<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE
ACT
For the transition period from ____________
to ____________
Commission file number
----------------------
ROYAL FINANCIAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 13-3961109
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2000 E. Lamar Blvd., Suite 290, Arlington, Texas 76006
--------------------------------------------------------------------------------
(Address of principal executive offices)
(817) 861-4000
--------------------------------------------------------------------------------
(Issuer's telephone number)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed 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 /X/ No/ /
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:
7,474,382
---------------------------
Transitional Small Business Disclosure Format (Check one): Yes / / No /X/
<PAGE>
ROYAL FINANCIAL CORPORATION
Form 10-QSB
May 31, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets:
May 31, 2000 and August 31, 1999 3
Consolidated Statements of Operations:
Three-month and Nine-month Periods
Ended May 31, 2000 and 1999 4
Consolidated Statements of Cash Flows:
Nine-month Periods Ended May 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports 11
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 47,052 $ 315,927
Prepaid expenses and other current assets 245,297 222,225
Manufactured home inventory 783,422 831,328
------------ ------------
Total Current Assets 1,075,771 1,369,480
INVESTMENTS:
Land for future development or sale 1,422,576 1,098,997
Mortgage loan portfolio, net 2,308,112 2,384,794
Real estate portfolio, net 91,589 748,962
Tax lien certificates and other 22,060
------------ ------------
Total Investments 3,822,277 4,254,813
PROPERTY, PLANT AND EQUIPMENT-MANUFACTURED
HOUSING COMMUNITY, NET 2,626,000 2,697,299
OFFICE PROPERTY AND EQUIPMENT, NET 42,997 128,845
OTHER ASSETS 12,745 42,976
------------ ------------
Total Assets $ 7,579,790 $ 8,493,413
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 218,079 $ 110,265
8 1/2% Senior Convertible Debentures 1,290,000 1,290,000
------------ ------------
Total Current Liabilities 1,508,079 1,400,265
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.001 par value: authorized 50,000,000 shares;
issued and outstanding, 7,474,382 shares 7,474 7,464
Additional paid-in capital 14,064,647 14,062,657
Accumulated deficit (8,000,410) (6,976,973)
------------ ------------
Total Stockholders' Equity 6,071,711 7,093,148
------------ ------------
Total Liabilities and Stockholders' Equity $ 7,579,790 $ 8,493,413
============ ============
</TABLE>
3
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ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
5/31/00 5/31/99 5/31/00 5/31/99
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Gains (losses) on sales of operating assets
Loans $ - $ 5,930 $ (492) $ 5,930
Real estate (6,959) 29,359 45,924 239,518
Other repossessed assets - - - (3,652)
Lot rental income 54,770 44,375 151,360 131,946
Sales of manufactured homes 177,406 - 307,449 64,800
Other - 4,561 200 6,323
----------- ----------- ----------- -----------
225,217 84,225 504,441 444,865
Operating expenses
Cost of manufactured homes sold 173,289 - 295,457 58,050
Salaries and benefits 116,856 137,186 364,961 420,982
Professional fees 11,314 119,639 113,941 257,640
Promotional 35,706 99,749 75,736 215,879
Travel and lodging 8,548 1,674 16,472 14,175
General and administrative 27,934 39,285 100,933 142,446
Depreciation 12,953 45,127 42,078 129,390
Office rent (1,299) 30,267 25,747 98,144
Insurance 19,687 9,641 61,550 34,899
Real estate holding costs 20,845 23,928 67,689 78,234
Taxes - payroll and other 9,062 49,220 62,860 194,911
Due diligence expenses 129 13,440 3,490 79,768
Write down of manufactured housing assets 173,768 - 173,768 -
----------- ----------- ----------- -----------
608,792 569,156 1,404,682 1,724,518
----------- ----------- ----------- -----------
Operating loss (383,575) (484,931) (900,241) (1,279,653)
Other income (expense)
Interest income 6,027 14,678 14,599 93,060
Interest expense (31,588) (39,939) (111,395) (129,070)
Loss on sale of office property and equipment - - (26,400) -
Failed offering costs - (192,502) - (192,502)
----------- ----------- ----------- -----------
(25,561) (217,763) (123,196) (228,512)
----------- ----------- ----------- -----------
Net loss $ (409,136) $ (702,694) $(1,023,437) $(1,508,165)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (0.05) $ (0.09) $ (0.14) $ (0.20)
=========== =========== =========== ===========
Weighted average shares outstanding 7,474,382 7,464,382 7,469,783 7,464,382
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
4
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ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended
5/31/00 5/31/99
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,023,437) $(1,508,165)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 42,078 129,390
