U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from ---------- to---------
Commission file number: 0-27552
REALCO, INC.
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(Exact name of registrant as specified in its charter)
New Mexico 85-0316176
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 University Blvd., N.E., Suite 5-100, Albuquerque, New Mexico 87102
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(Address of principal executive offices) (Zip code)
(505) 242-4561
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by the Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 XX No
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As of May 14, 1999, the Registrant had outstanding 2,767,000 shares of its no
par value common stock, the Registrant's only class of common stock.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
1999 September 30,
(unaudited) 1998
----------- -----------
ASSETS
Cash and cash equivalents $ 3,030,306 $ 3,788,086
Restricted cash 141,346 170,240
Securities available for sale 161,310 217,968
Accounts and notes receivable, net 1,824,366 2,277,771
Costs and estimated earnings in excess of
billings on uncompleted contracts 283,667 -
Inventories 15,824,472 16,760,111
Property & equipment, net 966,904 928,226
Investments - equity method 1,659,692 1,806,502
Deferred income taxes 243,448 301,376
Other assets 2,304,444 2,117,770
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$26,439,955 $28,368,050
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 5,661,937 $ 6,532,598
Lease obligations 44,628 77,422
Construction advances and notes payable,
collateralized by inventories 7,061,176 9,032,641
Accounts payable and accrued liabilities 3,402,016 2,583,933
Escrow funds held for others 141,346 170,240
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Total liabilities 16,311,103 18,396,834
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 500,000 shares
Series A - issued and outstanding,
82,569 shares, stated at liquidation
value 825,690 825,690
Series B - issued and outstanding, 212,859
shares, stated at liquidation value 2,128,590 2,128,590
Series D - issued and outstanding, 23,919
shares, stated at liquidation value 239,190 239,190
Common stock - no par value; authorized,
6,000,000 shares; issued, 2,845,000 shares 7,712,461 7,712,461
Retained earnings (deficit) (556,652) (683,930)
Accumulated other comprehensive income 3,549 (26,809)
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10,352,828 10,195,192
Less 78,000 shares common stock
held in treasury - at cost 223,976 223,976
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10,128,852 9,971,216
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$26,439,955 $28,368,050
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See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
(unaudited)
1999 1998
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REVENUES
Brokerage commissions and fees $ 5,544,470 $ 4,373,536
Construction sales 5,071,968 2,254,498
Sales of developed lots 425,500 181,850
Equity in net earnings of investees 262,071 53,097
Interest and other, net 17,572 87,594
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11,321,581 6,950,575
COSTS AND EXPENSES
Cost of brokerage revenue 3,925,657 3,012,003
Cost of construction sales 4,574,494 2,075,134
Cost of developed lots sold 299,496 137,466
Selling, general, administrative and other 2,242,087 1,997,950
Depreciation and amortization 150,830 123,787
Interest 259,588 176,694
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11,452,152 7,523,034
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Loss before income taxes (130,571) (572,459)
INCOME TAX BENEFIT (68,383) (223,000)
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NET LOSS (62,188) (349,459)
PREFERRED STOCK DIVIDEND REQUIREMENT 30,144 30,144
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NET LOSS APPLICABLE
TO COMMON SHARES $ (92,332) $ (379,603)
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BASIC AND DILUTED LOSS PER COMMON SHARE
Net loss per common share before
preferred stock dividend requirement $ (.02) $ (0.13)
=========== ===========
Net loss per common share after
preferred stock dividend requirement $ (.03) $ (0.14)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,767,000 2,779,467
=========== ===========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended March 31,
(unaudited)
1999 1998
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REVENUES
Brokerage commissions and fees $11,710,387 $ 8,585,193
Construction sales 9,625,702 5,399,388
Sales of developed lots 1,067,000 650,473
Equity in net earnings of investees 358,236 176,888
Interest and other, net 715,241 609,545
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23,476,566 15,421,487
COSTS AND EXPENSES
Cost of brokerage revenue 8,520,648 5,985,268
Cost of construction sales 8,757,166 4,893,029
Cost of developed lots sold 783,926 550,846
Selling, general, administrative and other 4,463,767 3,986,773
