<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended August 31, 2000
-----------------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from________ to _______
Commission file number __________________________
ROYAL FINANCIAL CORPORATION
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(Name of small business issuer in its charter)
Nevada 13-3961109
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(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)
Issuer's telephone number (817) 861-4000
--------------
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE
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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: $896,008.
As of December 1, 2000, the aggregate market value of the 7,474,382 common
shares held by non-affiliates of the registrant was approximately $934,298
based upon the closing price of $.125 on the OTC Bulletin Board.
<PAGE>
(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: 7,474,382
---------
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
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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 was 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 110 acres of raw land in Punta
Gorda, Florida for approximately $1,098,500 and purchased fourteen model homes
for a total of approximately $995,000 (three of which were sold in 1999).
During fiscal year 2000, the Company focused on the sale of its
operating segments to raise cash to pay off its company debts. On December 5,
2000, the Company sold its manufactured housing community to an unrelated party
for a net sales price of $2,361,000. On December 8, 2000, Royal Mortgage
Corporation retired $1,290,000 in notes and its respective accrued interest.
THE COMPANY'S BUSINESS
As of August 31, 2000, the Company's assets and operations were
composed of two operating segments:
/ / Manufactured Housing;
/ / Real Estate
Within these segments, the Company, together with its subsidiaries,
owned the following real estate assets as of August 31, 2000:
/ / The Manufactured Housing Segment includes the Park,
which contains approximately 217 homesites on a 65 acre
site in Florida, and inventory of Manufactured Homes.
/ / Real Estate Segment consists of the Company's tax lien
certificate investments, raw land that the Company now
intends to sell instead of develop and the 2
non-performing mortgage loans collateralized by
commercial properties. At August 31, 2000, the Company
held 3 tax lien certificates with the underlying
properties located in Louisiana. All other real estate
was sold during fiscal year 2000.
3
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MANUFACTURED HOUSING SEGMENT
This operating segment of the Company's business consists primarily of
operating the Park, a retirement manufactured housing community and selling
manufactured homes.
Revenues from the manufactured housing segment for the year ended
August 31, 2000 totaled $206,070 in consolidated revenues before losses on sale
of non-manufactured operating assets.
On October 11, 2000, the Company entered into an agreement to sell the
manufactured housing community to an unrelated third party for a net sales
price of $2,361,000. The sale of the manufactured housing community was closed
on December 5, 2000 for a net sales price of $2,361,000. The remaining assets
within the community at the time of sale on December 5, 2000, were three
manufactured model homes that are currently under contract to sell.
REAL ESTATE SEGMENT
Revenues from this operating segment comprise approximately $46,940 in
losses on sales in addition to $1,420,720 in expenses related to provisions for
loss on investments for the year ended August 31, 2000.
The principal business activities within this segment consist of
acquisition of sub- and non-performing mortgage loans.
The Company's mortgage loan portfolio totaled approximately $705,000
or 14% of the Company's total assets as of August 31, 2000. This is comprised
of two non-performing commercial mortgages collateralized by commercial
properties.
The primary non-performing mortgage is collateralized by three brick
mill-type buildings with 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 off Interstate 95 near the downtown area of
Bridgeport, Connecticut.
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, 2000 was approximately $705,000 which represents a
write down from $1,500,000 originally paid for the notes due to management's
opinion as to the current resale value of the underlying properties after
obtaining local real estate valuations in the Bridgeport, Connecticut areas.
The Company is in foreclosure proceedings on this property and expects a
favorable ruling to obtain title to this property.
EMPLOYEES
The Company employs a total of six full-time persons, including its
officers. None of the Company's employees are represented by a union and the
Company believes its relationship with its employees is excellent. There are no
employment contracts between the Company and any of its employees. After
December 31, 2000, only four full-time employees, including its officers, will
remain.
REGULATION
The Company is subject to certain State of Florida regulations
concerning the resale of real estate.