Amortization of debenture costs 29,231 217,078
Loss on sale of office property and equipment 26,400 -
Write off of loan 11,525 -
Write down of manufactured housing assets 173,768 -
Changes in operating assets and liabilities
Prepaid expenses and other assets 30,052 (1,010,651)
Accounts payable and accrued liabilities 107,814 103,895
----------- -----------
Net cash used in operating activities (602,569) (2,068,453)
----------- -----------
Cash flows from investing activities
Purchase of additional land (323,579) (507,406)
Principal collections on tax lien certificates 7,518 335,496
Purchases of tax lien certificates - (232,143)
Purchases of property and equipment (109,640) (119,562)
Sale of property and equipment 20,323 -
Investment in loans (100,500) (589,299)
Collection on loans 43,595 91,827
Disposition of loans 104,934 -
Sale of real estate and other assets 791,994 2,004,323
Purchases of real estate properties and other investments (102,951) (1,348,028)
Investment in manufactured housing community development - (797,222)
----------- -----------
Net cash provided by (used in) investing activities 331,694 (1,162,014)
----------- -----------
Cash flows from financing activities
Payments for deferred financing costs - (135,857)
Proceeds from exercise of stock options 2,000 -
----------- -----------
Net cash provided by (used in) financing activities 2,000 (135,857)
----------- -----------
Net decrease in cash and cash equivalents (268,875) (3,366,324)
Cash and cash equivalents, beginning of period 315,927 3,912,255
----------- -----------
Cash and cash equivalents, end of period $ 47,052 $ 545,931
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000
(Unaudited)
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Royal Financial Corporation (together with its subsidiaries, 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. 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 was substantially the same. Accordingly, the
merger was treated as a combination of entities under common control.
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, 1999
included in the Company's Form 10-KSB.
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
NOTE B - Accounting for Long-Lived Assets to be DISPOSED OF
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", requires that long-lived assets to be disposed of and for which
management has committed to a plan to dispose of the assets, be reported at
the lower of carrying amount or fair value less cost to sell. During the
current fiscal year, the Company developed a plan to begin marketing the
Manufactured Housing Community. Accordingly, the Company's investment in
Property, Plant and Equipment Manufactured Housing Community is reflected in
the accompanying consolidated balance sheet as of May 31, 2000 at the lower
of carrying amount or fair value less cost to sell and no depreciation has
been recognized in the accompanying consolidated statement of operations for
the nine months ended May 31, 2000. Additionally, the Company's current
investment strategy is to shift a majority of the Company's assets to cash
and cash equivalents, as discussed in Note C. Accordingly, all investments of
the company are reflected in the accompanying consolidated balance sheet as
of May 31, 2000 at the lower of carrying value or what management believes
are the net realizable values.
The Company has entered into an agreement to sell Walden Woods
Retirement Village, its manufactured housing community for approximately $2.6
million. Accordingly, the manufactured housing assets have been written down
in the quarter ended May 31, 2000 to $2.6 million. Additionally, the
purchaser has agreed to acquire the majority of the remaining manufactured
home inventory. The Company expects to close on the sale by July 31, 2000.
NOTE C - MANAGEMENT'S PLANS FOR CONTINUED EXISTENCE
In December, 1999, the Company's Board of Directors approved a
change in investment strategy to shift the majority of the Company's assets
to cash and cash equivalents. Once a substantial portion of the Company's
assets have been converted to cash and cash equivalents, the Board will
re-evaluate the real estate market and make a decision regarding the
re-investment of funds or the return of capital to stockholders. As shown in
the accompanying financial statements, the Company incurred net losses of
$849,669 and $1,508,165 for the nine months ended May 31, 2000 and May 31,
1999, respectively, and has incurred losses since inception. Management's
plans to maintain sufficient future cash flows to meet its financial
obligations include the sale of real estate properties and investments and
continued efforts to reduce operating expenses. Accordingly, Management
believes that sufficient cash flow will ultimately be available to meet the
Company's financial obligations. However, the Company was unable to pay the
principal due of $1,290,000 on March 31, 2000 on its Convertible Senior
Debentures, as discussed in Note H.
