<PAGE>
FORM 10-QSB
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 November 30, 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
November 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets:
November 30, 2000 and August 31, 2000 3
Consolidated Statements of Operations:
Three-month Periods Ended November 30, 2000 and 1999 4
Consolidated Statements of Cash Flows:
Three-month Periods Ended November 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 9
ITEM 2. Exhibits and Reports 10
</TABLE>
2
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, August 31,
2000 2000
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $339,081 $48,715
Receivables 208,851 680,326
Manufactured home inventory 155,000 412,636
Other current assets 13,477 33,674
------------ ------------
Total Current Assets 716,409 1,175,351
INVESTMENTS:
Land held for sale 800,000 800,000
Mortgage loan portfolio, net 717,974 705,225
Other 79,693 79,915
------------ ------------
Total Investments 1,597,667 1,585,140
PROPERTY, PLANT AND EQUIPMENT-MANUFACTURED
HOUSING COMMUNITY, NET 2,352,927 2,361,000
OFFICE PROPERTY AND EQUIPMENT, NET 16,932 19,735
OTHER ASSETS 12,745 12,745
------------ ------------
Total Assets $4,696,680 $5,153,971
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 19,175 $ 123,701
8 1/2% Senior Convertible Debentures 1,290,000 1,290,000
------------ ------------
Total Current Liabilities 1,309,175 1,413,701
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: authorized 50,000,000 shares;
issued and outstanding, 7,474,382 shares 7,474 7,474
Additional paid-in capital 14,064,647 14,064,647
Accumulated deficit (10,684,616) (10,331,851)
------------ ------------
Total Stockholders' Equity 3,387,505 3,740,270
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,696,680 $ 5,153,971
============ ============
</TABLE>
The accompanying notes are an intergal part of these statements.
3
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
November 30,
---------------------------------
2000 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Revenues
Gains (losses) on sales of operating assets
Loans $ -- $ (492)
Real estate -- 65,803
Lot rental income 58,755 43,275
Sales of manufactured homes 202,990 56,500
---------- -------------
261,745 165,086
Operating expenses
Cost of sales of manufactured homes sold 287,999 51,664
Salaries and benefits 91,260 117,981
Professional fees 38,413 54,188
Promotional 8,788 16,423
Travel and lodging 12,331 2,537
General and administrative 65,787 37,480
Depreciation 3,355 14,498
Office rent 16,997 16,483
Insurance 20,079 18,110
Real estate holding costs 22,906 29,689
Taxes - payroll and other 27,395 28,471
Due diligence -- 2,801
---------- -------------
595,310 390,325
---------- -------------
Operating loss (333,565) (225,239)
Other income (expense)
Interest income 8,113 3,447
Interest expense (27,313) (39,859)
Loss on sale of office property and equipment -- (26,400)
Failed offering costs -- (3,500)
---------- -------------
(19,200) (66,312)
---------- -------------
Net loss $ (352,765) $ (291,551)
========== =============
Loss per share - basic and diluted $ (0.05) $ (0.04)
========== =============
Weighted average shares outstanding 7,474,382 7,464,382
========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
November 30,
-------------------------------
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(352,765) $(291,551)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation 3,355 14,498
Amortization -- 13,528
Loss on sale of office property and equipment -- 26,400
Provision for losses on Manufactured Home inventory -- 11,525
Changes in operating assets and liabilities --
Receivables 471,475 -
Prepaid expenses and other assets 277,833 75,790
Accounts payable and accrued liabilities (104,526) 9,687
--------- ---------
Net cash provided by (used in) operating activities 295,372 (140,123)
--------- ---------
Net cash provided by (used in) investing activities
Purchase of additional land -- (56,143)
Principal collections on tax lien certificates 222 691
Purchases of property and equipment (552) (16,340)
Sale of property and equipment 8,073 10,175
Investment in loans (12,749) (69,191)
Collection on loans -- 49,130
Disposition of loans -- 62,533
Sale of real estate and other assets -- 410,163
Purchases of real estate properties and other investments -- (87,758)
--------- ---------
Net cash provided by (used in) investing activities (5,006) 303,260
--------- ---------
Net increase in cash and cash equivalents 290,366 163,137
Cash and cash equivalents, beginning of period 48,715 315,927
--------- ---------
Cash and cash equivalents, end of period $ 339,081 $ 479,064
========= =========
Supplemental information on cash flows:
Supplemental Cash Flow Information
Interest paid $ 27,313
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ROYAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 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, and non-performing mortgage loans
collateralized by commercial real estate properties.