Depreciation and amortization 270,333 249,207
Interest 495,520 374,675
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23,291,360 16,039,798
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Earnings (loss) before income taxes 185,206 (618,311)
INCOME TAX EXPENSE (BENEFIT) 57,928 (235,900)
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NET EARNINGS (LOSS) 127,278 (382,411)
PREFERRED STOCK DIVIDEND REQUIREMENT 60,288 60,288
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NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ 66,990 $ (442,699)
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BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share before
preferred stock dividend requirement $ .05 $ (0.14)
=========== ===========
Net earnings (loss) per common share after
preferred stock dividend requirement $ .02 $ (0.16)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,767,000 2,787,088
=========== ===========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended March 31,
(unaudited)
1999 1998
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Cash flows from operating activities
Net earnings (loss) $ 127,278 $ (382,411)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities
Depreciation and amortization 270,333 249,207
Accretion of discount on notes payable 27,617 27,617
Net distributions in excess of earnings
of investees 208,390 136,722
Gain on sale of investees and securities (7,478) (345,276)
Change in operating assets and liabilities
(Increase) decrease in accounts receivable (178,581) (355,327)
(Increase) decrease in inventories 935,639 (663,163)
(Increase) decrease in net billings
related to costs and estimated earnings
on uncompleted contracts (283,667) 106,055
(Increase) decrease in other assets 116,807 (210,055)
Increase in accounts payable and
accrued liabilities 570,017 163,826
(Increase) decrease in deferred tax asset 57,928 (213,400)
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Net cash provided by (used in)
operating activities 1,844,283 (1,486,205)
Cash flows from investing activities
Purchases of property and equipment (205,944) (74,787)
Purchases of securities available for sale (185,769) -
Proceeds from sale of securities available
for sale 254,041 586,297
Advances on notes receivable (94,938) (448,624)
Receipts on notes receivable 726,924 332,188
Purchase of investments - equity method (61,580) -
Payments for business acquired (122,260) (426,250)
Cash acquired in business acquisition - 292,453
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Net cash provided by investing activities 310,474 261,277
Cash flows from financing activities
Construction advances and notes
payable, net (1,971,465) 1,485,345
Payments on long term debt and
capital lease obligations (931,072) (495,964)
Purchase of treasury stock - (117,686)
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Net cash provided by (used in)
financing activities (2,902,537) 871,695
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<PAGE>
NET DECREASE IN CASH AND CASH
EQUIVALENTS (747,780) (353,233)
Cash and cash equivalents at beginning
of period 3,778,086 4,242,305
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Cash and cash equivalents at end
of period $ 3,030,306 $ 3,889,072
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See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Realco, Inc. and
its wholly owned subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions of Form 10-Q and Article 10 of the Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the periods ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 1999.
For further information refer to the financial statements and footnotes included
in the Company's annual report on Form 10-KSB for the year ended September 30,
1998.
The consolidated financial statements include the accounts of Realco, Inc. and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS
Earnings (Loss) Per Share
In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share" was issued. SFAS 128 establishes standards for
computing and presenting earnings per share (EPS) and simplifies the existing
standards. This statement replaces the presentation of primary EPS with a
presentation of basic and diluted EPS. SFAS No. 128 was adopted in the financial
statements for the year ended September 30, 1998. The adoption of this standard
had no impact on the Company's earnings per share amounts.
Comprehensive Income
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Comprehensive Income" was issued. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 130 was adopted in the financial statements
for the quarter ended December 31, 1998. The adoption of this standard had no
significant impact on the financial statements of the Company.
Total comprehensive income (loss) for the three months ended March 31, 1999 and
1998 was approximately ($35,000) and ($349,000), respectively, and was
approximately $158,000 and ($379,000) for the six months ended March 31, 1999
and 1998, respectively.
