and, in the case of any such loss,
theft or destruction, upon receipt of any indemnity bond in such reasonable
amount as the Company may determine (or if such Debenture is held by the
original Debenture Holder, of an unsecured indemnity agreement reasonably
satisfactory to the Company) or, in the case of any such mutilation, upon
surrender of an cancellation of such Debenture, the Company will make and
deliver, in lieu of such lost, stolen, destroyed or mutilated Debenture, a new
Debenture of like tender and unpaid principal amount and dated as of the date to
which interest has been paid on the Debenture so lost, stolen, destroyed or
mutilated.
2
<PAGE>
ss. 1.4. Registered Holders. The Company may deem and treat the
person in whose name any Debenture is registered as the absolute owner and
holder of such Debenture for the purpose of receiving payment of the principal
of and interest on such Debenture and for the purpose of any notices, waivers or
consents thereunder, whether or not such Debenture shall be overdue, and the
Company shall not be affected by notice to the contrary. Payments with respect
to any Debenture shall be made only to the registered Debenture Holder thereof.
ss. 2. Surrender of the Debenture.
ss. 2.1. Surrender of Debentures. The Company may, as a condition of
payment of all or any of the principal of, and interest on, this Debenture or
its conversion, in whole or in part, require the Debenture Holder to present
this Debenture for notation of such payment and, if this Debenture be paid in
full or converted at the option of the Company as herein provided, require the
surrender hereof.
ss. 3. Covenants.
ss. 3.1. To Pay Principal and Interest. The Company covenants and
agrees that so long as this Debenture shall be outstanding it will pay principal
and interest as herein provided and in accordance with the Company's agreement,
with both the custodian, Boyd R. Branch, Attorney at Law and paying agent bank,
Von Graffenried AG.
3
<PAGE>
ss. 3.2. To Keep Books. The Company will keep proper books of record
and accounts in which full, true and correct entries will be made of its
transactions in accordance with generally accepted accounting principals.
ss. 3.3. Payment of Taxes; Corporate Existence; Maintenance of
Properties. The Company will pay and discharge promptly or cause to be paid and
discharged promptly all taxes, assessments and governmental charges or levies
imposed upon its income or profits or upon any of its property, real, personal
or mixed, or upon any part thereof, before the same shall become in default, as
well as all lawful claims for labor, materials and supplies which, if unpaid,
might by law become a lien or charge upon its property; provided, however, that
the Company shall not be required to pay any such tax, assessment, charge, levy
or claim if the amount, applicability or validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books reserves (provided for and segregated to the extent
required by generally accepted accounting principles) deemed by it adequate with
respect thereto;
(a) maintain and keep or cause to be maintained and kept its
properties in good repair, working order and condition, and from time to time
make or cause to be made all needful and proper repairs, renewals, replacements
and improvements so that the business carried on in connection therewith may be
properly and advantageously conducted at all times.
4
<PAGE>
ss. 3.4. To Insure. The Company will maintain insurance in such
extent and against such hazards and liabilities as is commonly maintained by
companies similarly situated.
ss. 4. Conversion of Debentures.
ss. 4.1. Rights to Convert. The Company and/or the Debenture Holder
shall have the right, exercisable at any time, to convert this Debenture into
Common Stock of the Company as set forth in Section 4.2 below. The Company shall
give forty-five (45) days written notice to the Debenture Holder hereof of such
conversion and the Debenture Holder shall give forty-five (45) days written
notice to the Company in order to convert.
This Debenture shall be deemed to have been converted immediately
prior to the close of business on the day the Company designates as the
effective conversion day. At such time the rights of the Debenture Holder shall
cease and the persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holders of such
Common Stock at such time. The Company shall issue and shall deliver a
certificate or certificates for the number of full shares of Common Stock
issuable upon conversion, together with payment in lieu of any fraction of a
share, as provided in ss. 4.3.
ss. 4.2. Conversion Price. In the event the Company elects to
convert this Debenture, the Holder will receive shares of Common Stock of the
Company at a price equal to a twenty percent (20%) discount to the Initial
Public Offering price.
