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 June 30, 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 August 13, 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
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
1999 September 30,
(unaudited) 1998
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ASSETS
Cash and cash equivalents $ 3,260,164 $ 3,788,086
Restricted cash 334,685 170,240
Securities available for sale 238,988 217,968
Accounts and notes receivable, net 1,682,409 2,277,771
Costs and estimated earnings in excess of
billings on uncompleted contracts 331,761 -
Inventories 14,976,532 16,760,111
Property & equipment, net 1,221,149 928,226
Investments - equity method 1,660,277 1,806,502
Deferred income taxes 157,320 301,376
Other assets 2,380,190 2,117,770
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$26,243,475 $28,368,050
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LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 5,214,219 $ 6,532,598
Lease obligations 37,281 77,422
Construction advances and notes payable,
collateralized by inventories 7,113,065 9,032,641
Accounts payable and accrued liabilities 3,284,084 2,583,933
Escrow funds held for others 334,685 170,240
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Total liabilities 15,983,334 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 deficit (434,746) (683,930)
Accumulated other comprehensive income 12,932 (26,809)
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10,484,117 10,195,192
Less 78,000 shares common stock
held in treasury - at cost 223,976 223,976
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10,260,141 9,971,216
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$26,243,475 $28,368,050
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See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30,
(unaudited)
1999 1998
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REVENUES
Brokerage commissions and fees $ 6,820,399 $ 6,883,310
Construction sales 5,864,209 2,524,769
Sales of developed lots 730,800 378,000
Equity in net earnings of investees 67,030 170,643
Interest and other, net 63,324 108,122
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13,545,762 10,064,844
COSTS AND EXPENSES
Cost of brokerage revenue 4,898,119 4,995,682
Cost of construction sales 5,227,010 2,292,894
Cost of developed lots sold 597,223 314,319
Selling, general, administrative and other 2,259,174 2,012,572
Depreciation and amortization 150,007 114,355
Interest 210,985 210,148
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13,342,518 9,939,970
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Earnings before income taxes 203,244 124,874
INCOME TAX EXPENSE 81,298 47,900
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NET EARNINGS 121,946 76,974
PREFERRED STOCK DIVIDEND REQUIREMENT 30,144 30,144
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NET EARNINGS APPLICABLE
TO COMMON SHARES $ 91,802 $ 46,830
=========== ===========
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Net earnings per common share before
preferred stock dividend requirement $ .04 $ 0.03
=========== ===========
Net earnings per common share after
preferred stock dividend requirement $ .03 $ 0.02
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,767,000 2,768,747
=========== ===========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended June 30,
(unaudited)
1999 1998
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REVENUES
Brokerage commissions and fees $18,530,786 $15,468,503
Construction sales 15,489,911 7,924,157
Sales of developed lots 1,797,800 1,028,473
Equity in net earnings of investees 425,265 347,531
Interest and other, net 704,200 722,113
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36,947,962 25,490,777
COSTS AND EXPENSES
Cost of brokerage revenue 13,068,176 10,980,950
Cost of construction sales 13,984,176 7,185,923
Cost of developed lots sold 1,381,149 865,165
Selling, general, administrative and other 6,999,166 5,999,345
Depreciation and amortization 420,340 363,562
Interest 706,505 584,823
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36,559,512 25,979,768
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Earnings (loss) before income taxes 388,450 (488,991)
INCOME TAX EXPENSE (BENEFIT) 139,266 (188,000)
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NET EARNINGS (LOSS) 249,184 (300,991)
PREFERRED STOCK DIVIDEND REQUIREMENT 90,432 90,432
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NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ 158,752 $ (391,423)
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share before
preferred stock dividend requirement $ .09 $ (0.11)
=========== ===========
Net earnings (loss) per common share after
preferred stock dividend requirement $ .06 $ (0.14)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,767,000 2,780,974
=========== ===========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31,
(unaudited)
1999 1998
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Cash flows from operating activities
Net earnings (loss) $ 249,184 $ (300,991)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities
Depreciation and amortization 420,340 322,136
Accretion of discount on notes payable 41,426 41,426
Net distributions in excess of earnings
of investees 146,225 101,612
Gain on sale of securities (19,736) (389,718)
Change in operating assets and liabilities
Increase in accounts receivable (131,752) (109,354)