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 $3,354,878,
$2,292,326, $2,185,528 and $1,518,513 for the years ended August 31, 2000,
August 31, 1999, eight months ended August 31, 1998 and year ended December 31,
1997, respectively, and as of August 31, 2000 the Company's current liabilities
exceeded its current assets by $238,350. 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 while the Company is in a "sales
mode" to pay off its debts and convert current holdings to cash and cash
equivalents.
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.
4
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ITEM 2. PROPERTIES
The Company moved into 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 for approximately $700 per month. This lease expires on July 31, 2001.
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
Developed acreage
This property owned at August 31, 2000 consisted of Walden Woods
Retirement Village (the "Park"), a gated 55+ retirement community in Homosassa,
Florida approximately 45 minutes north of Tampa.
The Company closed the sale of this property on December 5, 2000 for a
gross sales price of $2,600,000.
Undeveloped Acreage
The book value of this land initially held for development, at August
31, 2000 was $800,000 which is approximately 16% of consolidated assets at
August 31, 2000. The Company's investment in undeveloped acreage consists of a
100% interest in approximately 110 acres located in Punta Gorda, Florida. The
zoning and density for this acreage that was 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 as a manufactured housing community. However, due to the inability
to raise additional capital in the Company's most recent securities offering,
the Company is now actively marketing this raw land.
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.
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 2000.
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, 2000. The quotations reflect inter-dealer prices without
retail mark-up, mark-down or commission and may not represent actual
transactions.
5
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<TABLE>
<CAPTION>
BID
---------------------------------------
High Low
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<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
First Quarter 2000 .25 .15
Second Quarter 2000 .25 .19
Third Quarter 2000 .28 .20
Fourth Quarter 2000* .16 .0875
* (As of December 5, 2000)
</TABLE>
HOLDERS
As of August 31, 2000 there were approximately 56 individual holders
of record of the Company's common stock, representing 1,329,748 shares, and
6,144,634 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 Regulations S offering was in the form of a one year
$3.00 convertible debenture with the $120,000 raised accruing interest at an
annual rate of 8.00%. Pursuant to Section 4(2), RMC elected to convert this
debt instrument in September 1996 at $3.00 per share plus the accrued interest
to the holder of the Convertible Debenture for a total of 43,210 shares.
In July 1996, RMC completed a $75,000 Regulation D Rule 506 offering
of 37,500 shares at a price of $2.00 per share from three investors, all of
whom were accredited investors as defined by Rule 501 of Regulation D.
In August 1997, RMC completed a 250,000 share Regulation S offering
at $2.00 per share.
In September 1997, RMC completed a Regulation D Rule 506 offering
raising $9,850,000 through the sale of 8 1/2% Convertible Debentures due March
2000 to 15 investors, all of whom were accredited investors as defined by Rule
501 of Regulation D. Pursuant to
6
<PAGE>
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 share
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 Form 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, 2000 TO AUGUST 31, 1999
REVENUES
Total revenues from operations increased from $550,329 at the year
ended August 31, 1999 as compared to $896,008 at the year ended August 31,
2000. This increase in revenues is due to the manufactured housing segment of
its business.
With respect to revenue from the Company's subsidiary, Walden Woods
of Sugarmill, Inc., lot rental income increased from $177,046 at the year
ended August 31, 1999 to $206,215 at the year ended August 31, 2000 due to
more lots being rented and an increase in lot rents that took place on January
1, 2000. In addition, the sale of the Company's manufactured home inventory at
its community in Homosassa, Florida increased its gross revenue from $175,139
at the year ended August 31, 1999 to $736,533 at the year ended August 31,
2000. This community was sold for a net sales price of $2,361,000 on December
5, 2000 and the three remaining manufactured homes in inventory are under
contract for sale with closings set for January 2001.
