U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] 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 12, 2000 the Company had approximately 2,892,000 shares outstanding of
its no par value common stock, the Company's only class of common stock.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31,
2000 September 30,
(unaudited) 1999
----------- -----------
ASSETS
Cash and cash equivalents $ 1,287 $ 3,688
Restricted cash 308 367
Available for sale securities 1,200 -
Accounts and notes receivable, net 2,209 1,899
Costs and estimated earnings in excess of
billings on uncompleted contracts 156 482
Inventories 13,681 14,932
Property & equipment, net 1,996 1,935
Investments - equity method 1,852 1,744
Deferred income taxes - 117
Cost in excess of net assets acquired, net 2,215 1,605
Other assets 878 1,043
----------- -----------
$ 25,782 $ 27,812
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 4,547 $ 5,214
Lease obligations 659 743
Construction advances and notes payable,
collateralized by inventories 6,197 6,797
Accounts payable and accrued liabilities 4,030 4,293
Escrow funds held for others 308 367
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Total liabilities 15,741 17,414
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 500,000 shares Series A - issued and
outstanding, 79,969
shares, stated at liquidation value 799 799
Series B - issued and outstanding, 212,859
shares, stated at liquidation value 2,129 2,129
Common stock - no par value; authorized,
50,000,000 shares; issued 2,894,038 shares 7,902 7,909
Accumulated other comprehensive income 531 -
Accumulated deficit (1,315) (408)
----------- -----------
10,046 10,429
Less 2,100 and 11,000 shares common
stock held in treasury, respectively
- at cost 5 31
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10,041 10,398
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$ 25,782 $ 27,812
=========== ===========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
(Dollars in thousands, except per share amounts)
(unaudited)
2000 1999
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REVENUES
Brokerage commissions and fees $ 6,540 $ 5,544
Construction sales 5,285 5,072
Sales of developed lots 633 426
Equity in net earnings of investees 57 262
Interest and other, net 145 18
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12,660 11,322
COSTS AND EXPENSES
Cost of brokerage revenue 4,779 3,926
Cost of construction sales 4,782 4,574
Cost of developed lots sold 456 299
Selling, general, administrative and other 2,813 2,242
Depreciation and amortization 220 151
Interest 193 260
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13,243 11,452
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Loss before income taxes (583) (130)
INCOME TAX BENEFIT (109) (68)
-------- --------
NET LOSS (474) (62)
PREFERRED STOCK DIVIDEND REQUIREMENT 28 30
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NET LOSS APPLICABLE TO COMMON SHARES $ (502) $ (92)
======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE
Net loss per common share before
preferred stock dividend requirement $ (.16) $ (.02)
======== ========
Net loss per common share after
preferred stock dividend requirement $ (.17) $ (.03)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,889,000 2,767,000
========= =========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended March 31,
(Dollars in thousands, except per share amounts)
(unaudited)
2000 1999
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REVENUES
Brokerage commissions and fees $ 12,800 $ 11,710
Construction sales 12,339 9,626
Sales of developed lots 1,567 1,067
Equity in net earnings of investees 108 358
Interest and other, net 258 715
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27,072 23,476
COSTS AND EXPENSES
Cost of brokerage revenue 9,509 8,521
Cost of construction sales 11,249 8,757
Cost of developed lots sold 1,130 784
Selling, general, administrative and other 5,431 4,464
Depreciation and amortization 404 270
Interest 463 495
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28,186 23,291
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Earnings (loss) before income taxes (1,114) 185
INCOME TAX EXPENSE (BENEFIT) (207) 58
-------- --------
NET EARNINGS (LOSS) (907) 127
PREFERRED STOCK DIVIDEND REQUIREMENT 56 60
-------- --------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ (963) $ 67
======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share before
preferred stock dividend requirement $ (.31) $ .05
======== ========
Net earnings (loss) per common share after
preferred stock dividend requirement $ (.33) $ .02
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,887,000 2,767,000
========= =========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended March 31,
(Dollars in thousands)
(unaudited)
2000 1999
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Cash flows from operating activities
Net earnings (loss) $ (907) $ 127
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 404 270
Accretion of discount on notes payable 22 28
Net distributions in excess of earnings of
investees (earnings in excess of
distributions) (108) 208
Gain on sale of securities (118) (7)
Gain on sale of property and equipment (13) -
Provision for deferred income taxes (207) 58
