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 June 30, 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 August 10, 2000 the Company had approximately 2,923,000 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)
June 30,
2000 September 30,
(unaudited) 1999
----------- -----------
ASSETS
Cash and cash equivalents $ 1,289 $ 3,688
Restricted cash 404 367
Available for sale securities 878 -
Accounts and notes receivable, net 2,247 1,899
Costs and estimated earnings in excess of
billings on uncompleted contracts 62 482
Inventories 12,524 14,932
Property & equipment, net 1,931 1,935
Investments - equity method 574 1,744
Investment - cost method 1,210 -
Deferred income taxes 22 117
Cost in excess of net assets acquired, net 2,175 1,605
Other assets 721 1,043
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$ 24,037 $ 27,812
=========== ===========
LIABILITIES
Notes payable $ 4,592 $ 5,214
Lease obligations 567 743
Construction advances and notes payable,
collateralized by inventories 6,056 6,797
Accounts payable and accrued liabilities 2,715 4,293
Escrow funds held for others 404 367
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Total liabilities 14,334 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 2,924,038 shares
and 2,894,038, respectively 7,966 7,909
Accumulated other comprehensive income 338 -
Accumulated deficit (1,527) (408)
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9,705 10,429
Less 700 and 11,000 shares common stock
held in treasury, respectively - at cost 2 31
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9,703 10,398
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$ 24,037 $ 27,812
=========== ===========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30,
(Dollars in thousands, except per share amounts)
(unaudited)
2000 1999
-------- --------
REVENUES
Brokerage commissions and fees $ 8,019 $ 6,820
Construction sales 5,616 5,864
Sales of developed lots 772 731
Equity in net earnings of investees 69 67
Interest and other, net 39 63
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14,515 13,545
COSTS AND EXPENSES
Cost of brokerage revenue 5,904 4,898
Cost of construction sales 5,003 5,227
Cost of developed lots sold 582 597
Selling, general, administrative and other 2,641 2,259
Depreciation and amortization 248 150
Interest 221 211
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14,599 13,342
-------- --------
Earnings (loss) before income taxes (84) 203
INCOME TAX EXPENSE 128 81
-------- --------
NET EARNINGS (LOSS) (212) 122
PREFERRED STOCK DIVIDEND REQUIREMENT 28 30
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NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ (240) $ 92
======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share before
preferred stock dividend requirement $ (.07) $ .04
======== ========
Net earnings (loss) per common share after
preferred stock dividend requirement $ (.08) $ .03
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,903,000 2,767,000
========= =========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended June 30,
(Dollars in thousands, except per share amounts)
(unaudited)
2000 1999
-------- --------
REVENUES
Brokerage commissions and fees $ 20,819 $ 18,531
Construction sales 17,955 15,490
Sales of developed lots 2,339 1,798
Equity in net earnings of investees 177 425
Interest and other, net 297 704
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41,587 36,948
COSTS AND EXPENSES
Cost of brokerage revenue 15,413 13,068
Cost of construction sales 16,252 13,984
Cost of developed lots sold 1,712 1,381
Selling, general, administrative and other 8,072 6,999
Depreciation and amortization 652 421
Interest 684 707
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42,785 36,560
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Earnings (loss) before income taxes (1,198) 388
INCOME TAX EXPENSE (BENEFIT) (79) 139
-------- --------
NET EARNINGS (LOSS) (1,119) 249
PREFERRED STOCK DIVIDEND REQUIREMENT 84 90
-------- --------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ (1,203) $ 159
======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share before
preferred stock dividend requirement $ (.39) $ .09
======== ========
Net earnings (loss) per common share after
preferred stock dividend requirement $ (.42) $ .06
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,892,000 2,767,000
========= =========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended June 30,
(Dollars in thousands)
(unaudited)
2000 1999
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Cash flows from operating activities
Net earnings (loss) $ (1,119) $ 249
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Depreciation and amortization 652 421
Accretion of discount on notes payable 32 41
Net distributions in excess of earnings of
investees 21 146
Gain on sale of securities (118) (19)
Gain on sale of property and equipment (9) -
Provision for deferred income taxes 95 144
Change in operating assets and liabilities
Increase in accounts receivable (327) (132)
Decrease in inventories 2,408 1,784
Decrease (increase) in net billings related
to costs and estimated earnings on
uncompleted contracts 420 (332)
(Increase) decrease in other assets (189) 36