EXPENSES
Total operating expenses increased from $2,479,865 at the year ended
August 31, 1999 to $3,481,265 at the year ended August 31, 2000 due to
$1,420,720 in provision for losses on investments. The increase in the cost of
sales of manufactured homes sold from $161,909 at the year ended August 31,
1999 to $736,678 at the year ended August 31, 2000 is due to increased sales
of its model manufactured home inventory at its community in Homosassa,
Florida. Upon excluding the cost of sales of manufactured home inventory and
the provision for losses on investments, however, operating expenses declined
significantly from $2,317,956 at the year ended August 31, 1999 to $1,323,867
at the year ended August 31, 2000 or by $994,089 (43%). The decrease in costs
were seen in nearly all expense categories due to fewer employees, lower
office rents, lower due diligence fees required to acquire properties and
other related costs. Management will cut its staff further at December 31,
2000 from six current full time employees to four full time employees. The
Company will phase out its sublease in Naples, Florida as well as attempt to
sublease some of its space in Arlington, Texas office.
7
<PAGE>
The decrease in interest income from $106,908 at the year ended
August 31, 1999 to $12,126 at the year ended August 31, 2000 is due to a
decrease of idle cash within the Company.
The increase in the loss on sale of office property and equipment
from $121,168 at the year ended August 31, 1999 to $642,798 at the year ended
August 31, 2000 is due to the effects of the Company's down sizing in closing
its previous offices in Arlington, Texas and Naples, Florida as well as costs
associated with the sale of its manufactured home community in Homosassa,
Florida.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $48,715 and $315,927 at August 31,
2000 and August 31, 1999, respectively. The decrease is attributable to cash
used in its operating activities during the fiscal year. Subsequently, the
Company collected approximately $400,000 from the sale of its remaining
residential mortgage portfolio in early September 2000. Also, the Company
sold, on December 5, 2000, its manufactured home community in Homosassa,
Florida for a net sales price of $2,361,000. The Company has subsequently
retired the $1,290,000 convertible debentures and its accrued interest in
early December 2000. Retiring the debt will eliminate approximately $109,000
in annual interest costs to service the debentures.
ITEM 7. FINANCIAL STATEMENTS
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants 9
Consolidated Financial Statements:
Consolidated Balance Sheet as of August 31, 2000 10
Consolidated Statements of Operations for
the year ended August 31, 2000, and the
year ended August 31, 1999 11
Consolidated Statements of Changes in Stockholders' Equity
for the year ended August 31, 2000, and the
year ended August 31, 1999 12
Consolidated Statements of Cash Flows
for the year ended August 31, 2000, and the
year ended August 31, 1999 13
Notes to Consolidated Financial Statements 14
</TABLE>
8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board or Directors
Royal Financial Corporation
We have audited the accompanying consolidated balance sheet of Royal
Financial Corporation and subsidiaries as of August 31, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Royal Financial Corporation and subsidiaries as of August 31, 2000, and
the consolidated results of their operations and their consolidated cash
flows for each of the two years in the period then ended, in conformity with
accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
Dallas, Texas
October 27, 2000 (except for Note C, as to which
the date is December 8, 2000)
9
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 2000
<TABLE>
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 48,715
Receivables 680,326
Manufactured home inventory 412,636
Other current assets 33,674
----------
Total current assets 1,175,351
INVESTMENTS
Land held for sale $ 800,000
Mortgage loan portfolio, net 705,225
Other 79,915 1,585,140
------------
PROPERTY, PLANT AND EQUIPMENT - MANUFACTURED
HOUSING COMMUNITY, NET 2,361,000
OFFICE PROPERTY AND EQUIPMENT, NET 19,735
OTHER ASSETS
Deposits and sundry assets 12,745
----------
Total assets $5,153,971
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 123,701
8 1/2% Senior Convertible Debentures 1,290,000
----------
Total current liabilities 1,413,701
COMMITMENTS
-
STOCKHOLDERS' EQUITY
Common stock, $.001 par value; authorized 50,000,000 shares;
issued and outstanding, 7,474,382 shares $ 7,474
Additional paid-in capital 14,064,647
Accumulated deficit (10,331,851) 3,740,270
------------- ----------
Total liabilities and stockholders' equity $5,153,971
==========
</TABLE>
The accompanying notes are an integral part of this statement.