Change in operating assets and liabilities
Increase in accounts receivable (285) (179)
Decrease in inventories 1,251 936
(Increase) decrease in net billings related
to costs and estimated earnings on
uncompleted contracts 326 (284)
Decrease in other assets 49 117
(Decrease) increase in accounts payable and
accrued liabilities (687) 570
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Net cash provided by (used in)operating
activities (273) 1,844
Cash flows from investing activities
Purchases of property and equipment (89) (206)
Proceeds from the sale of property and equipment 13
Purchase of securities available for sale (995) (186)
Proceeds from the sale of securities available
for sale 1,007 254
Advances on notes receivable (157) (95)
Receipts on notes receivable 132 727
Purchase of investments - equity method - (62)
Payments for businesses acquired (484) (122)
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Net cash provided by (used in) investing
activities (573) 310
Cash flows from financing activities
Construction advances and notes payable, net (600) (1,971)
Payments on capital lease obligations and
long term debt (998) (931)
Proceeds from borrowings under long term debt 24 -
Issuance of treasury stock 19 -
-------- --------
Net cash used in financing activities (1,555) (2,902)
-------- --------
<PAGE>
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,401) (748)
Cash and cash equivalents at beginning of period 3,688 3,778
-------- --------
Cash and cash equivalents at end of period $ 1,287 $ 3,030
======== ========
Non-cash investing and financing activities:
- --------------------------------------------
In January 2000, the Company purchased the net assets and business of Farnsworth
Realty and Management Company for $400,000. In connection with the purchase,
liabilities were assumed as follows:
Fair value of assets acquired, including
an office building $ 451
Cash paid (250)
Issuance of note payable (150)
--------
Liabilities assumed $ (51)
========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
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, 2000 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 2000.
For further information refer to the financial statements and footnotes included
in the Company's annual report on Form 10-K for the year ended September 30,
1999.
1. Principles of Consolidation:
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.
2. Earnings (Loss) Per Share:
Earnings (loss) per common share is calculated based on the weighted average
number of shares outstanding during the year.
3. Other Comprehensive Income (Loss):
Total comprehensive income (loss) for the periods presented is as follows:
2000 1999
---------- ----------
Quarter ended March 31 $ 57,000 $ (35,000)
Six months ended March 31 (376,000) 158,000
4. Available for Sale Securities:
As a result of a March 28, 2000 capital infusion and committing to a new line of
business, Arinco Computer Systems Inc. ("Arinco"), which was a relatively
inactive over the counter traded stock, experienced substantial stock price
appreciation and increases in trading volume. As the Company owns 285,000 shares
of common stock of Arinco and accounts for this investment as an available for
sale security, other comprehensive income, net of deferred income taxes of
$531,000 was recognized on unrealized gains during the period.
Due to declines in market value of Arinco stock, other comprehensive income, net
of deferred income taxes, relating to such unrealized gains on trading
securities is $267,000 at May 12, 2000.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview of Operations
- ----------------------
Based upon the various lines of business in which the Company is engaged, it has
defined the following operating segments for purposes of financial accounting
and reporting: Real Estate Brokerage Segment, Construction and Land Development
Segment, and Financial Services Segment.
The Company currently operates within the Albuquerque, New Mexico and Phoenix,
Arizona metropolitan areas. Since inception, management has planned on expanding
operations and business concepts to other geographical areas, preferably to
areas within the southwest United States having similar demographics.
For the Quarter Ended March 31, 2000
The Company experienced a consolidated pre-tax loss of $583,000 for the
quarter ended March 31, 2000 compared to $130,000 for the 1999 quarter. While
total revenues increased $1,338,000, or 12%, to $12,660,000, total expenses
increased $1,791,000, or 16%, to $13,243,000. Gross profit from the Company's
brokerage, construction and land development operations increased $198,000, or
9%, to $2,441,000.
As expected, the majority of this increase in total expenses represents
cost of sales directly related to the increase in total revenues. However,
selling, general and administrative expenses increased $571,000 to $2,813,000
for the 2000 quarter. This increase in operating expenses is attributable to the
Company's growth strategy, however, management has determined that based upon
current levels of operating revenues, such expenses must be reduced. As such,
several cost control initiatives have been implemented, which are discussed in
further detail in the Results of Operations by Operating Segment.