(Increase) decrease in inventories 1,783,579 (3,511,234)
(Increase) decrease in net billings
related to costs and estimated earnings
on uncompleted contracts (331,761) 127,634
Decrease in other assets 36,008 75,868
Increase in accounts payable and
accrued liabilities 700,151 164,776
(Increase) decrease in deferred tax asset 144,056 (200,300)
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Net cash provided by (used in)
operating activities 3,037,720 (3,678,145)
Cash flows from investing activities
Purchases of property and equipment (581,964) (231,734)
Purchases of securities available for sale (420,783) (168,692)
Proceeds from sale of securities available
for sale 449,839 675,520
Advances on notes receivable (554,200) (623,854)
Receipts on notes receivable 1,281,314 518,764
Payments for businesses acquired (420,326) (426,250)
Cash acquired in business acquisition - 292,453
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Net cash provided by (used in)
investing activities (246,120) 36,207
Cash flows from financing activities
Construction advances and notes
payable, net (1,919,576) 3,434,135
Payments on long term debt and
capital lease obligations (1,399,946) (447,104)
Proceeds from borrowings under long term
debt and capital lease obligations - 44,946
Purchase of treasury stock - (127,773)
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Net cash provided by (used in)
financing activities (3,319,522) 2,904,204
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<PAGE>
NET DECREASE IN CASH AND CASH
EQUIVALENTS (527,922) (734,734)
Cash and cash equivalents at beginning
of period 3,788,086 4,242,305
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Cash and cash equivalents at end
of period $ 3,260,164 $ 3,504,571
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See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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 - COMPREHENSIVE INCOME
Total comprehensive income (loss) for the three months ended June 30, 1999 and
1998 was approximately $131,000 and $77,000, respectively, and was approximately
$289,000 and ($320,000) for the nine months ended June 30, 1999 and 1998,
respectively.
<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 June 30, 1999
This segment experienced a pre-tax loss of $17,126 in 1999 as compared to a
pre-tax profit of $242,082 in 1998. The primary cause of this decline was higher
operating expenses in the Arizona market. These higher operating costs are
associated with relocations to updated office facilities and new office
openings, which are discussed in more detail below.
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 $172,775 was
experienced for the quarter ended June 30, 1999 as compared to $114,711 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.
It is expected this facility will be ready for occupancy in mid-August 1999,
however, as a result of this timing, it is not anticipated that these actions
will significantly improve operations until fiscal 2000, if any.
<PAGE>
Prudential Preferred Properties, Arizona recognized pre-tax earnings of
$222,130 in the 1999 quarter compared to $440,528 in 1998. As gross profits were
comparable between the quarters, the decrease is primarily the result of a
$225,305 increase in operating costs between the quarters, which is associated
with relocations to more modern office facilities, as well as new office
openings in the Phoenix metropolitan area. Management does not anticipate this
decline in earnings to continue as the market share increases through expansion
throughout the region, recruiting new agents, and acquisition opportunities, and
as operating efficiencies are recognized in the continuing process of combining
certain administrative and management functions of Winn and Mull.
First Commercial Real Estate Services, Inc. an Albuquerque commercial
brokerage company, recognized an increase in brokerage commissions and fees of
$311,841 or 245% for the quarter ended June 30, 1999 as compared to 1998. This
increase was primarily the result of timing of significant commercial property
sales. A pre-tax profit of $48,210 was recognized for the quarter ended June 30,
1999 as compared to a pre-tax loss of $77,638 in 1998. This $125,848 improvement
in earnings is primarily attributable to additional gross profit generated by
the growth in commissions, as operating expenses were comparable between the
periods.
For the Nine Months Ended June 30, 1999
Total brokerage commissions and fees for this segment increased $3,062,283 or
20%, to $18,530,786 for the nine months ended June 30, 1999 as compared to 1998.
This increase is primarily attributable to additional revenues of $1,962,431
generated by Winn, which was acquired in February 1998. All other entities
within this segment experienced moderate revenue increases for the period. This
segment experienced a pre-tax loss of $428,734 for the nine months ended June
30, 1999 as compared to $326,718 in 1998. The increase in the loss is the result
of higher operating expenses in the Arizona market and the Company retaining a
lower average split of brokerage commissions in New Mexico.
While Prudential Preferred Properties, New Mexico did experience a 6%
increase in brokerage commissions and fees, the decrease in its pre-tax loss was
limited to 2% or $16,080 due to a lower average split retained by the Company as
selling, general and administrative expenses were comparable between the
periods.