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, 2000
included in the Company's Form 10-KSB.
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 past
fiscal year, the Company developed a plan to begin marketing for sale the
Manufactured Housing Community. Subsequently, the Company sold the
Manufactured Housing Community during December 2000 for $2.6 million, less
closing costs of approximately $239,000. Accordingly, the Company's
investment in Property, Plant, and Equipment - Manufactured Housing Community
is reflected in the accompanying consolidated balance sheet as of November
30, 2000 at the lower of carrying amount on fair value less cost to sell and
no depreciation has been recognized for this asset in the accompanying
consolidated statement of operations for the three months ended November 30,
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 November 30, 2000 at the lower
of carrying value or at estimated realizable values.
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
proceeds from this sale allowed the Company to retire its Senior Convertible
Debentures of $1,290,000 plus accrued interest. In addition, the Company paid
$1,046,413 in a special distribution, 100% of which is a return of capital
for tax purposes, to shareholders of record at November 30, 2000 which
represented a special distribution rate of $.14 per share with payment date
being December 20, 2000.
6
<PAGE>
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment - manufactured housing community consist of the
following:
<TABLE>
<CAPTION>
November 30,
2000
------------
<S> <C>
Land $ 929,515
Land improvements and buildings 1,408,258
Furniture, fixtures and equipment 89,591
------------
2,427,364
Less accumulated depreciation (74,437)
------------
Net $ 2,352,927
------------
Office property and equipment consist of the following:
Furniture, fixtures and equipment $ 98,312
Less accumulated depreciation (81,380)
------------
Net $ 16,932
============
</TABLE>
NOTE E - 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 November 30, 2000 there were a total of 1,330,000 options
outstanding at a weighted average exercise price of $2.28.
NOTE F - RELATED PARTY TRANSACTIONS
At November 30, 2000, the Company had a loan to e.io, inc. of
$208,851 including interest at 8%, and owns shares of e.io, inc. common stock
at a cost of $77,047. Officers of the Company owned an aggregate of
approximately 11% of the outstanding stock at August 31, 2000. On December 1,
2000, e.io, inc. raised additional capital which diluted the officers of
Royal to 1% of the outstanding stock of e.io, inc.
NOTE G - 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.
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended November 30, 2000
-------------------------------------------------------------------------------------------------
Manufactured Corporate
Housing Residential and other Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lot rental income $ 58,755 $ -- $ -- $ 58,755
Manufactured home sales 202,990 -- -- 202,990
Manufactured home cost of goods sold (287,999) -- -- (287,999)
Interest and other -- 8,113 -- 8,113
Loss on sale of loans -- -- -- --
Gain on sale of real estate -- -- -- --
----------- ----------- ----------- -----------
Total revenue $ (26,254) $ 8,113 $ -- $ (18,141)
Net Loss $ (89,553) $ (115,814) $ (147,398) $ (352,765)
Depreciation $ -- $ 767 $ 2,588 $ 3,355
Identifiable assets $ 2,507,927 $ 1,597,667 $ 591,086 $ 4,696,680
Capital expenditures $ -- $ -- $ 552 $ 552
<CAPTION>
Three Months Ended November 30, 1999
-------------------------------------------------------------------------------------------------
Manufactured Corporate
Housing Residential and other Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lot rental income $ 43,275 $ -- $ -- $ 43,275
Manufactured home sales 56,500 -- -- 56,500
Manufactured home cost of goods sold (51,664) -- (51,664)
Interest and other -- -- 3,447 3,447
Loss on sale of loans -- (492) -- (492)
Gain on sale of real estate -- 65,803 -- 65,803
----------- ----------- ----------- -----------
Total revenue $ 48,111 $ 65,311 $ 3,447 $ 116,869
Net income (loss) $ (24,127) $ 48,127 $ (315,551) $ (291,551)
Depreciation $ -- $ -- $ 14,498 $ 14,498
Identifiable assets $ 3,594,294 $ 2,702,568 $ 1,915,579 $ 8,212,441
Capital expenditures $ 16,554 $ 79,902 $ 132,976 $ 229,432
</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, 2000. 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
8
<PAGE>
respect to future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward
looking statements made by, or on behalf of, the Company. The Company
disclaims any obligation to update forward looking statements.
OVERVIEW
The Company was originally organized as Davenport Ventures, Inc.