As a result of operations as an investment company, prior to the Company
changing its line of business and becoming a publicly traded real estate
company, the Company invested in 285,000 shares common stock of Arinco Computer
Systems Inc. ("Arinco"). Arinco was an inactive corporation, which maintained
its registration with the SEC and was traded in the over the counter market
under the symbol "ARCU". On March 27, 2000, Arinco closed a securities purchase
agreement with Pangea Internet Advisors LLC, which provided for the sale of $40
million of newly-issued preferred stock, representing approximately 97% of the
issued and outstanding common stock of Arinco on an as converted, fully-diluted
basis. After receiving this capital infusion, Arinco is seeking to acquire
controlling interests in and actively manage companies engaged primarily in the
Internet, e-commerce and related technology industries. Due to these events, the
trading price of Arinco has increased substantially, resulting in other
comprehensive income of approximately $531,000 for the Company, which consists
of unrealized gains on available for sale securities, net of a $354,000 deferred
income tax liability. Such other comprehensive income is a component of equity
and is not recognized in the statement of operations.
For the Six Months Ended March 31, 2000
<PAGE>
Operations for the period resulted in a pre-tax loss of $1,114,000 as
compared to pretax earnings of $185,000 for the 1999 period. Consistent with the
aforementioned quarterly operating results, the Company experienced an increase
in total revenues of $3,596,000, or 15%, to $27,072,000 and an increase in total
expenses of $4,895,000 or 21%, to $28,186,000 for the 2000 period. Also
consistent with the aforementioned quarterly results, gross profit from the
Company's brokerage, construction and land development operations increased
$477,000, or 11%, to $4,818,000.
This increase in gross profit was offset by a $967,000 increase in selling
general and administrative expenses. Other significant fluctuations between the
two periods were a $250,000 decrease in equity earnings of investees in the 2000
period, a $134,000 increase in depreciation and amortization in the 2000 period,
and a non-recurring gain of $550,000 recognized in the 1999 period. These
significant items effecting operations are discussed in more detail in the
Results of Operations by Operating Segment.
As previously mentioned, the Company generated $531,000 of other
comprehensive income during the 2000 period, associated with its common stock
holdings of Arinco.
Results of Operations by Operating Segment
- ------------------------------------------
Real Estate Brokerage Segment:
The real estate brokerage segment consists of Hooten/Stahl, Realtors, d.b.a.
Prudential Preferred Properties, New Mexico ("PPP-NM); Mull Realty Company, Inc.
and Cliff Winn, Inc. Realtors, collectively d.b.a. Prudential Preferred
Properties, Arizona ("PPP-AZ"); and First Commercial Real Estate Services, Inc.
("First Commercial").
For the Quarter Ended March 31, 2000
This segment experienced a pre-tax loss of $664,000 for the 2000 quarter as
compared to a pre-tax loss of $250,000 in 1999. While company dollar (the
portion of brokerage commissions and fees retained by the Company) increased
$142,000 or 9% over the 1999 quarter, this increase was more than offset by an
increase in selling, general and administrative expenses of $415,000 or 24% and
an increase in depreciation and interest expense of $128,000 or 89%. The
increase in operating expenses is primarily associated with PPP-AZ operations,
while the increase in depreciation and interest expense is primarily associated
PPP-NM operations. Each of these items are discussed in more detail below.
The operations of PPP-NM 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 $496,000 was experienced for the quarter ended March
31, 2000, which is historically one of the lower volume quarters of the year, as
compared to $365,000 in the 1999 quarter. As brokerage revenues, cost of
brokerage revenues and selling, general and administrative expenses fluctuated
only nominally between the periods, this additional loss is primarily the result
of additional interest expense and depreciation. Increases in interest expense
are the result of interest paid on capital leases for furniture and equipment in
the new office facility, as well as <PAGE>
interest charges on intercompany working capital advances, which are eliminated
in consolidation. The increase in depreciation expense is also the result of
capital expenditures for the new office facility.
Management continues to attempt to implement changes at PPP-NM to increase
market share, reduce agent commission splits and reduce operating expenses. In
connection with the Company's plan to consolidate four sales offices into a
single, modern facility, a restructuring charge of $273,000 associated with
lease abandonment expenses was accrued in the fourth quarter of fiscal 1998. Of
this restructuring charge, $25,000 was utilized in the current quarter,
resulting in an ending accrual of $176,000 for tenant improvements, vacancies
and shortfalls on sublease revenues.
