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 December 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.
- -----------------------------------------------------------------------------
(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
------ ------
As of February 10, 2000 the Company had approximately 2,889,000 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)
December 31,
1999 September 30,
(unaudited) 1999
----------- -----------
ASSETS
Cash and cash equivalents $ 2,559 $ 3,688
Restricted cash 241 367
Accounts and notes receivable, net 2,242 1,899
Costs and estimated earnings in excess of
billings on uncompleted contracts 111 482
Inventories 13,115 14,932
Property & equipment, net 1,809 1,935
Investments - equity method 1,795 1,744
Deferred income taxes 215 117
Cost in excess of net assets acquired, net 2,125 1,605
Other assets 827 1,043
----------- -----------
$ 25,039 $ 27,812
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 4,441 $ 5,214
Lease obligations 682 743
Construction advances and notes payable,
collateralized by inventories 5,908 6,797
Accounts payable and accrued liabilities 3,789 4,293
Escrow funds held for others 241 367
----------- -----------
Total liabilities 15,061 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,
6,000,000 shares; issued 2,894,038 shares 7,907 7,909
Accumulated deficit (841) (408)
----------- -----------
9,994 10,429
Less 5,100 and 11,000 shares common
stock held in treasury, respectively
- at cost 16 31
----------- -----------
9,978 10,398
----------- -----------
$ 25,039 $ 27,812
=========== ===========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended December 31,
(Dollars in thousands, except per share amounts)
(unaudited)
1999 1998
-------- --------
REVENUES
Brokerage commissions and fees $ 6,260 $ 6,166
Construction sales 7,054 4,554
Sales of developed lots 934 642
Equity in net earnings of investees 51 96
Interest and other, net 113 697
-------- --------
14,412 12,155
COSTS AND EXPENSES
Cost of brokerage revenue 4,730 4,595
Cost of construction sales 6,467 4,183
Cost of developed lots sold 674 484
Selling, general, administrative and other 2,618 2,222
Depreciation and amortization 184 120
Interest 270 235
-------- --------
14,943 11,839
-------- --------
Earnings (loss) before income taxes (531) 316
INCOME TAX EXPENSE (BENEFIT) (98) 127
-------- --------
NET EARNINGS (LOSS) (433) 189
PREFERRED STOCK DIVIDEND REQUIREMENT 28 30
-------- --------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ (461) $ 159
======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share before
preferred stock dividend requirement $ (.15) $ .07
======== ========
Net earnings (loss) per common share after
preferred stock dividend requirement $ (.16) $ .06
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,884,103 2,767,000
========= =========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended December 31,
(Dollars in thousands)
(unaudited)
1999 1998
-------- --------
Cash flows from operating activities
Net earnings (loss) $ (433) $ 189
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Depreciation and amortization 184 120
Accretion of discount on notes payable 12 14
Net distributions in excess of earnings of
investees (earnings in excess of distributions (51) 360
Provision for deferred income taxes (98) 112
Change in operating assets and liabilities
Decrease (increase) in restricted cash 126 (48)
(Increase) decrease in accounts receivable (306) 135
Decrease in inventories 1,817 381
Decrease (increase) in net billings related
to costs and estimated earnings on
uncompleted contracts 371 (171)
Decrease (increase) in other assets 216 (88)
(Decrease) increase in accounts payable and
accrued liabilities (1,054) 101
(Decrease) increase in escrow funds
held for others (126) 48
-------- --------
Net cash provided by operating activities 658 1,153
Cash flows from investing activities
Purchases of property and equipment (28) (77)
Advances on notes receivable (157) (58)
Receipts on notes receivable 120 373
Purchase of investments - equity method - (62)
-------- --------
Net cash provided by investing activities (65) 176
Cash flows from financing activities
Construction advances and notes payable, net (889) (1,151)
Proceeds from borrowing under revolving and
long term debt 24 -
Payments on capital lease obligations and
long term debt (870) (818)
Issuance of treasury stock 13 -
-------- --------
Net cash used in financing activities (1,722) (1,969)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,129) (640)
Cash and cash equivalents at beginning of period 3,688 3,788
-------- --------
Cash and cash equivalents at end of period $ 2,559 $ 3,148
======== ========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 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 three months ended December 31, 1999 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.
<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.
The Company experienced a net loss of $433,000 for the quarter ended December
31, 1999, as compared to net earnings of $189,000 for the 1998 quarter. This
decrease in earnings is primarily attributable to the Company receiving
developed homesites, with a value of $550,000 in the 1998 quarter, for the
assignment of its partnership interest in a joint venture which was engaged in a
lawsuit. This decrease is also attributable to a $495,000 increase in operating
expenses (which includes selling, general, administrative and other expenses)
and depreciation, amortization, and interest expense exceeding the $277,000
increase in gross profit from the Company's primary operations.