6
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NOTE D - CASH FLOW INFORMATION
Supplemental information on cash flows and noncash investing and
financing transactions is as follows:
<TABLE>
<S> <C>
Supplemental Cash Flow Information
Interest paid $109,650
Schedule of noncash investing activities:
Real estate acquired through foreclosure $209,984
Real estate sold and financed by the Company $192,856
</TABLE>
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment - manufactured housing community consist
of the following:
<TABLE>
<CAPTION>
May 31,
2000
-----------
<S> <C>
Land $ 1,194,514
Land improvements and buildings 1,390,411
Furniture, fixtures and equipment 102,664
-----------
2,687,589
Less accumulated depreciation (61,589)
-----------
Manufactured housing community, net $ 2,626,000
===========
Office property and equipment consist of the following:
Furniture, fixtures and equipment $ 113,108
Leasehold improvements 73,015
-----------
186,123
Less accumulated depreciation (143,126)
-----------
Office property and equipment, net $ 42,997
===========
</TABLE>
NOTE F - CHANGES IN STOCK OPTIONS
On December 16, 1999, the Company issued stock options to the
Company's directors to purchase a total of 40,000 shares of the Company's
common stock at an exercise price of $0.20 per share. These options are fully
vested at date of grant and expire in five years.
As of May 31, 2000 there were a total of 1,528,667 options
outstanding at a weighted average exercise price of $2.11. On January 5,
2000, one director exercised his options for 10,000 shares at $0.20 per share.
NOTE G - COMMITMENTS
In December 1998, the Company paid a deposit in connection with a
contract to purchase approximately 30 acres in Charlotte County, Florida. The
contract was subject to the resolution of certain contingencies, which have
been resolved. In February 2000, the Company closed on the contract and made
a payment of $205,000.
NOTE H - SENIOR CONVERTIBLE DEBENTURES
The Company was unable to pay the principal due of $1,290,000 on its
8.5% Convertible Senior Debentures due March 31, 2000 (the "Debentures"). The
Company paid the accrued interest on the Debentures through March 31, 2000.
The Company is currently marketing for sale several unencumbered assets; upon
the sale of one or more of these assets, the Company will pay the principal
balance plus all accrued interest. As discussed in Note B, the Company has
entered into a contract to sell its manufactured housing community for
approximately $2.6 million. Non-payment of principal is an Event of Default
under the Debentures. Upon an Event of Default, certain rights are available
to the Debenture holders. Each Debenture holder may 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
7
<PAGE>
specific performance of any covenant or agreement contained in the Debenture
or in aid of the exercise of any power granted in the Debenture, or may
proceed to enforce the payment of such Debenture or to enforce any other
legal or equitable right.
NOTE I - SEGMENT REPORTING
The Company currently has two major operating segments: Manufactured
Housing and Residential.
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 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.
<TABLE>
<CAPTION>
Manufactured Corporated
Three Months Ended May 31, 2000 Housing Residential and Other Consolidated
------------------------------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 232,176 $ (6,959) $ - $ 225,217
Net income (loss) $ (212,842) $ (14,996) $ (181,298) $ (409,136)
Three Months Ended May 31, 1999
------------------------------------
Revenues $ 47,164 $ 37,081 $ - $ 84,225
Net income (loss) $ (48,108) $ (31,434) $ (623,152) $ (702,694)
Nine Months Ended May 31, 2000
------------------------------------
Revenues $ 459,009 $ 45,432 $ - $ 504,441
Net income (loss) $ (258,256) $ 18,549 $ (783,730) $(1,023,437)
Identifiable assets $ 3,413,287 $ 2,322,652 $ 1,843,851 $ 7,579,790
Nine Months Ended May 31, 1999
------------------------------------
Revenues $ 199,535 $ 245,330 $ - $ 444,865
Net income (loss) $ (82,120) $ 158,746 $(1,584,791) $(1,508,165)
Identifiable assets $ 3,441,294 $ 3,873,398 $ 2,036,762 $ 9,351,454
</TABLE>
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,
and the Form 10-KSB for the fiscal year ended August 31,1999. 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.
8
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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 residential and 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, ownership and operation of a manufactured
housing community in Florida, and land for future development of manufactured
housing communities. Currently, the Company's strategy is to shift the
majority of its assets to cash and cash equivalents.
