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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE 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 other organization Identification No.)
1650 University Boulevard, NE, Suite 5-100
Albuquerque, New Mexico 87102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (505)242-4561
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 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 X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of the Registrant's common stock outstanding as of December
10, 2000 was approximately 2,959,000. The aggregate market value of the
Registrant's common stock held by non- affiliates as of December 11, 2000 was
approximately $6,773,000.
DOCUMENTS INCORPORATED BY REFERENCE
Notice of 2001 Annual Meeting of Stockholders and Proxy Statement
(incorporated into Part III).
PART I
ITEM 1: BUSINESS.
Realco, Inc., incorporated in 1983 under the laws of the State of New Mexico,
and subsidiaries is hereinafter sometimes referred to as the "Registrant" or the
"Company".
General
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The Company is an integrated real estate services company, which provides a wide
range of real estate related products and services to customers primarily within
the Albuquerque, New Mexico and Phoenix, Arizona metropolitan areas. The
Company's operations are grouped into four principal segments - real estate
brokerage services, residential construction and land development, commercial
construction and financial services.
The Company's principal executive offices are located at 1650 University Blvd.
NE, Suite 5-100, Albuquerque, New Mexico 87102 and its telephone number at that
location is (505)242-4561.
Real Estate Brokerage Services:
This segment's operations consist of residential and commercial real estate
brokerage services in the Albuquerque and Phoenix metropolitan areas.
Residential brokerage operations are conducted under a franchise agreement with
Prudential Real Estate Affiliates (PREA) by two of the Company's principal
subsidiaries, Hooten/Stahl Realtors, Inc. (d.b.a. Prudential Preferred
Properties, New Mexico) and Mull Realty Company, Inc. (d.b.a. Prudential
Preferred Properties, Arizona). Such operations consist of providing marketing
services to buyers and sellers of residential real estate, providing relocation
services, and to a lesser extent, providing residential property management. The
Company's current franchise agreement with PREA expires in June 2001. While PREA
had previously expressed an interest in renewing this agreement, the Company
provided notification on October 10, 2000 that it does not intend to renew such
agreement. The Company is currently pursuing other options with respect to
branding its residential brokerage operations which includes, but is not limited
to, private branding or other national branding.
Commercial brokerage operations consist primarily of providing marketing
services to buyers, sellers, lessors and lessees of commercial real estate.
These operations also include commercial property management and business
brokerage to a lesser extent. These services are collectively performed by First
Commercial Real Estate Services, Inc., an Albuquerque based subsidiary and Mull
Realty Company, Inc., a Phoenix based subsidiary.
Residential Construction and Land Development:
Residential construction is performed by Charter Building & Development, Corp.
("Charter"), an Albuquerque based subsidiary. Charter's operations can be
described as that of a general contractor, whereby the majority of construction
labor and materials needs associated with any given home are subcontracted to
third parties. Residential construction is performed in the Albuquerque
metropolitan area and at September 30, 2000, Charter had a backlog of 35 homes
under contract with an indicated value of $5,000,000, as compared to 49 homes
under contract with an indicated value of $8,000,000 in 1999.
The Company is also in the business of acquiring vacant land for the purpose of
subdividing and developing such land into residential homesites. These
activities are performed by Realco Land Development Division, an unincorporated
division of the Company, in the Albuquerque metropolitan area. The homesites
developed by this division are used internally by Charter as well as sold to
third parties.
Commercial Construction:
Realco Construction, Inc., previously known as Amity, Inc., is the Company's
Albuquerque based general contractor specializing in commercial construction.
Late in fiscal 2000, this company opened an office in Irvine, California, which
services that region, as well as Phoenix, Arizona.
Commercial construction projects consist primarily of tenant improvements,
ground-up construction of small commercial buildings and commercial remodels.
With the acquisition of certain net assets and business operations of TI
Construction, Inc. (TI) in August 1999, the Company strengthened its multi-state
presence and acquired an expertise in the construction of veterinary facilities.
At September 30, 2000, the Company had a backlog of commercial construction
projects of $2,500,000 as compared to $2,300,000 in 1999.