(Decrease) increase in accounts payable and
accrued liabilities (1,680) 700
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Net cash provided by operating activities 186 3,038
Cash flows from investing activities
Purchases of property and equipment (142) (582)
Proceeds from the sale of property and equipment 13 -
Purchase of securities available for sale (995) (421)
Proceeds from the sale of securities available
for sale 1,008 450
Advances on notes receivable (157) (554)
Receipts on notes receivable 194 1,281
Payments for businesses acquired, net
of cash acquired (756) (420)
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Net cash used in investing activities (835) (246)
Cash flows from financing activities
Construction advances and notes payable, net (741) (1,920)
Payments on capital lease obligations and
long term debt (1,100) (1,400)
Proceeds from borrowings under long term debt 69 -
Issuance of treasury stock 33 -
Purchase of treasury stock (11) -
-------- --------
Net cash used in financing activities (1,750) (3,320)
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<PAGE>
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,399) (528)
Cash and cash equivalents at beginning of period 3,688 3,788
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Cash and cash equivalents at end of period $ 1,289 $ 3,260
======== ========
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)
========
In June 2000, the Company purchased all the outstanding stock of Financial
Services Group, Inc. in exchange for 680,000 shares of Company common stock. In
connection with this acquisition, liabilities were assumed as follows:
Fair value of assets acquired, including
650,000 shares of Realco common stock
which was cancelled and cash of $46 $ 1,546
Stock issued (1,445)
--------
Liabilities assumed $ (101)
========
See accompanying notes.
<PAGE>
REALCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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 ended June 30 is as follows:
2000 1999
---------- ----------
Three months ended $ (405,000) $ 131,000
Nine months ended (781,000) 289,000
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 (loss), net of deferred income taxes,
of ($193,000) and $338,000 was recognized on unrealized gains (losses) during
the three and nine months periods ended June 30, 2000, respectively.
<PAGE>
5. Investments:
Effective May 1, 2000 the Company adopted the cost method to account for its
investment in MI Acquisition Corporation. As a result of additional stock
offerings by this privately owned financial services company, the Company's
equity position has been diluted to a level which no longer supports accounting
for this investment under the equity method.
6. Segment Information:
The Company operates in the following segments: real estate brokerage,
residential construction and land development, commercial construction, and
financial services. In the Company's annual report on Form 10-K for the fiscal
year ended September 30, 1999, commercial construction activities were included
in the "Construction and Land Development Segment". Due to recent growth in
these operations, a commercial construction segment has been established for
reporting purposes in fiscal 2000.
Information concerning the Company's business segments for the periods ended
June 30 is as follows:
Three months ended:
2000 1999
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Revenues
Real estate brokerage $ 8,019,000 $ 6,818,000
Residential construction
and land development 4,940,000 5,800,000
Commercial construction 1,475,000 806,000
Financial services 262,000 312,000
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Total for reportable segments 14,696,000 13,736,000
Intersegment elimination (181,000) (191,000)
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Total revenues $ 14,515,000 $ 13,545,000
============ ============
Operating profit (loss)
Real estate brokerage $ (224,000) $ (17,000)
Residential construction
and land development 199,000 215,000
Commercial construction 3,000 (10,000)
Financial services (62,000) 15,000
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Earnings (loss) before taxes $ (84,000) $ 203,000
============ ============
<PAGE>
Nine months ended:
2000 1999
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Revenues
Real estate brokerage $ 20,835,000 $ 18,571,000
Residential construction
and land development 15,394,000 15,342,000
Commercial construction 4,980,000 2,563,000
Financial services 926,000 986,000
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Total for reportable segments 42,135,000 37,462,000
Intersegment elimination (548,000) (514,000)
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Total revenues $ 41,587,000 $ 36,948,000
============ ============
Operating profit (loss)
Real estate brokerage $ (1,427,000) $ (429,000)
Residential construction
and land development 241,000 801,000
Commercial construction (22,000) (36,000)
Financial services 10,000 52,000
------------ ------------
Earnings (loss) before taxes $ (1,198,000) $ 388,000
============ ============
Operating profit consists of total revenues, less costs and expenses including
interest expense on intercompany advances, but does not include income taxes.