<PAGE>
Disclosures About Segments of and Enterprise and Related Information
In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures About Segments of and Enterprise and Related Information" was
issued.
SFAS 131 establishes for the way that a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. SFAS 131 is effective for
fiscal years beginning after December 31, 1997, but need not be applied to
interim financial statements in the initial year of its application. Management
believes adoption of this statement will not have a material impact on the
financial statements of the Company.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
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Revenues of the Company are generated through the following segments: (1)
residential and commercial real estate brokerage; (2) residential and commercial
construction, and land development activities, and (3) financing activities
which include residential construction lending through participation agreements
with banks, land acquisition and development loans for single family residential
subdivisions, and from recognition of earnings generated by other financial
service entities in which the Company owns an equity interest. Operations of
such equity method investees include commercial and residential mortgage
origination, securities brokerage services, investment banking, and to a lesser
extent, property and casualty insurance. The Company currently operates within
the Albuquerque, New Mexico and Phoenix, Arizona metropolitan areas. Since
inception, management has planned on expanding the Company's operations and
business concepts to other geographical areas, preferably to areas within the
Southwest having similar demographics. Based upon the various lines of business
in which the Company is engaged, it has defined the following operating segments
for purpose of financial accounting and reporting: Real Estate Brokerage
Segment, Construction and Land Development Segment, and Financial Services
Segment.
Real Estate Brokerage Segment:
The real estate brokerage segment consists of Hooten/Stahl, Realtors, dba
Prudential Preferred Properties, New Mexico; Mull Realty Company, Inc. (Mull)
and Cliff Winn, Inc. Realtors (Winn), collectively dba Prudential Preferred
Properties, Arizona; and First Commercial Real Estate Services, Inc.
For the Quarter Ended March 31, 1999
Total brokerage commissions and fees from unaffiliated customers for this
segment increased 27% to $5,544,470 for the quarter ended March 31, 1999 as
compared to 1997. This increase is primarily attributable to an increase in
revenues of $678,325 resulting from the acquisition of Winn in February 1998,
and gradual increases of other companies within the segment. This segment
experienced a pre-tax loss of $249,920 in 1999 as compared to $274,195 in 1998.
This loss is primarily the result of recurring non-profitable operations of
Prudential Preferred Properties, New Mexico.
The operations of Prudential Preferred Properties, New Mexico continue to
result in losses as a result of past declines in market share and the inability
to significantly reduce operating expenses. A pretax loss of $364,622 was
experienced for the quarter ended March 31, 1999 as compared to $369,490 in
1998. Management is continuing its efforts to improve the operations of its
Albuquerque based residential brokerage through increasing market share by
recruiting, as well as exploring acquisition opportunities of small independent
brokerage firms. It is further expected that management's plan to consolidate
four office branches into a newly constructed, modern facility will result in
operating expense efficiencies and recruiting of agents to regain market share.
<PAGE>
It is expected this facility will be ready for occupancy in July 1999, however
as a result of this timing, it is not anticipated that these actions will
significantly improve operations until fiscal 2000, if any.
The aforementioned increase in brokerage commissions and fees provide by
Winn in the quarter ended March 31, 1999 as compared to 1998, resulted in an
increase in pre-tax earnings of $12,262 to $141,242 for Prudential Preferred
Properties, Arizona. Increases in occupancy costs as a result of office
relocations for this quarter over 1998 reduced profitablity of operations to
some extent.
First Commercial Real Estate Services, Inc, an Albuquerque commercial
brokerage company, recognized an increase in brokerage commissions and fees of
$104,484 or 38% for the quarter ended March 31, 1999 as compared to 1998. This
increase was primarily the result of timing of significant commercial property
sales. A pre-tax loss of $15,107 was recognized for the quarter ended March 31,
1999 as compared to $20,418 in 1998. The increase in commissions did not
significantly improve earnings as a result of additional general and
administrative expenses incurred in 1999 in an effort to expand operations.