PPP-AZ recognized a pre-tax loss of $111,000 in the 2000 quarter compared
to a pre-tax profit of $141,000 in 1999. While revenues increased $1,122,000 or
33% over 1999, the increase in company dollar was limited to $199,000. This was
due to a decline in company dollar from 29% to 26% in 2000. Additionally,
operating expenses (consisting of selling, general, administrative, depreciation
and interest expense) increased $446,000 or 52% to $1,310,000. While a
substantial portion of this increase was a direct result of higher revenues and
non-recurring costs associated with an acquisition, management has determined
that operating expenses have risen to an unacceptable level and has begun
decreasing such costs. Management does not anticipate this decline in earnings
to continue.
Effective January 1, 2000, PPP-AZ successfully completed the acquisition of
certain assets and the business operations of Farnsworth Realty and Management
Company ("Farnsworth"), a Mesa, Arizona based real estate broker. At the time of
the acquisition, Farnsworth was already operating under a franchise agreement
with Prudential Real Estate Affiliates, similar to PPP- AZ, providing for a much
easier integration into existing operations. Consideration for this acquisition,
which also included an unencumbered office building, consisted of a cash payment
of $250,000, future cash payments of up to $150,000 and the assumption of
approximately $50,000 in liabilities. A Form 8-K filing with audited financial
statements was not required on this acquisition due to certain thresholds not
being met.
First Commercial, an Albuquerque based commercial brokerage company,
recognized a pre-tax loss of $40,000 in the 2000 quarter as compared to $15,000
in 1999. This increase is due to a 33% decline in brokerage revenues to $254,000
in the 2000 quarter, as operating expenses remained relatively constant. This
decrease in revenues is primarily the result of timing of significant commercial
property sales, which is customary to such operations.
For the Six Months Ended March 31, 2000
Brokerage commissions and fees for this segment increased $1,090,000 or 9%,
to $12,800,000 for the 2000 period. This increase is attributable to additional
revenues of $1,369,000 generated by PPP-AZ and $71,000 generated by First
Commercial, as reduced by a $350,000 decrease generated by PPP-NM. Despite the
increase in revenues, this segment experienced a pre-tax loss of $1,203,000 for
the 2000 period as compared to $412,000 in 1999. This additional loss is the
result of higher operating expenses and the Company retaining a lower average
split of brokerage commissions.
The pre-tax loss reported by PPP-NM increased $293,000 to $933,000 in the
2000 period. The $350,000 decrease in brokerage revenues, resulted in this
<PAGE>
company recognizing $3,885,000 in the 2000 period, or an 8% decline. While
revenues decreased 8%, the company dollar on such revenues declined 15% or
$160,000 for the period. Additionally, operating expenses increased 7% to
$1,806,000 for the 2000 period. Such increase in operating expenses consists
primarily of additional interest and depreciation expense on capital
expenditures for the new office facility and intercompany working capital
advances.
As a result of the aforementioned $1,369,000 or 20% increase in revenues of
PPP-AZ, the company dollar increased 14% to $2,174,000 over the 1999 period. The
increase in company dollar is not proportionate as a result of agents retaining
a higher portion of the commissions revenue. Operating expenses for the 2000
period increased $616,000 to $2,318,000. These factors collectively resulted in
PPP-AZ recognizing a pre-tax loss of $132,000 as compared to a pre-tax profit of
$238,000 in 1999. The increased operating expenses resulting from expansion of
operations as well as erosion of the company dollar is being confronted by
management and it is anticipated that brokerage operations in this market will
recover and be profitable for the 2000 fiscal year.
First Commercial recognized a pre-tax loss of $103,000 for the 2000 period,
as compared to $81,000 in 1999. Despite the aforementioned increase in revenues
of $71,000 or 12% over 1999, the company dollar actually decreased by $4,000 or
2% to $246,000, due to a high split agent closing a large transaction during the
2000 period. The other major component effecting comparability between the two
periods was a $16,000, or 5% increase in operating expenses which is primarily
the result of growth initiatives. Based upon projected commission revenues from
closings through fiscal year end, management believes that First Commercial will
generate pre-tax profits for the 2000 fiscal year.