7. Income Taxes:
For the periods ended June 30, 2000, the Company's effective income tax rate
differed from the federal statutory rate due to increases in the valuation
allowance for deferred tax assets.
<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, Residential Construction and Land
Development Segment, Commercial Construction Segment, and Financial Services
Segment.
The Company currently operates primarily within the Albuquerque, New Mexico and
Phoenix, Arizona metropolitan areas. The Company recently opened a satellite
office for commercial construction in Southern California. 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 June 30, 2000
The Company experienced a consolidated pre-tax loss of $84,000 for the
quarter ended June 30, 2000 compared to a pre-tax profit of $203,000 for the
1999 quarter. While total revenues increased $970,000, or 7%, to $14,515,000,
total expenses increased $1,257,000, or 9%, to $14,599,000. Gross profit from
the Company's brokerage, construction and land development operations outpaced
the percentage increase in total revenues, as gross profit increased 8% or
$225,000 to $2,918,000.
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 $382,000 or 17% to
$2,641,000 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, management continues to implement several cost control
initiatives on a Company wide basis. Such initiatives are discussed in further
detail in the Results of Operations by Operating Segment.
For the Nine Months Ended June 30, 2000
Operations for the period resulted in a pre-tax loss of $1,198,000 as
compared to pre-tax earnings of $388,000 for the 1999 period. Consistent with
the aforementioned quarterly operating results, the Company experienced an
increase in total revenues of $4,639,000, or 13%, to $41,587,000 and an increase
in total expenses of $6,225,000 or 17%, to $42,785,000 for the 2000 period. The
increase in gross profit from the Company's brokerage, construction and land
development operations lagged the sales increase percentage, as such gross
profits increased $350,000 or 5% to $7,736,000. This is primarily due to the
fact that the gross profit margin from brokerage operations decreased from 29%
to 26% in the 2000 period. Such decrease is discussed in more detail in the
results of operations for the Real Estate Brokerage Segment.
<PAGE>
This increase in gross profit was more than offset by a $1,073,000 or 15%
increase in selling, general and administrative expenses.
Other significant fluctuations between the two periods were a $248,000
decrease in equity earnings of investees in the 2000 period, a $231,000 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 discussed in more detail in the result of operations from the Financial
Services Segment, the Company generated $338,000 of other comprehensive income,
net of deferred income taxes, during the 2000 period.
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 June 30, 2000
This segment experienced a pre-tax loss of $224,000 for the 2000 quarter as
compared to a pre-tax loss of $17,000 in 1999. Brokerage commissions and fees
increased 18% to $8,019,000 for the 2000 quarter, while the company dollar (the
portion of brokerage commissions and fees retained by the Company) only
increased $194,000 or 10% over the 1999 quarter.
The increase in company dollar was more than offset by an increase in
selling, general and administrative expenses of $239,000 or 13% and an increase
in depreciation and interest expense of $165,000 or 121%. The increase in
operating expenses is primarily associated with PPP-AZ operations, which is the
Company's strongest growth market while the increase in depreciation and
interest expense is primarily associated with PPP-NM operations. Each of these
items are discussed in more detail below.