For the Six Months Ended March 31, 1999
Total brokerage commissions and fees from unaffiliated customers for this
segment increased $3,125,194 or 36%, to $11,710,387 for the six months ended
March 31, 1999 as compared to 1998. This increase is primarily attributable to
additional revenues of $2,347,571 generated by Winn, which was acquired in
February 1998. Additionally, brokerage commissions and fees from unafilliated
customers generated by Prudential Preferred Properties, New Mexico for the six
month period increased $675,836 or 19% over 1998. This segment experienced a
pre-tax loss of $411,608 for the six months ended March 31, 1999 as compared to
$568,800 in 1998. The decrease in the loss is the result of various factors
discussed below.
While Prudential Preferred Properties, New Mexico did experience the
aforementioned 19% increase in brokerage commissions and fees, the decrease in
its pre-tax loss was limited to 10% or $74,144 due to a lower average split
retained by the Company and flattening of selling, general and administrative
expenses.
Prudential Preferred Properties, Arizona recognized an increase in
brokerage commissions and fees of $2,507,492 or 57% over 1998, and an increase
in pre-tax net earnings of $25,296 or 12% over 1998. Management anticipates
continued increases in net earnings of these operations as market share
increases and operating efficiencies are recognized on the continuing process of
combining certain administrative and management functions of Winn and Mull.
Additionally, management is continuing to seek other opportunities to expand its
activities in the Phoenix market through acquisitions.
First Commercial Real Estate Services, Inc. recognized a pre-tax loss of
$80,576 as compared to a pre-tax loss of $25,418 in 1998. While brokerage
commissions and fees were comparable between the two periods, increased selling,
general and administrative expenses resulted in the additional loss. As a result
of exploring additional profitable opportunites and in an effort to compensate
for the cyclical nature of commercial brokerage transactions, this company has
increased its capacity as a property manager, and is seeing improved growth and
profitability in this area.
<PAGE>
Construction and Land Development Segment:
The construction and land development segment operates in the Albuquerque, Rio
Rancho and Los Lunas, New Mexico metropolitan areas. Construction is comprised
of the residential and commercial operations of Charter Building & Development
Corp. (Charter) and Amity, Inc., respectively. This segment also includes
development activities consisting of the acquisition of raw land for development
into residential homesite lots, which are sold to Charter or to other builders.
Such land development projects may be performed under joint venture agreements
or entirely by the Company.
For the Quarter Ended March 31, 1999
This segment experienced a substantial improvement in operating
profitability by generating a pre-tax profit of $43,127 for the quarter ended
March 31, 1999 as compared to a pre-tax loss of $209,806 in 1998. This
improvement is primarily attributable to Charter reporting a $3,488 pre-tax
profit in 1999 compared to a loss of $250,727 in 1998. Additionally, total
revenues from this segment increased $3,029,465 or 122%, to $5,511,248. These
increases relate primarily to operations of Charter and land development
activities which are discussed in more detail below.
Charter's continued improvement in operations is primarily the result of
the company's recently introduced line of value engineered homes, which are
being received well by the marketplace as it offers a quality built home for a
very reasonable price. This new line of homes has generated substantially higher
sales volume, an increase of $1,359,541 or 70% over 1998, as well as increased
the gross profit margin on home sales to 10% from 4% in 1998. Management
anticipates Charter to sustain these higher production volumes and profitability
levels with this new product line based upon current market conditions. At March
31, 1999, Charter had a backlog of homes under contract with estimated revenues
of approximately $9,038,000.
Revenues from Amity's commercial construction and remodeling totaled
$1,154,831 for the quarter ended March 31, 1999, which represents an increase
of $855,500 over 1998. This increase was primarily attributable to revenues
recognized on a construction contract in progress of approximately $924,000, for
which there was no comparable activity in 1998. A pre-tax profit of $8,087 was
recognized for the quarter ended March 31, 1999, as compared to a pre-tax loss
of $19,792 in 1998. This reduction is prim arily the additional gross profit of
$16,842 recognized on contracts in progress in 1999, as well as a slight
reduction in operating expenses. Amity has estimated backlog construction
revenues under contract of $2,035,000 at March 31, 1999.