Financial Services:
The Company provides financial services through its wholly owned subsidiaries
Great American Equity Corporation (GAEC) and PHS, Inc. (PHS), as well as through
its investment in MI Acquisition Corporation (MI), the parent company of Miller
& Schroeder, Inc.
In the past, GAEC's lending activities included residential construction lending
and homesite acquisition and development lending. These financing activities
were performed under participation agreements with Albuquerque based financial
institutions or private investors. Such activities are no longer a significant
portion of Company operations.
The operations of PHS include a 50% partnership interest in PHS Mortgage
Company, a full service residential mortgage banker. This partnership has
operations at certain New Mexico and Arizona residential brokerage offices
operated by the Company. As such, PHS receives the majority of its business
through referrals from the Company's sales associates.
The Company owns a 10% equity position in MI, which is a financial services firm
specializing in underwriting debt securities. James A. Arias, the Company's
President and Chief Executive Officer serves on the Board of Directors and Audit
Committee of MI and actively participates in certain cross marketing activities
of services and products.
Operating Strategy
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Since the completion of the Company's Initial Public Offering in February 1996,
it has been the Company's intention to cross-market services between the primary
business segments resulting in one stop shopping for the real estate related
needs of its customers.
Management has determined in recent months that its best growth opportunities
exist in the financial services industry. As a result of this determination, a
Letter of Agreement was executed on October 9, 2000 with Equity Securities
Investments, Inc. (ESI), a Minneapolis based broker and dealer in securities.
This Letter of Agreement provides for the Company to acquire 100% of the
outstanding stock of ESI in a tax-free, stock-for-stock transaction.
The ability of the Company to expand its business in recent years has been due
in part to the addition of working capital from the public securities offering.
The Company anticipates that it will require additional working capital at some
future date to fund internal growth initiative and consummate additional
acquisitions.
Financial Information
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Financial information about the Company's business segments can be found in Note
K to the consolidated financial statements presented in Item 8 of this Form 10-K
and is incorporated herein by reference.
Inventory Acquisition and Development
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The Company's construction and land development segments are the only operations
with significant inventory needs. Such inventory needs consist of homesites,
building materials and labor. Residential homesites are acquired either by the
purchase of developed lots from third parties or by the purchase of a parcel of
undeveloped land which the Company develops. The Company has also entered into
joint venture agreements with other builders and developers to acquire
undeveloped parcels of land for development into homesites. At September 30,
2000, the Company owned or controlled through a combination of unencumbered
ownership, debt financing and purchase agreements, over 347 developed homesites
(as compared to 390 in 1999) within the Albuquerque, New Mexico metropolitan
area. Such homesites are utilized by Charter's homebuilding operations and may
also be sold to other homebuilders and individuals.
Acquisition of residential homesites is funded through the use of available cash
of the Company or through secured loans with various financing sources.
Financing is typically provided by local branches of financial institutions on
such terms and conditions which are customary in the marketplace. In some
instances, the Company may also secure subordinate debt on land inventory to
reduce the loan to value position assumed by the financial institutions, without
using internal working capital. Such subordinate debt is typically arranged by
the Company's financial services subsidiary, GAEC, and participated out to high
net worth individuals.
As the Company uses subcontractors to provide skilled labor and materials for
the majority of its operations, construction inventory purchases consist
primarily of payments to such subcontractors. Inventory purchases are funded
through construction draws from financial institutions under credit agreements
or from progress billings to property owners. The Company's credit agreements
typically provide pre-established lending guidelines which determine interest
rates, available balances and repayment terms. These credit agreements are
provided by local branches of financial institutions on such terms and
conditions which are customary in the marketplace.
Internet Developments
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As part of the Company's focus to maximize opportunities and growth potential,
the Company continues to strengthen its internet presence. Specifically, the
Company's residential construction and land development segment has established
a website which provides users with the Company's background and credentials,
the Company's most popular floorplans, information on subdivisions where the
Company is currently building and contact information. The Company's real estate
brokerage services segment maintains websites which provide Company background
and credentials, property listings, information on the local market, relocation
services and contact information. In fiscal 2000, the Company implemented the
technology to provide "Virtual Tours" and "Still Images" for property listings.
Competition and Market Factors
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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.
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.