Construction and Land Development Segment:
The construction and land development segment operates primarily in the
Albuquerque, Rio Rancho and Los Lunas, New Mexico metropolitan areas, with the
exception of commercial construction operations, which has performed several
contracts in other regions throughout the United States. The Company is
currently in the final stages of establishing a satellite office for its
commercial construction operations in Phoenix, Arizona.
Construction is comprised of the residential and commercial operations of
Charter Building & Development Corp. (Charter) and Amity, Inc. (d.b.a. Realco
Construction), 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, 2000
This segment experienced a decline in pre-tax profits of $37,000 to $6,000
for the quarter ended March 31, 2000. While total construction sales for this
segment increased $213,000 or 4%, gross profit on such sales only increased 1%.
Within this 1% variance, gross profits from residential construction decreased
$125,000, while gross profits from commercial construction increased $126,000.
Both of which are discussed in more detail
<PAGE>
below. Operating expenses for this segment increased $110,000 or 19% for the
2000 quarter, which is primarily the result of increased selling, general and
administrative expenses associated with operations of TI Construction, Inc.,
which was acquired by Realco Construction effective August 1, 1999.
Operations of Charter resulted in a pre-tax loss of $108,000 for the March
31, 2000 quarter as compared to a pre-tax profit of $3,000 in 1999. This decline
in profitability is the result of the aforementioned $125,000 decrease in gross
profit on home sales and a $19,000 increase in operating expenses to $416,000,
as offset by a $13,000 increase in gross profit on lot sales and a $26,000
increase in interest and other income.
While the decrease in Charter home sales of $450,000 or 12% to $3,467,000
in the 2000 quarter, gross profits decreased $125,000 or 32% to $271,000. This
larger than expected decrease in gross profit is primarily the result of losses
taken on two speculative/model homes in which there was a change in product line
for this particular subdivision, making the sale of these homes difficult, as
well as a loss recognized on the sale of a custom home due to poor cost
controls. The increasing mortgage rates have had a negative effect on Charter's
sales volume, however, based upon customer traffic at subdivisions and recently
signed contracts, it appears that sales volume is in the process of recovering
to some extent.
Revenues from Realco Construction's operations totaled $1,819,000 for the
quarter ended March 31, 2000, which represents an increase of $664,000 or 57%
over 1999. This increase is the result of increased marketing efforts of tenant
improvement work, as well as the acquisition of TI late in fiscal 1999. As a
result of implementing better cost controls, gross profits increased 131% or
$232,000 in the 2000 quarter. Such increases in gross profits were offset
largely by an increase in operating expense of $119,000 to $212,000. This
substantial increase in operating expenses is the result of establishing an
administrative infrastructure to support a much higher volume of construction
operations. While management is identifying and making some administrative cost
reductions, the trend of increasing revenues must continue in order to result in
profitable operations.
The Company's land development activities experienced a decrease in
revenues from lot sales of $38,000 to $481,000 in the 2000 quarter. However,
such sales were more profitable in the 2000 quarter resulting in a $26,000, or
19% increase in gross profit to $164,000. After considering a $29,000 decrease
in operating expenses and a nominal increase in interest and other income, such
operations resulted in a pre-tax profit of $96,000 as compared to $31,000 in the
1999 quarter.
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
removed from Charter's inventory. Such deferred profits totaled $152,000 at
March 31, 2000.
For the Six Months Ended March 31, 2000
The period's total operating revenues for this segment increased $2,660,000
to $13,960,000, or 24%, over 1999. Additionally, this segment recognized a
pre-tax profit of $18,000 compared to $560,000 in 1999. The decrease in earnings
is primarily the result of $550,000 of non-recurring income recognized in the
1999 period. <PAGE>
Charter's residential construction revenues for the period increased
$966,000 or 12% over 1999. Despite the increase in revenues, gross profit
actually decreased by $6,000 to $689,000. This decrease in gross profit is the
result of problems the company is encountering in cost control (estimating and
field changes) as well as increasing incentives to customers in an attempt to
promote sales which have become slower due to increases in mortgage rates. Given
this decrease in gross profit and increases in operating expenses, Charter
incurred a pre-tax loss of $162,000 as compared to $125,000 in 1999. Management
has implemented some changes which are expected to reduce operating expenses and
is in the process of evaluating its cost control methods.