The operations of PPP-NM resulted in a pre-tax loss of $327,000 for the
2000 quarter, as compared to $173,000 for the 1999 quarter. This loss is a
continuing trend due to past declines in market share and the inability to
significantly reduce operating expenses. While brokerage commissions and fees
increased $228,000 or 10% over the 1999 quarter, company dollar actually
decreased $69,000 or 10%. This decline in company dollar is attributable to (1)
offering higher splits to agents in an effort to improve retention and
recruitment of agents and (2) an increase in the amount of production generated
by the "top tier" agents who command higher splits. Management continues to
implement plans to gradually recapture a higher company dollar, but retention
issues prevent making drastic changes. <PAGE>
Selling, general and administrative expenses of PPP-NM were comparable
between the periods, but depreciation and amortization expense increased $29,000
or 109%, and interest expense increased $52,000 or 100%. The increase in
interest expense is the result of interest paid on capital leases for furniture
and equipment in the new office facility, as well as 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.
Recent reports from the Albuquerque Multiple Listing Service have indicated that
PPP-NM is showing signs of regaining market share, as the company's listings
taken for the three months ended June 30, 2000 have increased 27% over the same
period in 1999.
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 $152,000 for tenant improvements, vacancies
and shortfalls on sublease revenues.
PPP-AZ recognized pre-tax profits of $136,000 in the 2000 quarter compared
to a pre-tax profit of $222,000 in 1999. While revenues increased $957,000 or
23% over 1999, the increase in company dollar was limited to $181,000 or 16%.
This decline in company dollar (from 28% to 26% in 2000) is attributable to
market pressures to recruit and retain agents, as well as small acquisitions of
existing brokerages which had been paying higher splits to agents. This trend is
being addressed by management through gradually reducing the splits paid to
agents associated with recent acquisitions, as well as adjusting operating
expenses as discussed below.
Selling, general and administrative expenses of PPP-AZ increased 21% to
$1,109,000 which is directly related to growth in the number of offices and
agents. As profitability is down from the 1999 period, primarily due to the
aforementioned decline in company dollar, management is actively reducing
overhead where possible, as well as increasing the portion of operating and
marketing costs reimbursed by agents. It is further expected that additional
reductions to operating expenses will occur as recent acquisitions become more
fully integrated into the previously existing operations.
First Commercial, an Albuquerque based commercial brokerage company,
recognized pre-tax profits of $5,000 in the 2000 quarter as compared to $48,000
in 1999. While brokerage commissions and fees, and the corresponding company
dollar were comparable between the periods, selling, general and administrative
expenses increased $50,000 or 36% over the 1999 period. This increase is
attributable to management's growth initiative for this subsidiary, which
recently increased its agent count and has newly established operations in Las
Cruces, New Mexico. It is anticipated that agent production will soon support
the increased level of operating expenses.
For the Nine Months Ended June 30, 2000
Brokerage commissions and fees for this segment increased $2,288,000 or
12%, to $20,819,000 for the 2000 period. This increase is attributable to
<PAGE>
additional revenues of $2,327,000 generated by PPP-AZ and $84,000 generated by
First Commercial, as reduced by a $123,000 decrease from PPP-NM. Despite the
increase in revenues, this segment experienced a pre-tax loss of $1,427,000 for
the 2000 period as compared to $429,000 in 1999. This additional loss is the
result of the Company retaining a lower average split of brokerage commissions
(29% as compared to 26% in 1999) and a 9% or $512,000 increase in selling,
general and administrative expenses, both of which are discussed in more detail
in other sections of this report.
The pre-tax loss reported by PPP-NM increased $447,000 to $1,260,000 in the
2000 period. Despite the nominal 2% decline in revenues, company dollar
decreased 14% to $1,446,000 due to the factors discussed in the three months
results of operations. Similar to the three month period; selling, general and
administrative expenses were comparable between the periods, but depreciation
and amortization, and interest expense increased $183,000 or 86% due to asset
additions under capital leases and interest charges on intercompany working
capital advances.