10
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 31,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues
Gains (losses) on sales of investments
Loans $ (85,389) $ (48,658)
Real estate 38,449 245,474
Lot rental income 206,215 177,046
Sales of manufactured homes 736,533 175,139
Other 200 1,328
------------ ------------
896,008 550,329
Operating expenses
Provision for loss on investments 1,420,720 -
Cost of sales of manufactured homes sold 736,678 161,909
Salaries and benefits 456,507 542,544
Professional fees 208,932 376,817
Promotional 66,576 236,607
Travel and lodging 23,024 35,552
General and administrative 262,747 241,505
Depreciation 46,107 171,350
Office rent 41,363 134,163
Insurance 87,600 59,236
Real estate holding costs 58,582 122,580
Taxes - payroll and other 71,628 205,713
Due diligence expenses 801 191,889
------------ ------------
3,481,265 2,479,865
------------ ------------
Operating loss (2,585,257) (1,929,536)
Other Income (Expense)
Interest income 12,126 106,908
Interest expense (138,949) (169,010)
Loss on sale of office property and equipment (642,798) (121,168)
Failed offering costs - (179,520)
------------ ------------
(769,621) (362,790)
------------ ------------
Net loss $(3,354,878) $(2,292,326)
============ ============
Loss per share - basic and diluted $ (0.45) $ (0.31)
============ ============
Weighted average shares outstanding 7,470,939 7,464,382
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended August 31, 2000 and 1999
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- paid-in Accumulated
Shares Amount capital deficit Total
------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Balances at September 1, 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
Exercise of stock options 10,000 10 1,990 - 2,000
Net loss - - - (3,354,878) (3,354,878)
------------ ------------- ------------- -------------- -------------
Balances at August 31, 2000 7,474,382 $7,474 $14,064,647 $(10,331,851) $ 3,740,270
============ ============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE>
ROYAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 31,
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,354,878) $(2,292,326)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 46,107 171,350
Amortization/write-off of debenture/offering costs 29,231 242,612
Loss on disposition of investments 46,940 --
Loss on sale of office property and equipment 642,798 121,168
Provision for losses on investments 1,420,720 --
Changes in operating assets and liabilities
Receivables (533,706) (11,245)
Other current assets 461,623 (773,418)
Accounts payable and accrued liabilities 13,436 30,015
----------- -----------
Net cash used in operating activities (1,227,729) (2,511,844)
----------- -----------
Cash flows from investing activities
Purchase of land -- (1,098,997)
Principal collections on tax lien certificates 12,370 337,846
Purchases of tax lien certificates -- (232,386)
Purchases of property and equipment (450,818) (173,462)
Purchases of loans (133,950) (671,118)
Collections on loans 184,455 121,140
Disposition of loans 1,328,258 751,018
Sale of real estate and other assets 18,202 2,152,437
Purchases of real estate properties -- (1,283,950)
Investment in park development -- (838,148)
----------- -----------
Net cash provided by (used in) investing activities 958,517 (935,620)
Cash flows from financing activities
Payments for deferred financing costs -- (148,864)
Proceeds from exercise of stock options 2,000 --
----------- -----------
Net cash provided by (used in) financing activities 2,000 (148,864)
----------- -----------
Net decrease in cash and cash equivalents (267,212) (3,596,328)
Cash and cash equivalents, beginning of year 315,927 3,912,255
----------- -----------
Cash and cash equivalents, end of year $ 48,715 $ 315,927
----------- -----------
Supplemental cash flow information:
Interest paid $ 109,569 $ 109,650
Schedule of non-cash investing activities:
Real estate acquired through foreclosure of loans $ -- $ 111,489
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
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, and non-performing mortgage loans collateralized by
residential and commercial real estate properties. During the year ended
August 31, 2000 the Company focused on the sale of assets to raise cash to
pay its debts. See NOTE C.