Prudential Preferred Properties, Arizona recognized an increase in brokerage
commissions and fees of $2,175,759 or 25% over 1998; however, pre-tax earnings
declined $193,102 from the 1998 quarter to $460,176 in 1999. This decline is the
result of the aforementioned higher operating costs, which are expected to
eventually result in growth in revenues and profitability.
First Commercial Real Estate Services, Inc. recognized a pre-tax loss of
$32,366 for the 1999 period, as compared to $103,056 in 1998. The decrease in
the loss is primarily the result of additional gross profit generated by higher
commissions revenue, and to a lesser extent management's efforts of increasing
the property management operations to compensate for the cyclical nature of
commercial brokerage transactions.
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
<PAGE>
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 June 30, 1999
This segment experienced a substantial improvement in operating profitability
by generating a pre-tax profit of $205,121 for the quarter ended June 30, 1999
as compared to a pre-tax loss of $163,581 in 1998. This $368,702 improvement in
earnings is primarily attributable to Charter reporting a $174,580 pre-tax
profit in 1999 compared to a loss of $201,676 in 1998. Additionally,
consolidated revenues from this segment increased $3,650,317 or 124%, to
$6,605,546. Such increases relate primarily to operations of Charter, which is
discussed in more detail below.
Charter's continued improvement in operations is primarily the result of the
company's line of value engineered homes introduced in 1999, which offers a
quality built home for a very reasonable price, and a lesser extent, expansion
of marketing efforts and growth in new home starts in the Albuquerque
metropolitan area. Collectively, these factors have generated substantially
higher sales volume, an increase of $3,073,369 or 155% over 1998, as well as
increased the gross profit margin on home sales from 7% to 11% in 1999.
Management anticipates Charter to sustain these higher production volumes and
profitability levels based upon current market conditions. However, customer
traffic at sales offices have been declining as a result of increasing interest
rates. At June 30, 1999, Charter had a backlog of homes under contract with
estimated revenues of approximately $9,052,000.
Revenues from Amity's commercial construction and tenant improvements totaled
$806,041 for the quarter ended June 30, 1999, which represents an increase of
$266,071 or 49% over 1998. This increase is primarily attributable to revenues
recognized on two large construction contracts in progress with combined
contract values of approximately $1,067,000, for which there was no comparable
activity in 1998, and an overall increase in the number of short term tenant
improvement contracts. A pre-tax loss of $ 9,910 was recognized for the quarter
ended June 30, 1999, as compared to a pre-tax loss of $51,543 in 1998. This
reduction is primarily the additional gross profit of $53,635 recognized on
contracts in progress in 1999. Amity has estimated backlog construction revenues
under contract of $1,972,000 at June 30, 1999.
The Company's land development activities experienced an increase in revenues
of $346,762 to $567,004 during the quarter ended June 30, 1999. However, pre-tax
profits only increased $30,315 to $118,789 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 lower than expected 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.
Profits on lots sold to Charter, either directly by a subsidiary or by a
joint venture, are eliminated in consolidation of this segment until the lot is
<PAGE>
removed from Charter's inventory. Such deferred profits totaled $257,153 at June
30, 1999.
For the Nine Months Ended June 30, 1999
The period's operating revenues for this segment increased $8,793,101 or 97%
over 1998. Additionally, this segment recognized a pre-tax profit of $765,209 in
1999 compared to a pre-tax loss of $523,269 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
$6,487,298 or 100% 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 5% to 10% in 1999. These increases in sales volume and gross profit
contributed to a decrease in the 1998 period's pre-tax loss of $763,117,
resulting in a pre-tax profit of $49,453 for the period ended 1999.
Revenues from Amity's commercial construction and remodeling for the period
totaled $2,563,301 in 1999, an increase of $1,078,456 or 73% 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 $36,438 for the period, as
compared to a pre-tax loss of $23,150 in 1998. The $37,747, or 16% 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 $1,316,555 and $533,815, respectively over 1998. The
increase in revenues primarily consists of $1,332,650 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
<PAGE>
interest in PHS Mortgage and an approximately 11% interest in MI Acquisition
Corporation.
For the Quarter Ended June 30, 1999
The Financial Services segment realize a pre-tax profit of $9,744 for the
quarter ended June 30, 1999 as compared to a pre-tax profit of $80,991 in 1998.