Results of Operations
- ---------------------
Real Estate Brokerage Segment:
The real estate brokerage segment consists of Prudential Preferred Properties,
New Mexico (PPP-NM), Prudential Preferred Properties, Arizona (PPP-AZ), and
First Commercial Real Estate Services, Inc. (First Commercial).
This segment realized a pre-tax loss of $539,000 for the 1999 period, as
compared to $162,000 in 1998. While brokerage commission did make a nominal
increase of $92,000 to $6,260,000, the company dollar (split retained by the
company) actually decreased $41,000 to $1,530,000 due to market pressures to
retain agents by offering higher splits. Other significant items effecting the
period's operations was a decrease in interest and other income of $88,000 which
related primarily to a rebate of royalty fees in 1998, and a $248,000 increase
in operating expenses, depreciation and amortization, and interest expense.
PPP-NM experienced a pre-tax loss of $437,000 in 1999, as compared to a $276,000
loss in 1998. This additional loss is the result of a 17% decrease in brokerage
revenues to $2,118,000 in 1999, due to softening of the Albuquerque housing
market. This decline in revenues as well as higher splits being retained by the
agents resulted in a 22% decrease in company dollar to $435,000 in 1999. While
operating expenses decreased 5% to $735,000 in 1999, depreciation and
amortization and interest expense increased from $64,000 to $139,000 in 1999.
<PAGE>
The increase in depreciation and amortization is the result of capital
expenditures associated with the consolidation of certain sales offices into a
common facility, while the increase in interest is attributable to a capital
lease for office furniture and equipment for this facility and intercompany
interest charges for working capital advances.
Management continues to implement its aggressive recruiting and cost reduction
plans for PPP-NM. The Company has seen positive results in its recruiting
efforts, however the majority of new agents retained are relatively
inexperienced. As such, these new agents typically do not contribute substantial
sales volume until they gain several months of experience. In an effort to
improve recruiting efforts, the Company has hired an individual with a strong
background for recruiting real estate agents, as well as appointed individuals
with the specific responsibility of coaching the inexperienced agents.
Additionally, the Company is carrying out cost control initiatives which are
expected to reduce management and administrative personnel costs by
approximately $200,000 on an annualized basis.
In connection with management's commitment to consolidate certain sales offices
of PPP-NM, a charge of $273,000 associated with lease abandonment expenses was
accrued in fiscal 1998. Of the $273,000 initial restructuring charge, $38,000
was utilized during fiscal 1999 and $34,000 was utilized in the first quarter of
fiscal 2000 for tenant improvements, vacancies and shortfalls on sublease
revenues on the abandoned properties.
While PPP-AZ did increase its brokerage revenues by 7% in the 1999 period to
$3,749,000, and increase its company dollar 7% to $981,000, operating expenses
increased $156,000, or 19% to $978,000. As a result, of these factors, a pre-tax
loss of $21,000 was recognized in the 1999 period, as compared to pre-tax
earnings of $31,000 in 1998.
The increase in operating expenses for PPP-AZ is attributable to selling and
administrative costs associated with the higher sales volume, as well as higher
facility costs associated with this subsidiary's expansion throughout the
Phoenix metropolitan area. The increase in facility costs is expected to result
in growth in revenues and profitability for these operations. In connection with
the Company's growth initiatives in the Phoenix market, the Company acquired
certain net assets and the operations of Prudential Farnsworth Real Estate,
based in Mesa Arizona effective January 1, 2000. Consideration for this
acquisition, which also included commercial real estate used as a sales office,
consisted of a cash payment of $250,000, future cash payments of up to $150,000
and the assumption of approximately $40,000 in liabilities.
First Commercial recognized a pre-tax loss of $63,000 in the 1999 period as
compared to $65,000 in 1998. While net operations were comparable between the
two periods, total revenues and expenses each increased by approximately
$195,000 or 100%. This increase in volume is the result of timing associated
with closing large transactions, which can be quite cyclical in the commercial
brokerage business. While gross revenues increased substantially, the Company
dollar only increased $27,000 or 31% to $115,000, due to a high split agent
closing a large transaction during the 1999 period. Operating expenses and
depreciation and amortization increased approximately $25,000 or 16% to $178,000
in 1999, as a result of growth in operations.
<PAGE>
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.