Revenues from Realco Construction's commercial construction operations for
the period totaled $3,505,000, as compared to $1,757,000 for the 1999 period,
resulting in a 99% increase. This increase in revenues as well as improved cost
controls, resulted in a $228,000, or 131%, increase in gross profit to $402,000
in the 2000 period. Similar to the quarterly analysis, this increase in gross
profit was offset by a $227,000 increase in operating expenses, resulting in a
pre-tax loss of $25,000 for the 2000 period, as compared to $27,000 in the 1999
period. The 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 a decrease of
$110,000, or 8% in revenues and a $506,000 decrease in pre-tax earnings to
$206,000 in 2000. The decrease in revenues and earnings is the result of
non-recurring other income of $550,000 being reported in the 1999 period. After
adjustment for this item, revenues from on-going operations actually increased
61% to $1,342,000 in the 2000 period, and pre-tax earnings from on- going
operations increased $44,000 to $206,000. Gross profit from lot sales increased
$140,000 or 52% to $407,000 in the 2000 period, however an increase of $82,000
or 59% in operating expenses limited the increase in pre-tax profits. This
increase in operating expenses includes $45,000 in selling, general and
administrative expenses and $37,000 in interest expense. Such expenses reflect
carrying costs associated with subdivisions, including debt service, property
taxes, homeowners dues and lot maintenance.
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 Company, a full service residential mortgage banker,
and an approximately 11% interest in MI Acquisition Corporation, the parent
company of Miller & Schroeder Inc., an investment banker specializing in debt
securities.
For the Quarter Ended March 31, 2000
The Financial Services segment, which also includes certain unallocated
operating expenses of the parent company, realized a pre-tax profit of $75,000
for the quarter ended March 31, 2000 as compared to $73,000 in 1999. While this
represents a nominal increase in earnings, there were several <PAGE>
significant variances within this amount, which are discussed in more detail
below. Also reported in this quarter is the aforementioned other comprehensive
income of $531,000 associated with the Company's common stock holdings of
Arinco.
Net equity earnings recognized from PHS were $81,000, as compared to
$150,000 in the 1999 quarter. This decrease in earnings is the result of a
downturn in mortgage activity due to increasing interest rates and increased
operating costs associated with growth initiatives.
The Company recognized a loss of $42,000 as compared to earnings of
$101,000 for the 1999 period relating to its equity interest in MI Acquisition
Corporation. The decrease in earnings of this investee is primarily attributable
to temporary declines in revenues and timing of individually significant
investment banking deals.
GAEC experienced a $38,000 increase in pre-tax profit to $59,000 for the
2000 quarter. This increase is primarily the result of equity earnings of
$20,000 earned on its minority interest in Hill Park Associates, a limited
partnership with real estate holdings (condominiums) in New York and an increase
in interest income of $16,000 earned on intercompany working capital advances to
PPP-NM. Such intercompany income is eliminated in consolidation.
An increase in interest and other income of $136,000, consisting primarily
of gains on sales of securities and a decrease of $57,000 in interest expense
due to principal reductions on subordinate debt are the other significant
fluctuations within the operations of this segment.
For the Six Months Ended March 31, 2000
The Financial Services segment realized a pre-tax profit of $72,000 as
compared to $42,000 for the 1999 period. This increase in earnings was
attributable to several factors; the most significant of which include a
$215,000 decrease in equity earnings of investees, an increase in interest and
other income of $169,000 consisting primarily of gains on sale of securities,
and a $57,000 decrease in interest expense due to scheduled principal reductions
in outstanding debt.
Net equity earnings recognized by PHS, Inc. from its interest in PHS
Mortgage totaled $131,000 for the 2000 period, as compared to $223,000 in 1999.
The Company recognized a loss of $40,000 for its equity interest in MI
Acquisition Corporation, as compared to earnings of $92,000 in 1999. This
decrease is primarily attributable to temporary declines in sales and trading
revenues of this company.
GAEC experienced a $58,000 increase in pre-tax operating profits to $94,000
for the 2000 period. This increase relates primarily to the aforementioned
interest charges on intercompany advances to PPP-NM.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity consists primarily of cash, trade accounts receivable,
inventories and construction advances collateralized by <PAGE>
inventory. It is expected that future cash needs will be financed by a
combination of cash flows from operations, future advances under construction
loans, and if needed, other financing arrangements, which may be made available
to the Company. The Company does not have any material commitments for capital
expenditures for fiscal 2000.