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 Corporation
(RMC) 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 the 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, 2000 the Company had six 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 5 - 20 years
Furniture, fixtures and equipment 3 - 5 years
</TABLE>
Maintenance and repairs are charged to income as incurred and improvements
are capitalized.
14
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LAND HELD FOR SALE
Land held for sale consists of approximately 110 acres of raw land in Punta
Gorda, Florida zoned as manufactured housing and commercial subdivision.
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,
2000 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
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 - 5 years) is computed using the straight-line
method. Leasehold improvements are amortized over the term of the related
leases.
DEFERRED FINANCING COSTS
The deferred financing costs represent professional fees, commissions and
other expenses that have been incurred to obtain financing. These costs are
amortized as interest expense over the life of the debentures, which matured
in March 2000, using the effective interest rate method. Amortization
expense for the years ended August 31, 2000 and 1999 was $29,231 and
$50,110, respectively.
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).
15
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 for the
years ended August 31, 2000 and 1999, because the effect of assumed
conversion or exercise is antidulitive.
NOTE C - SUBSEQUENT EVENTS
During December 2000, the Company sold its manufactured housing community
for $2.6 million, less closing costs of approximately $239,000. The senior
convertible debentures of $1,290,000 plus accrued interest were retired using
proceeds of this sale.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment - manufactured housing community consist of
the following at August 31, 2000:
<TABLE>
<S> <C>
Land $ 929,515
Land improvements and buildings 1,408,258
Furniture, fixtures and equipment 97,664
----------
2,435,437
Less accumulated depreciation (74,437)
----------
$2,361,000
==========
</TABLE>
Office property and equipment consist of the following at August 31,
2000:
<TABLE>
<S> <C>
Furniture, fixtures and equipment $ 98,887
Less accumulated depreciation (79,152)
----------
$19,735
==========
</TABLE>
NOTE E - OPERATING LEASES
The Company leases office space in Arlington, Texas, and Naples, Florida and
has various equipment operating leases expiring through 2004.
Future minimum lease payments following August 31, 2000 are as follows:
16
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 2000
NOTE E - OPERATING LEASES- CONTINUED
<TABLE>
<CAPTION>
Year ending
August 31,
------------
<S> <C>
2001 $ 61,501
2002 60,813
2003 59,123
2004 56,940
--------
$238,377
========
</TABLE>
Lease expense during the years ended August 31, 2000 and 1999 was $50,688
and $145,236, respectively.
NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
mortgage loans, and senior convertible debentures payable. The methodologies
used and key assumptions made to estimate fair value 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. Carrying value approximates fair value.
SENIOR CONVERTIBLE DEBENTURES
The carrying amount approximates fair value because they are due and payable
at August 31, 2000.
NOTE G - 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 the year ended August 31, 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, 2000 were due and payable at maturity on March 31, 2000. As
discussed in Note C, the Company retired the debentures in December 2000.
NOTE H - INCOME TAXES
Following is a reconciliation of the Company's income tax provision with the
amount of tax computed at the federal statutory rate:
17
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 2000
NOTE H - INCOME TAXES - CONTINUED
<TABLE>
<CAPTION>
2000 1999
-------------- ------------
<S> <C> <C>
Tax benefit at the federal statutory rate $ 1,140,659 $ 779,391
Nondeductible expenses (2,751) (2,903)
Other (835) (750)
Change in valuation allowance (1,137,073) (775,738)
-------------- ------------
$ - $ -
============== ============
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Net operating loss carryforward $ 3,170,935 $ 2,023,573
Property and equipment (9,130) 1,159
-------------- --------------
3,161,805 2,024,732
Valuation allowance (3,161,805) (2,024,732)
-------------- --------------
Net deferred tax asset $ - $ -
============== ==============
</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 $9,300,000 which are being carried forward
to future years and expire through 2020. During the year ended August 31,
1999, the Company revised its net operating loss carryforward, which
resulted in reduction in gross deferred tax assets of approximately
$258,000.