SOURCES OF REVENUES
Currently, the majority of the Company's net revenues is derived
from net gains and/or losses form the disposition of investment properties,
lot rental income from the Company's manufactured housing community in
Florida and revenues from the sale of new manufactured homes. In addition,
historically substantial income has 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 of properties is
uncertain.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999
Total revenues increased approximately $141,000 or 167%, to $225,000
for the three months ended May 31, 2000, as compared to $84,000 for the three
months ended May 31, 1999. The principal reason for the increase in revenue
was the $177,000 increase in sales of manufactured homes. Revenues, and the
related costs of manufactured homes sold, increased in the current
three-month period due to the sales of three manufactured homes, versus none
in the prior year three-month period. The decrease in gains (losses) on sales
of operating assets of approximately $36,000 was principally due to sales of
single family residential properties. In the quarter ended May 31, 2000, the
Company disposed of two of its remaining properties, at a loss, while in the
quarter ended May 31, 1999, the Company disposed of five of its residential
properties. The increase in lot rental income of approximately $10,000
resulted principally from an increase in the rental rate effective January 1,
2000.
Total operating expenses, excluding the costs of manufactured home
sales, decreased approximately $307,000 or 54%, to $262,000 for the three
months ended May 31, 2000 compared to $569,000 for the three months ended May
31, 1999. Much of the sharp drop in overall operating expenses is due to
Management's recent change in the investment strategy of the Company to shift
assets to cash and cash equivalents. Certain operating expenses have been
reduced as the Company liquidates its real estate portfolio. Additionally,
the Company has made continued efforts to reduce its expenses. As a result of
these efforts, salaries and benefits decreased approximately $20,000,
professional fees decreased $108,000 and general and administrative expenses
decreased $11,000. The decrease in promotional expenses of approximately
$64,000 is attributable to steps taken in the prior year to establish a
market presence by engaging certain investor relations firms, and other
promotional activities. Such activities were not undertaken in the current
year. Depreciation decreased approximately $32,000 due primarily to the fact
that depreciation is not currently being taken on the manufactured housing
community, as such property is being marketed for sale. Office rent decreased
approximately $32,000 due to the Company moving to smaller office space for
its Texas operations ,while subleasing a portion thereof to another company,
and subleasing its Florida office space to that same company. The sublease of
the Texas office was agreed to in the third quarter, but was effective
January 1, 2000, which contributed to the negative rent in the quarter. The
decrease in taxes - payroll and other of approximately $40,000 is primarily
due to less real estate properties held in the current year. Due diligence
expenses decreased approximately $13,000 due to the Company not being as
active in pursuing new investment opportunities as in the prior year. As
discussed in Note B to the financial statements, manufactured housing assets
were written down by $173,768 in the three months ended May 31, 2000.
The decrease in interest income of approximately $9,000 is due
primarily to the lower average cash balances in the current year, as compared
to the prior year three-month period. The failed offering costs in the prior
fiscal year of $193,000 occurred in connection with the Company's
unsuccessful offering of $50,000,000 of notes.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999
Total revenues increased approximately $60,000 or 13%, to $504,000
for the nine months ended May 31, 2000, as compared to $445,000 for the nine
months ended May 31, 1999. The principal reason for the increase in revenue
was the $177,000 increase in sales of manufactured homes. Revenues, and the
related costs of manufactured homes sold, increased in the current nine-month
period due to the sales of five manufactured homes, versus one in the prior
year nine-month period. The decrease in gains (losses) on sales of operating
assets of approximately $194,000 was principally due to sales of single
family residential properties. For the nine months ended May 31, 2000, the
Company disposed of nine of its remaining properties, while for the nine
months ended May 31, 1999, the Company disposed of nineteen of its
residential properties. The increase in lot rental income of approximately
$19,000 resulted from the aforementioned increase in the rental rate.
Total operating expenses, excluding the costs of manufactured home
sales, decreased approximately $731,000 or 44%, to $935,000 for the nine
months ended May 31, 2000 compared to $1,666,000 for the nine months ended
May 31, 1999. As mentioned above, much of the sharp drop in overall operating
expenses is due to Management's recent change in the investment strategy of
the Company to shift assets to cash and cash equivalents. Certain operating
expenses have been reduced as the Company liquidates its real estate
portfolio. Additionally,
9
<PAGE>
the Company has made continued efforts to reduce its expenses. As a result of
these efforts, salaries and benefits decreased approximately $56,000,
professional fees decreased $144,000 and general and administrative expenses
decreased $42,000. The decrease in promotional expenses of approximately
$140,000 is attributable to steps taken in the prior year to establish a
market presence by engaging certain investor relations firms, establishing an
internet web site, and other promotional activities. Such activities were not
undertaken in the current year. Depreciation decreased approximately $87,000
due primarily to the fact that depreciation is not currently being taken on
the manufactured housing community, as such property is being marketed for
sale. Office rent decreased approximately $72,000 due to the Company moving
to smaller office space for its Texas operations, while subleasing a portion
thereof to another company, and subleasing its Florida office space to that
same company. The decrease in taxes - payroll and other of approximately
$132,000 is primarily due to less real estate properties held in the current
year. Due diligence expenses decreased approximately $76,000 due to the
Company not being as active in pursuing new investment opportunities as in
the prior year.