("Davenport") in the state of Nevada on August 18, 1993. In June 1998,
controlling interest in the Company was acquired by certain shareholders of
Royal Mortgage Corporation. On August 10, 1998 the shareholders of Davenport
and Royal Mortgage Corporation, a Texas corporation ("RMC") approved the terms
of a Restated and Amended Agreement and Plan of Merger between the two
entities. As a result of the merger, the total number of common shares
outstanding as of August 18, 1998 (the effective date of the merger) was
7,464,382. The Company changed its name from Davenport Ventures, Inc. to Royal
Financial Corporation and changed its year end from December 31 to August 31.
In March 1999, the Company's Form 10-SB was approved by the
Securities and Exchange Commission and the Company became a reporting company
under the Securities Exchange Act of 1934, as amended.
The Company is a real estate financial holding company which invests
in the asset backed real estate and mortgage markets. The Company's
investments include commercial non-performing mortgages, 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.
The Company is in the process of selling its operating assets to
raise cash to pay its debts. In December 2000, the Company sold its
Manufactured Housing Community, retired its Senior Convertible Debentures and
paid a $1,046,413 special distribution ($.14 per share) to shareholders of
record at November 30, 2000. Once a substantial portion of the Company's
assets have been converted to cash, the Board will evaluate the real estate
market and make a decision regarding the reinvestment of funds or the return
of capital to shareholders.
SOURCES OF REVENUES
Currently, the majority of the Company's net revenue is derived from
the sale of manufactured homes and lot rental income from the Company's
manufactured housing community in Florida. Due to the capital nature of many
of the Company's investments, the timing of cash flows from dispositions as
well as funds needed for investment opportunities which may arise has a
certain degree of uncertainty. Management has concluded that the most prudent
use of the Company's cash reserves at this time is in low risk investments
that are readily convertible into cash.
RESULTS OF OPERATIONS - THREE MONTHS ENDED NOVEMBER 30, 2000 AND 1999
Total revenues increased approximately $96,659 or 59% to $261,745 for
the three months ended November 30, 2000, as compared to $165,086. The primary
increase in revenue is from the sales of manufactured homes of $202,985 as the
Company is liquidating these homes in the Manufactured Housing Community that
sold in early December 2000.
Total operating expenses, net of the cost of sales of the
manufactured homes sold, decreased approximately $31,350 or 10% to $307,311
for the three months ended November 30, 2000 as compared to $338,661 for the
three months ended November 30, 1999.
The increase in interest income of approximately $4,666 is due to
higher average idle cash balances in the current comparable periods.
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 in the coming months. Once a substantial portion of the
Company's assets have been converted to cash and cash equivalents, the Board
will evaluate the real estate market and make a decision regarding the
investment of funds or the return of additional capital to stockholders.
Cash and cash equivalents are $339,081 and $48,715 at November 30,
2000 and August 31, 2000, respectively. The increase is attributable primarily
to collections of receivables and reduction of manufactured home inventories.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved as plaintiff in various
lawsuits of a nature regularly incurred in the ordinary course of the
Company's business. Neither the Company nor any of its subsidiaries is
involved in any litigation, arbitration or other proceedings relating to
9
<PAGE>
claims which are material to the Company's financial position or results of
operations. To the best of management's knowledge, there is no pending or
threatened litigation against the Company or any of its subsidiaries.
ITEM 2. 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, or Royal Mortgage Corporation*
3.5 By Laws of Royal Mortgage Corporation
3.6 Articles of Incorporation, as amended, of Royal Mortgage Brokerage,
Inc.*
3.7 By Laws of Royal Mortgage Brokerage, Inc.*
3.8 Authorization to Transact Business in Florida of Royal Mortgage
Brokerage, Inc.*
3.9 Articles of Incorporation of Walden Woods of Sugarmill, Inc.*
3.10 By Laws of Walden Woods of Sugarmill, Inc.*
3.11 Articles of Incorporation of Walden Woods of Sugarmill Sales, Inc.*
4.1 8 1/2% Convertible Senior Debenture due 2000 (filed as Exhibit No 4.1
for the fiscal quarter ended February 28, 1999 and incorporated herein
by reference)
27 Financial Data Schedule (filed herewith) *filed as exhibits with the
same numbers as indicated above on Form 10-SB and incorporated herein
by reference.
</TABLE>
(b) No reports on Form 8-K have been filed during the period for which this
report is filed
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ROYAL FINANCIAL CORPORATION
(Registrant)
Date: January 16, 2000 /s/ Michael J. Pilgrim
-------------------------------------
Michael J. Pilgrim, President & CEO
Date: January 16, 2000 /s/ Mark J. Teinert
-------------------------------------
Mark J. Teinert, Secretary/Treasurer
11