NOTE I - OPTIONS AND WARRANTS
The Company has issued stock options to directors, employees and others.
Options are granted at no less than fair value at date of grant, as
determined by the board of directors. Generally, the options vest at date
granted and expire in five years. Following is a summary of option
transactions for the years ended August 31, 1999 and 2000:
18
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 2000
NOTE I - OPTIONS AND WARRANTS - CONTINUED
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
----------- ----------------
<S> <C> <C>
Outstanding at September 1, 1998 1,748,667 $ 2.34
Granted 150,000 $ 2.00
Canceled (400,000) $ 3.50
-----------
Outstanding at August 31, 1999 1,498,667 $ 2.15
Granted 40,000 $ 0.20
Exercised (10,000) $ 0.20
Canceled (198,667) $ 1.00
-----------
Outstanding at August 31, 2000 1,330,000 $ 2.28
===========
</TABLE>
The weighted average fair value per share of options granted in 2000 and 1999
was $.05 and $.10, 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.
The following table summarizes information about stock options at August 31,
2000:
<TABLE>
<CAPTION>
Outstanding and Exercisable
----------------------------------------------------
Weighted
average
remaining Weighted
contractual average
Exercise price Shares life (in years) exercise price
-------------- ----------- ----------------- ----------------
<S> <C> <C> <C>
$0.20 30,000 4.29 $0.20
2.25 - 2.75 1,250,000 1.7 2.26
4.25 50,000 2.8 4.25
----------- ----------------
1,330,000 $2.28
=========== ================
</TABLE>
19
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 2000
NOTE I - OPTIONS AND WARRANTS - CONTINUED
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 loss per share amounts would be increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended August 31,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net loss
As reported $ 3,354,878 $ 2,292,326
Pro forma $ 3,356,878 $ 2,307,326
Basic and diluted loss per share
As reported $0.45 $0.31
Pro forma $0.45 $0.31
</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. At August 31, 2000, warrants to purchase 181,899 shares, generally at
$6.00 per share, were outstanding.
NOTE J - UNUSUAL CHARGES TO OPERATIONS
The Company recorded a provision for loss on investments of $1,420,720 in
August 2000.
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, which had been deferred, were written off in May 1999.
NOTE K - RELATED PARTY TRANSACTIONS
At August 31, 2000, the Company had a loan to e.io, inc. of $173,355
including interest at 8%, and owns shares of e.io, inc. common stock at a
cost of $77,047. Officers of the Company own an aggregate of approximately
11% of the outstanding common stock of e.io, inc.
NOTE L - SEGMENT REPORTING
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 Company currently has two major
operating segments: Manufactured Housing Segment and the Real Estate Segment.
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 Real Estate 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.
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended August 31, 2000 and
1999.
20
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
August 31, 2000
NOTE L - SEGMENT REPORTING - CONTINUED
<TABLE>
<CAPTION>
Year ended August 31, 2000
--------------------------
Manufactured Corporate
Housing Real Estate and Other Consolidated
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Lot rental income $ 206,215 $ - $ - $ 206,215
Manufactured home sales 736,533 - - 736,533
Manufactured home cost of goods sold (736,678) - - (736,678)
Interest and other 200 - 12,126 12,326
Loss on sale of loans - (85,389) - (85,389)
Gain on sale of real estate - 38,449 - 38,449
-------------- ------------- ----------- --------------
Total revenue $ 206,270 $ (46,940) $ 12,126 $ 171,456
Net loss $ (621,856) $(2,210,977) $ (522,045) $ (3,354,878)
Depreciation $ 12,848 $ - $ 33,259 $ 46,107
Identifiable assets $ 2,808,461 $ 2,317,113 $ 28,397 $ 5,153,971
Capital expenditures $ 121,935 $ 328,466 $ 417 $ 450,818
<CAPTION>
Year ended August 31, 1999
--------------------------
Manufactured Corporate
Housing Real Estate and Other Consolidated
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Lot rental income $ 177,046 $ - $ - $ 177,046
Manufactured home sales 175,139 - - 175,139
Manufactured home cost of goods sold (161,909) - - (161,909)
Interest and other 1,328 - 106,908 108,236
Loss on sale of loans - (48,658) - (48,658)
Gain on sale of real estate - 245,474 - 245,474
-------------- ------------- ----------- --------------
Total revenue $ 191,604 $ 196,816 $ 106,908 $ 495,328
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>
21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 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 47 President and Chief Executive Officer, Chairman
Mark J. Teinert 46 Secretary and Treasurer
David E. Wentsch 48 Director
Richard Bergner 69 Director
</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 was 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 December 1999, 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. 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. 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.