5
<PAGE>
If, due to some unforseen circumstance(s), the Company is unable to complete an
Initial Public Offering of its shares prior to maturity of the Convertible
Senior Debentures the Debenture Holder may, at his choosing, elect to; (1)
redeem his Debentures or (2) convert his Debentures into shares of the private
Company at a price per share equal to a 20% discount to the value of the shares
of the private Company as determined by an independent arms length evaluation.
ss. 4.3. Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of any Debentures. If more than one Debenture is
converted the number of full shares which shall be issuable upon conversion
thereof shall be computed on the basis of the aggregate principal amount of the
Debenture so converted. Instead of any fractional share of Common Stock which
would otherwise be issuable upon conversion of any Debenture, the Company shall
pay a cash adjustment in respect of such fraction.
ss. 4.4. Taxes on Conversion. The Company shall pay any and all
taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of Debenture pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that of the holder of the Debenture to be converted, and no such
issuance or delivery shall be made unless and until the person requesting such
issuance has paid to the Company the amount of any such tax, or has established,
to the satisfaction of the Company, that such tax has been paid.
6
<PAGE>
ss. 4.5. Covenant as to Stock. The Company convenants that all
shares of Common Stock which shall be issued upon conversion of Debentures shall
be fully paid and nonassessable and, except as provided in ss. 4.4, the Company
will pay all taxes, liens and charges, including any legal or accounting fees
and expenses with respect to the issuance thereof.
ss. 5. Senior Debt.
(a) "Senior Debt" means all indebtedness for principal and
interest, including interest accruing during the period of any bankruptcy and
other amounts payable, for money borrowed (but not trade debt or other accounts
payable).
(b) The Company covenants and agrees, and each Debenture
Holder, by his acceptance hereof likewise covenants and agrees that the payment
of the principal of, interest and all other amounts payable on the Debentures
shall be senior to any other debt of the Company in accordance with the
provisions of this ss. 5 and each Debenture Holder, whether upon original issue
or upon transfer or assignment thereof, accepts and agrees to be bound by such
provisions.
(c) Upon any payment or distribution of assets or securities
of the Company of any kind or character, whether in cash, property or
securities, upon any dissolution or winding up or total or partial liquidation
or reorganization of the Company whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all Senior Debt of
the Company shall first be paid in cash or cash equivalents.
7
<PAGE>
(d) Upon any payment or distribution of assets or securities
of the Company referred to in this ss. 5, the Debenture Holders shall be
entitled to rely upon any order or decree of a court of competent jurisdiction
in which such dissolution, winding up, liquidation or reorganization preceedings
are pending, and upon a certificate of the receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making any such payment or
distribution, delivered to the Debenture Holders for purpose of ascertaining the
persons entitled to participate in such distribution, the Holders of Senior Debt
and other indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this ss. 5.
(e) The provisions of this ss. 5 are intended to be for the
benefit of, and shall be enforceable directly by, the holders of Senior Debt of
the Company.
ss. 6. Events of Default.