The decrease in interest income of approximately $78,000 is due
primarily to the lower average cash balances in the current year. The loss on
the sale of office property and equipment in fiscal 2000 of $26,000 occurred
as the result of the Company selling all office furniture and fixtures,
computers and telephone equipment in the Naples, Florida office to a third
party for $10,000. The failed offering costs in the prior fiscal year of
$193,000 occurred in connection with the Company's unsuccessful offering of
$50,000,000 of notes.
LIQUIDITY AND CAPITAL RESOURCES
In December, 1999, the Company's Board of Directors approved a
change in investment strategy to shift the majority of the Company's assets
to cash and cash equivalents. Once a substantial portion of the Company's
assets have been converted to cash and cash equivalents, the Board will
re-evaluate the real estate market and make a decision regarding the
re-investment of funds or the return of capital to stockholders.
Management's plans to maintain sufficient cash flows to meet its
immediate financial obligations include the sale of real estate properties
and investments and continued efforts to reduce operating expenses. Due to
the uncertainty in the timing of the cash flows from real estate asset sales,
the Company may experience liquidity problems until certain asset sales are
made.
The Company was unable to pay the principal due of $1,290,000 on its
8.5% Convertible Senior Debentures due March 31, 2000 (the "Debentures"). The
Company paid the accrued interest on the Debentures through March 31, 2000.
The Company is currently marketing for sale several unencumbered assets; upon
the sale of one or more of these assets, the Company will pay the principal
balance plus all accrued interest. As discussed below, the Company has
entered into a contract to sell the manufactured housing community.
Non-payment of principal is an Event of Default under the Debentures. Upon an
Event of Default, certain rights are available to the Debenture holders. Each
Debenture holder may 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 specific performance of any covenant or agreement contained in the
Debenture or in aid of the exercise of any power granted in the Debenture, or
may proceed to enforce the payment of such Debenture or to enforce any other
legal or equitable right.
The Company has entered into an agreement to sell Walden Woods
Retirement Village, its manufactured housing community for approximately $2.6
million. Additionally, the purchaser has agreed to acquire the majority of
the remaining manufactured home inventory. The Company expects to close on
the sale by July 31, 2000.
Cash and cash equivalents were approximately $47,000 and $316,000 at
May 31, 2000 and August 31, 1999, respectively. The decrease was primarily
attributable to approximately $603,000 used in operating activities offset
partially by approximately $332,000 provided by investing activities.
Net cash used in operating activities amounted to $603,000 for the
first nine months of fiscal 2000, as compared to $2,068,000 for the same
period of the prior year. This decrease was primarily due to a reduced net
loss in the current year and certain working capital related changes,
including an increase of manufactured home inventory in the prior year
nine-month period. Net cash provided by investing activities amounted to
$332,000 in the nine months ended May 31, 2000 as compared to net cash used
for investing activities of $1,162,000 for the nine months ended May 31,
1999. In the current year's nine-month period, the Company realized
significant cash from sales of real estate properties. Due the change in of
the Company's investment strategy to a shift to cash investments, new real
estate investments were minimal other than an additional investment in land,
resulting principally from a prior year commitment. For the nine months ended
May 31, 1999, the Company also realized significant cash from real estate
sales, however such amount was more than offset by new investments in real
estate, loans and tax lien certificates. Net cash provided by financing
activities amounted to $2,000 in the nine months ended May 31, 2000 as
compared to net cash used in financing activities of $136,000 for the nine
months ended May 31, 1999.
YEAR 2000
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. The Company has
experienced no adverse effects as a result of Year 2000. The costs associated
with Year 2000 problems have not been material. The Company will continue to
monitor its systems and those of third parties, such as its tenants, service
providers, vendors, financial institutions, the Company's transfer agent and
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other unaffiliated parties with whom the Company conducts business to ensure
that any latent Year 2000 matters that may arise are addressed promptly.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits
27 Financial Data Schedule
</TABLE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROYAL FINANCIAL CORPORATION
(Registrant)
Date: July 11, 2000 /s/ Michael J. Pilgrim
-----------------------------------
Michael J. Pilgrim, President & CEO
Date: July 11, 2000 /s/ Mark J. Teinert
------------------------------------
Mark J. Teinert, Secretary/Treasurer
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