As a result of the aforementioned $2,327,000 or 21% increase in revenues of
PPP-AZ, company dollar increased 14% to $3,510,000 over the 1999 period. The
increase in company dollar is not proportionate as a result of agents retaining
a higher portion of the commission revenue due to the factors discussed in the
three months results of operations. Operating expenses for the 2000 period
increased $745,000 or 29% to $3,324,000. While this increase is directly
attributable to internal growth as well as acquisitions, the current level of
these expenses is excessive, and management continues to execute cost saving
measures. As a result of updating of facilities and costs relating to
acquisitions, depreciation and amortization expense increased $132,000 to
$191,000 for the 2000 period.
These factors collectively resulted in PPP-AZ recognizing pre-tax profits
of $4,000 as compared to $460,000 in 1999.
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 $51,000 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 recognized a pre-tax loss of $98,000 for the 2000 period,
as compared to $32,000 in 1999. Despite generating the aforementioned 8%
increase in revenues, company dollar only increased by $5,000 or 1% to $450,000
due to a high split paid on a large transaction during the 2000 period. The
other major component effecting comparability between the two periods was a
$66,000, or 15% increase in operating expenses which is primarily the result of
the aforementioned growth initiatives. <PAGE>
Residential Construction and Land Development Segment:
The residential construction and land development segment operates primarily in
the Albuquerque, Rio Rancho and Los Lunas, New Mexico metropolitan areas. This
segment is comprised of the homebuilding operations of Charter Building &
Development Corp. (Charter), as well as land 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, 2000
This segment experienced a decline in pre-tax profits of $16,000 to
$199,000 for the quarter ended June 30, 2000.
Construction sales for this segment decreased 18% to $4,139,000 in 2000 due
to the negative effect of increasing mortgage rates. Such sales resulted in
gross profits of $431,000 as compared to $552,000 in 1999. Gross profit margins
on home sales decreased approximately .5% to 10.4% due to sales price reductions
and offering incentives to promote sales, as well as some initial pricing errors
made on new models and options offered.
Sales of developed lots showed a slight increase of 5% to $771,000 in 2000,
as sales to builders other than Charter increased. However, due to an average
profit margin of 25% recognized in 2000 as compared to 18% in 1999, gross
profits from such sales increased 42% from $134,000 to $190,000 in 2000. This
increase is attributable to a higher portion of lot sales coming from a
particular subdivision, which is more profitable.
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 profits totaled $128,000 at June 30,
2000.
As a result of principal reductions to outstanding debt, this segment
decreased its interest expense for the 2000 quarter by $30,000 to $178,000.
Selling, general and administrative expenses, depreciation and amortization and
other income was relatively comparable between the periods.
For the Nine Months Ended June 30, 2000
Total revenues for this segment of $15,394,000 were comparable to the 1999
amount of $15,342,000. However, pre-tax profits decreased $560,000 to $241,000
in 2000. This decrease in earnings is the result of a previously reported
$550,000 non-recurring income item recognized in the 1999 period.
Year to date construction sales of $12,974,000 represent a less than 1%
increase over 1999. This slight increase resulted from strong production in the
first two quarters, as offset by a third quarter decrease. Gross profit margins
on such sales decreased from 9.6% to 8.6% in 2000, yielding gross profits of
$1,120,000 as compared to $1,246,000 in 1999. This decrease in gross profit is
attributable to discounts and promotions offered to stimulate sales, pricing
errors on new models and options, as well as losses incurred on sales of certain
speculative and model homes which were not received well by customers.
<PAGE>
Sales of developed lots increased $541,000 or 30% to $2,339,000 in 2000.