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 $100,000.
22
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
-------------
AWARDS
ANNUAL COMPENSATION -------------
--------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY COMPENSATION OPTIONS (#)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Pilgrim 2000 132,000 5,000 0
President & CEO 1999 132,000 0 0
1998 132,000 5,000 10,000
1997 75,000 5,000 260,000
Mark J. Teinert 2000 126,000 5,000 0
Secretary/Treasurer 1999 126,000 0 0
1998 126,000 5,000 10,000
1997 75,000 0 250,000
</TABLE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
-----------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Pilgrim 10,000 25% $.20 December 2004
Mark J. Teinert 10,000 25% $.20 December 2004
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of August 31, 2000 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.
23
<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>
Michael J. Pilgrim 241,667 3.2% 531,667 6%
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Mark J. Teinert 221,667 2.97% 531,667 6%
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
David E. Wentsch -0- -- 130,000 1%
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Richard Bergner -0- -- 20,000 --
2000 E. Lamar Blvd., Suite 290
Arlington, Texas 76006
Directors and executive officers as a group 463,334 6.2% -- --
(4 persons)
Cede & Co. (2) 6,104,400 81.7% -- --
</TABLE>
(1) Mr. Pilgrim's wife owns beneficially, since 1995, 231,667
shares, Mr. Pilgrim has ownership of only 10,000 shares obtained by
exercise of options granted by the Company.
(2) Messrs. Pilgrim, Teinert and all executive officers and
directors as a group beneficially own options exercisable at an
average exercise price of $2.32 for 270,000, 270,000 and 150,000
shares of common stock, respectively.
(3) 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.
Late 1999 and early 2000, the Company entered into an agreement with
e.io, inc. to sublease the Naples, Florida office lease and a part of the
Arlington, Texas office space, up to August 1, 2000 and purchase the office
furniture and fixtures from the Company. Loans were made to e.io, inc. at 8%
interest and the total principal and interest owed to the Company at August 31,
2000 totaled $173,355. In addition, the Company acquired in November 1999,
77,047 shares in e.io, inc. at $1.00 per share or $77,047, through a private
placement of e.io's securities. The notes owed by e.io, inc. and the common
stock owned by the Company is included on the balance sheet noted as
"Receivables" and "other" in the Investments Section of the Balance Sheet.
Messrs. Pilgrim and Teinert were founders in e.io, inc. and own 11% of the
outstanding stock but have not been officers or directors from e.io's inception
to December 1, 2000. The Company believes that the monies loaned will be paid in
full in the Company's second and third fiscal quarter 2001.
24
<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 of Walden Woods of Sugarmill, Inc.*
3.7 By Laws of Walden Woods of Sugarmill, Inc.*
3.8 ARTICLES OF INCORPORATION of Walden Woods of Sugarmill Sales, Inc.*
3.9 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)
* 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.
</TABLE>
25
<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
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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: December 14, 2000 /s/ Michael J. Pilgrim
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Michael J. Pilgrim, President & CEO
Date: December 14, 2000 /s/ Mark J. Teinert
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Mark J. Teinert, Secretary/Treasurer
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