ss. 6.1. Events of Default. If one or more of the following events,
herein called Events of Default, shall happen for any reason whatsoever and
whether such happening shall be voluntary or involuntary or come about or be
effected by operation of law or pursuant to or in compliance with any judgment,
decree or order of any court of any order, rule or regulation of any
administrative or governmental body) and be continuing:
8
<PAGE>
(a) Default shall be made in the payment of the principal of
any Debenture, when and as the same shall become due and payable, whether at
maturity or at a date fixed for prepayment or by acceleration or otherwise; or
(b) Default shall be made in the payment of any installment of
interest on any Debenture according to its tenor when and as the same shall
become due and payable and such default shall continue for a period of 30 days;
or
(c) Default shall be made in the due observance or performance
of any covenant, condition or agreement on the part of the Company contained in
this Debenture and such default shall continue for a period of 30 days; or
(d) The Company shall be adjudicated a bankrupt or insolvent,
or shall consent to the appointment of a receiver, trustee or liquidator of
itself or of any material part of its property, or shall admit in writing its
inability to pay its debts generally as they come due, or shall make a general
assignment for the benefit of creditors, or shall file a voluntary petition or
an answer seeking reorganization or arrangement in a proceeding under any
bankruptcy law (as now or hereafter in effect) or any answer admitting the
material allegation of a petition filed against the Company in any such
proceeding, or shall, by voluntary petition, answer or consent, seek relief
under the provisions of any other now existing or future bankruptcy or other
similar law providing for the reorganization or winding up of corporations, or
the Company or its directors or majority stockholders shall take action looking
to the dissolution or liquidation of the Company; or
9
<PAGE>
(e) An order, judgment or decree shall be entered by any court
of competent jurisdiction appointing, without the consent of the Company, a
receiver, trustee or liquidator of the Company or of any material part of its
property, and such receiver, trustee or liquidator shall not have been removed
or discharged within 90 days thereafter, or any material part of the property of
the Company shall, in any judicial proceeding, be sequestered and shall not be
returned to the possession of the Company within 90 days thereafter; or
(f) A petition against the Company in a proceeding under any
bankruptcy law (as now or hereinafter in effect) shall be filed and shall not be
dismissed within 30 days after such filing, or, in case the approval of such
petition by a court of competent jurisdiction is required, shall be filed and
approved by such a court as properly filed and such approval shall not be
withdrawn or the proceeding dismissed within 30 days thereafter, or if, under
the provisions of any other similar law providing for reorganization or winding
up of corporations and which may apply to the Company, any court of competent
jurisdiction, custody or control of the Company or of any material part of its
property and such jurisdiction, custody or control shall not be relinquished or
terminated within 30 days thereafter; or
(g) The Company shall (1) be declared in default in the
payment of principal or interest on any evidence of indebtedness for money
borrowed (other than the Debentures) and such default shall continue for more
than the period of grace, if any, therein specified, unless such default shall
have been cured or waived prior to such indebtedness becoming or being declared
to be due and payable prior to its stated maturity, or (2) default shall
continue for more than the period of grace, if any, therein specified, or (3)
default in the performance or observance of any other term,
10
<PAGE>
condition or agreement contained in any such evidence of indebtedness for money
borrowed or in any agreement relating thereto if as a result of such default
such evidence of indebtedness is declared to be due and payable prior to its
stated maturity; then, in any such event, any registered holder or Debenture
Holder may declare the Debenture or Debentures held by it or them to be
immediately due and payable and upon such declaration the same shall become and
be immediately due and payable, together with accrued interest thereon, anything
in the Debentures to the contrary notwithstanding.
ss. 6.2 Suits for Enforcement. In case any one or more of the Events
of Default specified in ss. 6.1 shall happen and be continuing, each Debenture
Holder which may, pursuant to the provisions of ss. 6.1, declare the Debenture
or Debentures held by it to be immediately due and payable, may proceed to
protect and enforce its rights by suit in equity, action at law and/or by other
appropriate proceeding, whether for the specific performance (to the extent
permitted by law) of any covenant or agreement contained in this Debenture, such
Debenture or in aid of the exercise of any power granted in this Debenture, such
Debenture, or may proceed to enforce the payment of such Debenture or to enforce
any other legal or equitable right of holder of such Debenture. If, pursuant to
the provision of ss. 6.1 or of this ss. 6.2, the Debenture Holder shall demand
payment thereof or take any action in respect of a default or an Event of
Default, the Company will forthwith give written notice, addressed as provided
in ss. 6.4, to the other Debenture Holders, specifying such action and the
nature of the default or Event of Default. Nothing contained in the ss. 6.2 or
in ss. 6.1 shall in any manner impair that absolute and unconditional right of
each Debenture Holder to receive payment of the principal of and interest, on
such Debenture when the same shall become due and payable in accordance with the
terms thereof, and to institute suit for the enforcement of such payment.