The Company's land development activities experienced an increase in
revenues of $519,500 to $781,500 during the quarter ended March 31, 1999.
However, pre-tax profits decreased $48,206 to $33,717 for the quarter. The
increase in revenues is primarily the result of lot purchases by Charter in
subdivisions developed by the Company, as opposed to a higher portion of
purchases made from joint ventures in the previous year, which the Company
participated on a partnership basis. The decline in pre-tax profits is primarily
the result of increases in carrying costs associated with lot inventory. Such
costs consist primarily of interest expense which is not capitalized, as
development has been completed. It is anticipated that Charter's increased home
sales volume, and therefore lot purchases will gradually reduce future interest
expense.
<PAGE>
For the Six Months Ended March 31, 1999
The period's operating revenues for this segment increased $5,142,784 or
84% over 1998. Additionally, this segment recognized a pre-tax profit of
$560,088 in 1999 compared to a pre-tax loss of $359,689 in 1998. As previously
discussed, the increase in revenues is attributable to operations of Charter,
and to a lesser extent Amity and land development activities. The improved
profitability is the result of a substantial reduction in the operating loss for
Charter and other income of $550,000 received in a lawsuit settlement relating
to the operations of the land development division. Both of which are discussed
in more detail below.
Charter's residential construction revenues for the period increased
$3,413,929 or 77% over 1998. As previously discussed, this increase is
attributable to the line of value engineered houses being received well by the
marketplace. This product line also contributed an increase in gross profit
margin from 3% for the period in 1998 to 10% in 1999. These increases in sales
volume and gross profit resulted in a decrease in the pre-tax loss of $386,861
to $125,127 for the period ended 1999.
Revenues from Amity's commercial construction and remodeling for the period
totaled $1,757,260 in 1999, an increase of $812,385 or 86% over 1998. Despite
this increase in revenues, a decrease in profit margins and higher general and
administrative expenses resulted in a pre-tax loss of $26,528 for the period, as
compared to a pre-tax profit of $28,383 in 1998. The $33,386 increase in general
and administrative expenses for the 1999 period was incurred in an effort to
expand operations. This increased level of operating costs are expected to
continue, however higher future production is expected to sustain such costs.
The Company's land development activities experienced an increase in
revenues and pre-tax earnings of $969,793 and $503,500, respectively over 1998.
The increase in revenues is primarily attributable to $496,650 of lot sales
resulting from increased activities of Charter, and $550,000 received in
connection with a lawsuit. Specifically, an agreement reached on December 30,
1998 provided for the Company to receive certain residential homesites valued at
approximately $550,000 in consideration for its interest in a joint venture,
which received an award of $1,633,000 in a lawsuit. As this award is expected to
go through an extensive future appeal process, management determined this
exchange was in the best interest of the Company after considering risk and
future legal costs. Overall profitability of this division decreased as a result
of increased carrying costs on lot inventory and a reduction in equity earnings
of investees, as a profitable joint venture concluded its development
operations.
Financial Services Segment:
The financial services segment consists of operations of the parent company,
Great American Equity Corporation (GAEC) and PHS, Inc.
In addition to financial services performed directly by the Company, operations
also include the Company's share of earnings from various equity method
investees who perform financial services. Such investees include a 50% equity
interest in PHS Mortgage and an approximately 11% interest in MI Acquisition
Corporation.
<PAGE>
For the Quarter Ended March 31, 1999
The Financial Services segment realized a pre-tax profit of $72,610 for the
quarter ended March 31, 1999 as compared to a pre-tax loss of $60,450 in 1998.
This increase is primarily attributable to higher equity earnings of investees,
while operating expenses remained comparable.