Construction is comprised of the residential and commercial operations of
Charter Building and Development Corp. and Realco Construction, respectively.
This segment also includes development activities consisting of the acquisition
of raw land for development into residential homesites, which are sold to
Charter or to other builders. Such land development projects are performed under
joint venture agreements with other developers or entirely by the Company.
Revenues for this segment increased $2,222,000 or 38% for the quarter ended
December 31, 1999 as compared to 1998. This increase in revenues contributed to
a $319,000 or 60% increase in gross profit over 1998. Such increase in gross
profit was offset largely by a $240,000 or 63% increase in operating expenses
and a $552,000 decrease in interest and other income. The increase in expenses
is primarily attributable to Charter and Realco Construction, which is discussed
in further detail below, and the decrease in interest and other income is the
result of the aforementioned homesites valued at $550,000 received in 1998.
As a result of these factors, this segment realized a pre-tax earnings of
$12,000 as compared to $517,000 in 1998.
Charter's residential construction revenues for the period increased $1,416,000
or 36% over 1998. This increase is the result of continued success of the
Company's line of homes designed to meet a lower price point that is in more
demand in the Albuquerque market. This increase in revenues resulted in a
$119,000 or 40% increase in gross profit to $417,000. This increase in gross
profit was offset by a $78,000 or 32% increase in operating expenses. Other
nominal fluctuations in other revenues and expenses resulted in Charter
recognizing a pre-tax loss of $53,000, as compared to $129,000 in 1998. The
profitability of this subsidiary is expected to improve over the remainder of
fiscal 2000, as management is currently implementing various plans to reduce
annual operating expenses by approximately $125,000 and improve job cost
controls.
Quarterly revenues from Realco Construction's commercial construction operations
totaled $1,686,000 in 1999, an increase of $1,084,000 or 180% over 1998. Despite
this increase in revenues, a decrease in gross profit margins from 12% to 10%
and a $107,000 or 105% increase in general and administrative expenses resulted
in a pre-tax loss of $45,000 for 1999, as compared to a pre-tax loss of $35,000
in 1998. The increase in general and administrative expenses for the 1999 period
was incurred as a result of expanding operations, including the previously
reported acquisition of TI Construction, Inc. in August 1999. Management has
implemented an immediate plan which is expected to decrease annual operating
expenses by approximately $135,000 and is currently analyzing other operating
expenses for areas of cost reduction through the economies of scale expected to
be realized upon the further integration of the operations of TI.
The Company's land development activities experienced an increase in revenues
from lot sales of $292,000 or 45% to $934,000 in 1999. This increase in revenues
resulted in additional gross profit of $102,000 or 64% to $260,000 in 1999.
Operating and interest expenses, which consist primarily of inventory carrying
costs increased $112,000 to $145,000 in 1999. This increase is primarily
associated with carrying costs on two large subdivisions which concluded
development in January 1999. Accordingly, such costs were expensed in the 1999
quarter, as opposed to being capitalized in the 1998 quarter.
<PAGE>
These factors as well as the significant effect of other income in the amount
$550,000 on the aforementioned assignment of a partnership interest in 1998,
resulted in the Company's land development operations generating pre-tax
earnings of $120,000 in 1999, as compared to $696,000 in 1998.
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, an investment
banker specializing in debt securities.
The financial services segment, which includes certain unallocated operating
expenses of the parent company, realized a pre-tax loss of $3,000, as compared
to $30,000 in 1998. This improvement in earnings is primarily the result of
approximately $73,000 in gains on sales of securities in 1999, for which there
was no comparable activity in 1998, as reduced by a $23,000 decrease in equity
earnings of investees and a $18,000 decrease in interest income. Operating
expenses, depreciation and amortization, and interest expense were comparable
between the two periods.
Net equity earnings recognized by PHS, Inc. from its interest in PHS Mortgage
Company totaled $50,000 for the 1999 period, as compared to $73,000 in 1998.
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's investment in MI did not make a significant contribution to equity
earnings in either period, as this has traditionally been a slow period for this
company.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity consists primarily of cash, trade accounts receivable,
inventories and construction advances collateralized by 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. <PAGE>
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.
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.
<PAGE>
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 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
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 reports
filed on Form 8-K during the 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: February 10, 2000
/s/ JAMES A. ARIAS
---------------------------------------
James A. Arias, President and Chief
Executive Officer
Date: February 10, 2000
/s/ CHRIS A. BRUEHL
---------------------------------------
Chris A. Bruehl, Secretary\Treasurer
and Chief Financial Officer
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