Work Force
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As of September 30, 2000, the Company's work force totaled approximately 1,170
people, including 180 employees and 990 real estate sales associates. Management
of the Company believes that its relations with its personnel are satisfactory
and none of its employees are represented by a union.
All of its real estate sales associates are independent contractors. As
independent contractors, such personnel are paid by commission only on the basis
of closed sales transactions. The Company's construction operations normally
hire independent subcontractors to provide the skilled labor needed for
construction projects.
ITEM 2: PROPERTIES.
The Company leases its executive offices on a month to month basis, at $500 per
month. Mr. James A. Arias, the Company's President, is a part owner of the
building in which the executive offices are located. This lease arrangement is
considered a below market lease as to terms and square foot cost when compared
to other leases currently in effect within the building.
The Company leases space for 21 real estate brokerage offices in the
Albuquerque, New Mexico and Phoenix, Arizona metropolitan areas. Such leases
total approximately 112,000 square feet of office space with a monthly cost of
approximately $141,000. Two of these office leases totaling 19,000 square feet
have been abandoned by the Company and are currently sublet with monthly
receipts of $18,000.
The Company's construction operations lease two office facilities in
Albuquerque, New Mexico and one office facility in Irvine, California. These
facilities, which include office space and workshop areas, total approximately
15,000 square feet and monthly rental costs total approximately $9,000.
Management believes all facilities are in adequate condition for their intended
use and will not require substantial improvements through Fiscal 2001.
ITEM 3: LEGAL PROCEEDINGS.
The Company is engaged in various legal proceedings incidental to its normal
business activities. Management of the Company does not believe that the outcome
of each such proceeding or all of them combined will have a material adverse
effect on the Company's operations or financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the 2000 fiscal year to a
vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
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The Company's common stock is traded on the NASDAQ National Market under the
symbol "RLCO". The following table sets forth for the periods indicated, the
high and low sales prices as reported.
Fiscal 2000 Fiscal 1999
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High Low High Low
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First Quarter 2.594 1.750 2.438 1.125
Second Quarter 2.625 1.719 2.875 1.150
Third Quarter 4.125 1.875 3.250 1.625
Fourth Quarter 2.750 1.250 3.000 1.625
Approximate Number of Holders of Common Stock
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As of December 11, 2000, there were approximately 700 holders of record of the
Company's common stock.
Company Dividend Policy Disclosure
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The Company has not paid any dividends on its Common Stock since its initial
public offering in February 1996 and expects that for the foreseeable future it
will follow a policy of retaining any earnings in order to finance the continued
development of its business. Payment of dividends is within the discretion of
the Board of Directors and will depend upon the earnings, capital requirements
and operating and financial condition of the Company, among other factors.
ITEM 6: SELECTED FINANCIAL DATA.
Years ended September 30,
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2000 1999 1998 1997 1996
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(In thousands, except per share amounts)
(a) (b) (c) (d)
Net sales $ 55,205 $ 48,328 $ 35,104 $ 28,681 $ 23,298
Income (loss) from
continuing operations (934) 276 (1,180) 330 132
Income (loss)from
continuing operations
per common share (.36) .10 (.47) .07 .01
Total assets 23,642 27,812 28,368 26,354 22,608
Long-term obligations 7,021 8,888 10,584 10,296 7,883
Cash dividends declared
per common share - - - - -
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(a) The 2000 results were affected by the acquisition of Farnsworth Realty &
Management Company on January 1, 2000 and the acquisition of Financial
Services Group, Inc. on June 1, 2000.
(b) The 1998 results were affected by the acquisition of Cliff Winn, Inc.
Realtors on February 1, 1998.
(c) The 1997 results were affected by the acquisition of Mull Realty Company,
Inc. on January 1, 1997 and the acquisition of First Commercial Real Estate
Services, Inc. on May 1, 1997.