This increase is largely attributable to the sale of two estate sized lots which
totaled $345,000. Such lots represent a portion of the five lots received for
the assignment of a partnership interest as reported in prior filings. Gross
profit margins on lot sales increased from 23% to 27% in 2000 due to the mix of
lot sales from various subdivisions, thereby resulting in gross profits of
$627,000 in 2000.
Selling, general and operating expenses increased $182,000 or 24% to
$949,000 in 2000. Of this increase, $137,000 is attributable to residential
construction operations and $45,000 is attributable to increased carrying costs
for land development operations. Certain cost control measures have been taken
with respect to residential construction operations, but additional reductions
may be necessary in the event sales volume does not increase in the near term.
Other items effecting comparability between the periods is a $56,000
decline in interest expense to $565,000 resulting from debt reduction in the
ordinary course of business, a $19,000 decrease in depreciation and amortization
expense and a $27,000 increase in other income (excluding the aforementioned
$550,000) which consists of construction management and commission fees earned.
Commercial Construction Segment:
Commercial construction operations, consist of Realco Construction, Inc.
(previously operated under the name Amity, Inc.), which is based in Albuquerque,
New Mexico. Realco Construction also operates from a satellite office in
Southern California and has performed commercial construction contracts in
numerous states.
For the Quarter Ended June 30, 2000
Revenues from Realco Construction's operations totaled $1,475,000 for the
quarter ended June 30, 2000, which represents an increase of $669,000 or 83%
over 1999. This increase is the result of increased marketing efforts of tenant
improvement work, specialty projects, and the acquisition of TI Construction,
Inc. ("TI") late in fiscal 1999. As a result of better estimating and cost
controls, gross profits increased 113% or $96,000 in the 2000 quarter. Such
increases in gross profits were offset largely by an increase in operating
expense of $89,000 to $172,000. This substantial increase in operating expenses
is the result of the TI acquisition, which provided an administrative
infrastructure to support a much higher volume of construction operations. While
management has identified and made some administrative cost reductions,
additional reductions will be necessary to result in profitable operations based
upon current revenues being generated.
These factors collectively resulted in pre-tax profits for this segment of
$3,000 as compared to a pre-tax loss of $10,000 in the 1999 quarter.
For the Nine Months Ended June 30, 2000
Revenues from commercial construction operations for the 2000 period
totaled $4,980,000, as compared to $2,563,000 for the 1999 period, resulting in
<PAGE>
a 94% increase. This increase in revenues as well as the aforementioned
improvements in estimating and cost controls, resulted in a $324,000, or 125%,
increase in gross profit to $583,000 in the 2000 period. Similar to the
quarterly analysis, this increase in gross profit was largely offset by a
$317,000 or 116% increase in operating expenses, resulting in a pre-tax loss of
$22,000 for the 2000 period, as compared to $36,000 in the 1999 period.
Financial Services Segment:
The financial services segment consists of operations of the parent company,
Great American Equity Corporation (GAEC), PHS, Inc. (PHS), and the recently
acquired Financial Services Group, Inc. (FSG).
In addition to financial services performed directly by the Company, operations
also include the Company's share of earnings from a 50% equity interest in PHS
Mortgage Company, a full service residential mortgage banker. Additionally, the
Company has a minority interest in MI Acquisition Corporation, the parent
company of Miller & Schroeder Inc., an investment banker specializing in debt
securities.
FSG was acquired in a stock purchase by the issuance of 680,000 shares of common
stock effective June 1, 2000. The primary assets of FSG were 650,000 shares of
Realco common stock (which was cancelled upon closing the transaction) and an
equity interest in a real estate partnership. This acquisition brings an
additional financial services entity to the Realco structure, which will
ultimately replace GAEC. It is anticipated that GAEC will be dissolved in the
near term, as it is a New York corporation and the company no longer operates in
that state. No Form 8-K was filed for this acquisition, as it did not meet
certain reporting threshholds. This entity was previously under the control of
James A. Arias, Realco's CEO.