This decrease is primarily attributable to lower earnings of equity method
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 $67,671
in the quarter ended June 30, 1999 compared to $70,113 in 1998. This slight
decrease in earnings is the result of increased operating costs associated with
expanding operations in the Phoenix metropolitan area and changing mortgage
underwriters. Additionally, this venture receives the majority of its business
through referrals of the real estate brokerage operations of the Company.
The Company recognized a loss of $2,987 as compared to earnings of $54,651
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 decrease in
earnings of this investee is primarily attributable to timing of individually
significant investment banking deals, which yield the majority of profits.
GAEC experienced a $24,768 decrease in pre-tax profit to $2,608 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
term as a result of the Company utilizing its working capital in other areas at
this time.
For the Nine Months Ended June 30, 1999
The Financial Services segment realized a pre-tax profit of $51,975 as
compared to a pre-tax profit of $396,400 for the 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 period 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 $290,844 for the 1999 period, as compared to $206,627 in 1998. This
increase is the result of continued growth in the operations of this venture.
The Company recognized equity earnings of $88,796 for the 1999 period as
compared to $7,958 in 1998 for its investment in MI Acquisition Corporation.
This increase in earnings of $80,838 is primarily attributable to the closing of
several profitable investment banking deals in the second quarter of 1999.
GAEC experienced a $112,033 decrease in pre-tax operating profits to $37,596
for the 1999 period. This decrease is primarily the result of a $80,000 loan
origination fee received in 1998, for which there was no comparable activity in
1999.
Overall Company Operations:
<PAGE>
For the Quarter Ended June 30, 1999
The Company generated a consolidated pre-tax profit of $203,244 for the
quarter ended June 30, 1999 compared to $124,874 in 1998. This increase in
earnings of $78,370 consists primarily of a $509,872 increase in gross profits
generated by brokerage commissions and fees, construction sales and lot sales;
as offset by a $246,602 increase in sales, general and administrative expenses,
a decrease in equity earnings of investees and interest and other income of
$148,411. Nominal changes in other financial statement line items further offset
the increase in gross profits.
The increase in gross profits is primarily attributable to the construction
and land development segment, while increased operating expenses are primarily
attributable to the real estate brokerage segment, which is incurring costs to
expand its operations.
For the Nine Months Ended June 30, 1999
Operations for the period resulted in pre-tax earnings of $388,450. Such
earnings represent a $877,441 improvement over the 1998 period operations, which
resulted in a $488,991 pre-tax loss. This increase is primarily the result of
additional gross profits of $1,995,901 generated by brokerage commissions and
fees, construction sales and lot sales. This increase in gross profit is
primarily offset by an increase in selling, general and administrative expenses
of $999,821 relating to the Company's growth. Other nominal changes in revenue
and expense categories further offset this growth in gross profit.
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 that 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 operating 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 $600,000.
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.
<PAGE>
Competition and Market Factors:
- -------------------------------
Each of the Company's subsidiaries competes principally on the basis of
reputation in the community in which it operates. However, the Company competes
in a highly competitive environment typical of all real estate dependent
companies. The real estate industry, and therefore the Company's business, is
cyclical and can be affected by consumer confidence levels, prevailing economic
conditions and interest rates. Additional factors effecting the Company'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 demographic trends. The
Company 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 Company has been notified by its principal vendors of its operating computer
programs, that they are deemed Year 2000 compliant. The Company 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 Company'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 Company's cash
receipts and disbursements but also provide deposit and lending services for the
Company and its customers. The Company has limited assurance from most of these
key parties that they are Year 2000 compliant.
While some of the Company's business relations have provided assurance they are
addressing Year 2000 issues, the Company cannot guarantee its key business
relationships will resolve these issues in a timely manner.
The Company does not believe there will be any significant future costs incurred
with respect to its own computer software and hardware since its vendors have
<PAGE>
deemed them Year 2000 compliant. Completion of testing of the subsystems and
contacting third parties will be done by 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, a comprehensive contingency plan is
being established.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company 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: August 13, 1999
James A. Arias
-------------------------
James A. Arias, President
Date: August 13, 1999
Chris A. Bruehl
---------------------------------------
Chris A. Bruehl, Senior Vice-President
and Chief Financial Officer
<PAGE>
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