11
<PAGE>
ss. 6.3. Remedies Cumulative. No remedy herein conferred upon the
Debenture Holder is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing at law or in equity or by
statute or otherwise.
ss. 6.4 Remedies Not Waived. No course of dealing between the
Company and any Debenture Holder shall operate as a waiver of any right of such
Debenture Holder hereunder or under such Debenture, and no delay on the part of
such Debenture Holder in exercising any right hereunder or thereunder shall so
operate.
ss. 7. Costs of Collection. In case of a default in the payment of
any principal of or interest on this Debenture, the Company will pay to the
Debenture Holder hereof such further amount as shall be sufficient to cover the
costs and expenses of collection, including (without limitation) reasonable
attorneys' fees.
ss. 8. Legend. Each Debenture and share of Common Stock issued by
the Company upon conversion hereof, shall bear the following legend:
"The Securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or registered or
qualified under the "blue sky" laws of any State. The securities may not be
pledged, hypothecated, assigned, sold or transferred unless registered under
that Act and registered or qualified under the blue sky laws as may be
applicable or unless, in the opinion of counsel reasonably satisfactory to the
Company, exemptions from such laws are available."
12
<PAGE>
ss. 9. Covenants Bind Successors and Assigns. All covenants,
stipulations, promises and agreements in this Debenture contained by or on
behalf of the Company shall bind its successors and assigns, whether so
expressed or not. This Debenture may only be assigned by the Debenture Holder to
affiliates of the Debenture Holder.
ss. 10. Governing Law. This Debenture shall be governed by and
construed in accordance with the laws of Texas.
ss. 11. Notice. Any notice pursuant to this Debenture shall be made
by registered or certified mail:
If to the Debenture Holder at the address shown on the register
maintained by the Company pursuant to ss. 1.2 of this Debenture.
If to the Company, at the address of the Company:
Royal Mortgage Corporation
1000 Ballpark Way, Suite 210
Arlington, Texas 76011
13
<PAGE>
ss. 12 Headings. The headings of the sections and subsections of
this Debenture are inserted for convenience only and do not constitute a part of
this Debenture.
IN WITNESS WHEREOF, Royal Mortgage Corporation has caused this
Debenture to be signed in its corporate name by one of its officers thereunto
duly authorized and this Debenture to be dated as of the day and year first
above written.
ROYAL MORTGAGE CORPORATION
By: /s/ Michael J. Pilgrim
--------------------------
Michael J. Pilgrim
President/CEO
ROYAL MORTGAGE CORPORATION
By: /s/ Mark J. Teinert
--------------------------
Mark J. Teinert
Secretary/Treasurer
[SEAL]
State of Texas
County of Tarrant
This instrument was acknowledged before me on April 14, 1997 by Michael J.
Pilgrim and Mark J. Teinert, of Royal Mortgage Corporation, on behalf of said
corporation.
- - ------------------------------------- /s/ Diane Posey
DIANE POSEY -------------------------
[SEAL] Notary Public, State of Texas Notary Public's Signature
My Commission Expires
JANUARY 27, 1999
- - -------------------------------------
14
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS PERIOD ENDED
FEBRUARY 28, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 1,442,429
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 446,238
<CURRENT-ASSETS> 2,481,596
<PP&E> 3,072,318
<DEPRECIATION> (241,897)
<TOTAL-ASSETS> 9,931,120
<CURRENT-LIABILITIES> 61,117
<BONDS> 1,290,000
0
0
<COMMON> 7,464
<OTHER-SE> 8,572,539
<TOTAL-LIABILITY-AND-EQUITY> 9,931,120
<SALES> 210,159
<TOTAL-REVENUES> 380,972
<CGS> 169,508
<TOTAL-COSTS> 169,508
<OTHER-EXPENSES> 1,186,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,131
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (805,473)
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<NET-INCOME> (805,473)
<EPS-PRIMARY> (.11)
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