The Company's projection of future cash requirements, is affected by numerous
factors, including but not limited to, changes in customer receipts, consumer
industry trends, sales volume, operating cost fluctuations, acquisitions of
existing businesses and unplanned capital spending.
As a result of future cash payments required for past acquisitions, increases in
operating expenses associated with growth and relocation of existing operations,
management believes that it may be necessary to secure additional financing to
sustain the Company's operations and anticipated growth for the ensuing twelve
months. Management is currently considering various financing options, which
includes refinancing of certain land inventory holdings, as well as securing
additional funds on certain unencumbered land inventory.
Competition and Market Factors
- ------------------------------
The business in which the Company is engaged is highly competitive. Many of the
Company's competitors have nationwide operations or are affiliated with national
franchising organizations. As such, a number of the Company's competitors have
greater financial resources. It is for that reason that the Company continues to
pursue strategic alliances with other companies in the industry.
The real estate industry, and therefore, the Company's operations, can be
cyclical and are affected by consumer confidence levels, prevailing economic
conditions and interest rates. Other factors effecting business include
increases in construction costs, increases in costs associated with home
ownership such as interest rates and property taxes, changes in consumer
preferences and demographic trends. The Company believes that its strategy of
vertical integration will eventually establish a strong presence in the markets
in which it does business, however, there can be no assurance that this strategy
will be successful.
Forward Looking Statements
- --------------------------
Investors are cautioned that certain statements contained in this document are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"). Statements which are predictive in
nature, which depend upon or refer to future events or conditions constitute
forward-looking statements. In addition, any statements concerning future
financial performance, ongoing business strategies or prospects, and possible
future Company actions, which may be provided by management are also
forward-looking statements as defined by the Act. Forward-looking statements are
based on current expectations and projections about future events and are
subject to risks, uncertainties, assumptions, and economic and market conditions
in the real estate industry, among other things. <PAGE>
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
management due to a number of factors. Important factors that could cause such
differences include but are not limited to, changes in general economic
conditions either nationally or in regions in where the Company operates or may
commence operations, employment growth or unemployment rates, availability and
costs of land and homebuilding materials, labor costs, interest rates,
prevailing rates for sales associate commission structures, industry competition
and regulatory developments.
Year 2000 Issues
- ----------------
As a result of the Company's Year 2000 readiness plan, which included a
contingency plan and was completed in 1999, there have been no material negative
effects encountered by the Company relating to Year 2000 issues thus far.
The Company's plan included a systematic process of testing computer hardware
and software, as well as receiving limited assurance from key vendors and
service providers (including suppliers and subcontractors for construction
operations, realtor clearing associations, financial institutions and mortgage
companies) as to their Year 2000 readiness. As a result of the Company primarily
using internal information technology personnel to carry out its Year 2000
readiness plan, total costs incurred to address this issue, including personnel
and equipment costs, were limited to less than $35,000.
The Company continues to remain alert to potential problems arising from Year
2000, but management believes the Company is adequately prepared for such
problems in the unlikely event that they do occur. Furthermore, management does
not anticipate incurring any additional costs relating to this issue.
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.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS IN SENIOR SECURITIES
None
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The following items were voted for in person, or by proxy at the Annual
Shareholders meeting held on March 10, 2000:
Election of Directors For Against
--------------------- ----------- -----------
James A. Arias 2,312,976 35,850
Bill E. Hooten 2,191,976 165,850
Arthur A. Schwartz 2,312,976 35,850
Marshall Blumenfeld 2,312,976 35,850
Martin S. Orland 2,312,976 35,850
Noel Zeller 2,312,976 35,850
Amendment of Company's Articles
of Incorporation For Against
-------------------------------- ----------- -----------
Increase in authorized shares of
no par value common stock from
6,000,000 to 50,000,000 2,316,876 40,950
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits filed with this Report.
(b) The Registrant filed Form 8-K dated March 10, 2000 reporting matters
under Item 5, Other Events.
<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 12, 2000
/s/ JAMES A. ARIAS
---------------------------------------
James A. Arias, President and Chief
Executive Officer
Date: May 12, 2000
/s/ CHRIS A. BRUEHL
---------------------------------------
Chris A. Bruehl, Senior Vice President
and Chief Financial Officer
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