Net equity earnings recognized by PHS, Inc. from its interest in PHS
Mortgage, a partnership, which originates and sells mortgages, totaled $107,343
in the quarter ended March 31, 1999 compared to $49,137 in 1997. This increase
in earnings is a continuing trend, as this relatively young venture continues to
increase its marketshare in the Albuquerque metropolitan area by offering a
wider variety of mortgage opportunities and expanding its operations to the
Phoenix metropolitan area. Additionally, this venture receives the majority of
its business through referrals of the real estate brokerage operations of the
Company.
The Company recognized equity earnings of $92,387 as compared to a loss of
$31,385 for the 1998 period relating to its equity interest in MI Acquisition
Corporation. This investee derives the majority of its revenue from the
securities brokerage services and investment banking activities of its principal
operating subsidiary, Miller & Schroeder Financial, Inc. The increase in equity
earnings of this investee is primarily attributable to a higher volume of
investment banking activity in the 1999 period which yields more profits.
GAEC experienced a $11,858 decrease in pre-tax profit for the 1999 quarter.
This decrease is primarily the result of lower interest income earned due to a
reduction in the amount of construction lending provided by this company. It is
not anticipated that lending activities will increase in the near terms as a
result of the Company utilizing its working capital in other areas at this time.
For the Six Months Ended March 31, 1999
The Financial Services segment realized a pre-tax profit of $42,230 as
compared to a pre-tax profit of $349,424 for 1998 period. The decrease is
primarily attributable to the $333,585 gain recognized on the sale of First
American Title, an equity method investee, in the 1998 quarter for which there
was no comparable activity in 1999. Other significant items affecting operating
results are as follows.
Net equity earnings recognized by PHS, Inc. from its interest in PHS
Mortgage totaled $180,680 for the 1999 period, as compared to $136,494 in 1998.
This increaase is the result of the aforementioned continued growth in
operations of this venture.
The Company recognized equity earnings of $91,783 for the 1999 period as
compared to a loss of $46,693 1998 for its investment in MI Acquisition
Corporation. This increase in earnings of $138,476 is primarily attributable to
the closing of several profitable investment banking deals in the 1999 period.
GAEC experienced a $87,265 decrease in pre-tax operating profits to $34,988
for the 1999 period. This decrease is primarily the result of a $70,000 loan
origination fee received in 1998, for which there was no comparable activity in
1999.
<PAGE>
Overall Company Operations:
The Company generated a consolidated pre-tax loss of $130,571 for the quarter
ended March 31, 1999 compared to $572,459 in 1998. While this is a substantial
improvement, recurring operating losses generated by Prudential Preferred
Properties, New Mexico, prevented the Company from showing earnings for the
quarter. As previously mentioned, management is continuing its efforts to
improvement the operations of this Albuquerque based residential brokerage
company, as well as continue to closely monitor the improved operations of other
Charter.
For the six months ended March 31, 1999, operations resulted in pre-tax earnings
of $185,206. Such earnings mark a substantial improvement over the 1998 period
operations, which resulted in a $618,311 pre-tax loss. This change is primarily
the result of improved profitability within the construction and land
development segment, while significant improvements in the real estate brokerage
segment are yet to be recognized.
Liquidity and Capital Resources:
- --------------------------------
The Company's liquidity consists primarily of cash, trade accounts receivable,
inventories and construction advances collateralized by inventory. Future cash
needs will be financed primarily by cash flows from operations, future advances
under construction loans and if needed, other financing arrangements which may
be available to the Company.
As previously stated, the Company is in the process of establishing new office
facilities for the real estate brokerage operations of Prudential Preferred
Properties, New Mexico. Occupancy costs of the facility will be financed
primarily through a ten year, non-escalated lease agreement which provides for
an eight year option for extending the term. This lease, which will be accounted
for as an operating lease provides for monthly payments of approximately
$40,000, which includes a portion of facility op erating costs. Office furniture
and equipment for this facility is being financed primarily by a three year
capitalized lease agreement, which provides for transfer of ownership at the end
of the term. It is anticipated that initial cost of this office furniture and
equipment will be approximately $550,000.