For the Quarter Ended June 30, 2000
The Financial Services segment, which also includes certain unallocated
operating expenses of the parent company, realized a pre-tax loss of $62,000 for
the quarter ended June 30, 2000 as compared to a pre-tax profit of $15,000 in
1999. Additionally, this segment recognized an other comprehensive loss of
$193,000 due to declines in market value of available for sale securities, which
is discussed in more detail in the nine months ended June 30, 2000 section
below.
Net equity earnings recognized from PHS were $62,000, as compared to
$68,000 in the 1999 quarter. This nominal decrease in earnings is the result of
a downturn in mortgage activity due to increasing interest rates and increased
operating costs associated with growth in Phoenix.
The Company recognized earnings of $15,000 in April 2000 as compared to a
loss of $3,000 for the 1999 quarter relating to its equity interest in MI
Acquisition Corporation. The increase in earnings of this investee is primarily
attributable to timing of individually significant investment banking
transactions. As a result of an additional stock offering by MI Acquisitions
Corporation in May 2000, the Company's equity position was diluted to a level,
which no longer supported accounting for this investment under the equity
method. Accordingly, the Company adopted the cost method to account for this
privately owned company effective May 1, 2000. <PAGE>
Interest income of this segment decreased $53,000 to $181,000 in 2000 due
to the gradual depletion in available working capital of this segment.
Other significant items effecting the operations of the segment was an
increase in selling, general and administrative expenses of $46,000 to $180,000
relating primarily to funding higher than usual claims for the employee welfare
plan, and a $23,000 decrease in interest expense due to scheduled principal
reductions on outstanding debt.
For the Nine Months Ended June 30, 2000
This segment realized a pre-tax profit of $10,000 as compared to $52,000
for the 1999 period. This decrease in earnings was effected by several factors;
the most significant of which include a $198,000 decrease in equity earnings of
investees, an increase in interest and other income of $138,000 consisting
primarily of gains on sale of securities, a $61,000 increase in general and
administrative expenses due to costs associated with employee benefit plans, and
a $80,000 decrease in interest expense due to scheduled principal reductions in
outstanding debt.
Additionally, this segment realized other comprehensive income of $338,000,
net of income taxes on unrealized appreciation of available for sales
securities. As previously reported, the Company owns 285,000 shares of common
stock of Arinco Computer Systems Inc. ("Arinco"), which was an inactive
corporation that 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, an
internet venture capital company. This agreement provided for the sale of $40
million of newly-issued preferred stock. Due to these events, the trading price
of Arinco increased substantially, resulting in other comprehensive income of
approximately $338,000 for the Company, which consists of unrealized gains on
available for sale securities, net of a $226,000 deferred income tax liability.
Such other comprehensive income is a component of equity and is not recognized
in the statement of operations.
Net equity earnings recognized by PHS, Inc. from its partnership interest
in PHS Mortgage totaled $193,000 for the 2000 period, as compared to $291,000 in
1999. This decline is the result of a lower capture rate of in-house referrals
from agents and fewer mortgage transactions due to higher interest rates.
Management has been working with office managers and agents in an effort to
increase in-house referrals, which appears to be working well in recent months.
The Company recognized a loss of $35,000 for its equity interest in MI
Acquisition Corporation, as compared to earnings of $89,000 in 1999. This
decrease is primarily attributable to temporary declines in sales and trading
revenues of this company and certain restructuring costs incurred.
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
<PAGE>
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 obligations for past acquisitions, future acquisition
opportunities, increases in operating expenses associated with growth of
existing operations, and debt reduction requirements, 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.
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
<PAGE>
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.
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: August 11, 2000
/s/ JAMES A. ARIAS
---------------------------------------
James A. Arias, President and Chief
Executive Officer
Date: August 11, 2000
/s/ CHRIS A. BRUEHL
---------------------------------------
Chris A. Bruehl, Senior Vice President
and Chief Financial Officer