The Company's current projection of future cash requirements, may be affected in
the future by numerous factors, including changes in customer receipts, consumer
industry trends, sales volume, operating cost fluctuations, acquisitions of
existing businesses and unplanned capital spending. Management believes that the
cash flow from operations, current reserve of cash and cash equivalents and
credit facilities in place will sustain the Company's operations and anticipated
growth for the ensuing twelve months.
Competition and Market Factors:
- -------------------------------
Each of the Registrant's subsidiaries competes principally on the basis of
reputation in the community in which it operates. However, the Registrant
competes in a highly competitive environment typical of all real estate
dependent companies. The real estate industry, and therefore the Registrant's
business, is cyclical and can be affected by consumer confidence levels,
prevailing economic conditions and interest rates. Additional factors effecting
the Registrant's business include cost increases and the availability of
construction materials and skilled labor, increases in costs associated with
home ownership such as property taxes, changes in consumer preferences and
<PAGE>
demographic trends. The Registrant believes that its strategy of vertical;
integration will eventually build a dominance in the markets in which it
operates, however there can be no assurance that this strategy will be
successful.
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995:
- -----------------------------------------
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company, (ii) the Company's plans and
results of operations will be affected by the Company's ability to manage its
growth, and (iii) other risks and uncertainties as indicated from time to time
in the Company's filings with the Securities and Exchange Commission.
Year 2000 Issues:
- -----------------
The Registrant has been notified by its principal vendors of its operating
computer programs, that they are deemed Year 2000 compliant. The Registrant is
in the completion stages of its systematic program of testing its computer
hardware and related software programs to detect and correct any Year 2000
deficiencies. The Registrant's key business relationships include suppliers and
subcontractors for building and land development, realtor clearing associations,
and financial institutions and mortgage companies which not only process the
Registrant's cash receipts and disbursements but also provide deposit and
lending services for the Registrant and its customers. The Registrant has
limited assurance from most of these key parties that they are Year 2000
compliant. While some of the Registrant's business relations have assured the
Registrant they are addressing Year 2000 issues, the Registrant cannot guarantee
its key business relationships will resolve these issues in a timely manner. The
Registrant does not believe there will be any significant future costs incurred
with respect to its own computer software and hardware since its vendors have
deemed them Year 2000 compliant. Completion of testing of the subsystems and
contacting third parties will be done by the Registrant's existing personnel
with less than $5,000 of additional costs incurred. This entire review process
is expected to be completed prior to the fiscal year end of September 30, 1999.
Additionally, at that time a comprehensive contingency plan will be established.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant has no material market risk associated with interest rates,
foreign currency exchange rates or commodity prices.
<PAGE>
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is subject to certain legal claims from time to time and is involved
in litigation that has arisen in the ordinary course of its business. It is the
Company's opinion that it either has adequate legal defenses to such claims or
that any liability that might be incurred due to such claims will not, in the
aggregate, exceed the limits of the Company's insurance policies or otherwise
result in any material adverse effect on the Company's operations or financial
position.
As first reported in the Registrant's 10-KSB filing of September 30, 1998, an
agreement was reached on December 30, 1998 whereby the Registrant received
certain residential homesites valued at approximately $550,000 in consideration
for its interest in a joint venture, which received an award of $1,633,000 in a
lawsuit. As this award is expected to go through an extensive appeal process,
management determined this exchange was in the best interest of the Registrant
after considering risk and future legal costs.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS IN SENIOR SECURITIES
None
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits filed with this Report.
(b) There were no Forms filed during this reporting period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REALCO, INC.
Date: May 14, 1999
James A. Arias
-------------------------
James A. Arias, President
Date: May 14, 1999
Chris A. Bruehl
---------------------------------------
Chris A. Bruehl, Senior Vice-President
and Chief Financial Officer
<PAGE>
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