(d) The 1996 results were affected by the acquisition of Amity, Inc. on July 1,
1996 and the issuance of debt and equity securities in connection with the
Company's initial public offering on February 7, 1996.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview of Operations
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Operations for 2000 resulted in a pre-tax loss of $1,322,000 as compared to
pre-tax earnings of $436,000 for 1999. The Company experienced an increase in
total revenues of $6,223,000, or 13%, to $56,007,000 and an increase in total
costs and expenses of $7,981,000 or 16%, to $57,329,000 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 $623,000 or 6% to $10,303,000. This is primarily due to the
fact that the gross profit margin from brokerage operations decreased from 27%
to 26% and the gross profit margin from construction operations decreased from
10% to 9%. Such decreases are discussed in more detail in the results of
operations by segment. Selling, general and administrative expenses increased
$1,541,000 or 17% to $10,642,000 in 2000. Such increase is primarily associated
with the growth of Phoenix based brokerage operations and commercial
construction operations.
Other significant fluctuations affecting 2000 results of operations were a
$509,000 or 56% decrease in interest and other income and a $295,000 or 49%
increase in depreciation and amortization in the 2000 period. The decrease in
interest and other income is primarily the result of a non-recurring gain of
$550,000 recognized in the 1999 period, while the increase in depreciation and
amortization is the result of rapid amortization of certain intangibles in a
recent acquisition and depreciation associated with updates to office facilities
for brokerage operations.
As discussed in more detail in the result of operations from the Financial
Services Segment, the Company generated $757,000 of other comprehensive income,
net of deferred income taxes, during the 2000 period.
Business Combinations
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The Company's growth has been achieved primarily through acquisitions,
subsequent to its public offering in 1996. Following is a brief description of
such acquisitions and terms.
In fiscal 1996, the Company acquired the outstanding stock of Amity, Inc., an
Albuquerque based commercial construction contractor for 24,297 shares of Series
D Preferred Stock of the Company. Additionally, the Company acquired a 50%
partnership interest for $63,000 in PHS Mortgage Company, which originates and
sells residential mortgages in the Albuquerque market. The operations of PHS
were expanded to Phoenix during 1998.
In fiscal 1997, the Company acquired the outstanding common stock of Mull Realty
Company (a Phoenix based residential and commercial real estate brokerage
company, d.b.a. Prudential Preferred Properties, Arizona) for a cash payment of
$359,000, the issuance of a $800,000 note payable and future contingent payments
of up to $1,175,000. The Company also purchased the net assets and business of
First Commercial Real Estate Services, Inc. (an Albuquerque based commercial
real estate brokerage company) for a cash payment of $265,000 in 1997.
Additionally, the Company purchased a minority interest in MI Acquisition
Corporation, the parent company of Miller & Schroeder, Inc. for $1,000,000. MI
is a financial services firm located in Minneapolis which specializes in debt
securities.
In fiscal 1998, the Company acquired the outstanding common stock of Cliff Winn,
Inc. Realtors (a Phoenix based residential real estate brokerage company) for a
cash payment of $426,000 and future contingent payments of up to $963,000.
In fiscal 1999, the Company acquired certain net assets and the business of TI
Construction, Inc. (TI). The acquisition of this commercial contractor which
specializes in veterinary clinics was made through the issuance of 67,000 shares
of Company common stock held in treasury.
In fiscal 2000, the Company acquired certain net assets and the real estate
brokerage business of Farnsworth Realty & Management Company (a Phoenix based
residential real estate brokerage company) for a cash payment of $125,000 and
future contingent payments of up to $150,000.
In fiscal 2000, the Company also acquired the outstanding common stock of
Financial Services Group, Inc. (FSG) for 680,000 common shares of Realco. The
primary assets of FSG consisted of 650,000 common shares of Realco, which were
cancelled upon delivery. This acquisition resulted in an additional financial
services entity within the Realco structure, which will ultimately replace GAEC
(a relatively inactive New York corporation). FSG was previously under the
control of James A. Arias, Realco's President and Chief Executive Officer.
On October 9, 2000 the Company executed a Letter of Agreement with Equity
Securities Investments, Inc. (ESI), a Minneapolis based broker and dealer in
securities, whereby the Company will acquire 100% of the outstanding stock of
ESI in a tax-free, stock-for-stock transaction. The agreement provides for the
shareholders of ESI to receive approximately 1,500,000 shares of Company common
stock, such shares representing approximately 30% of the then fully diluted
outstanding common shares. This transaction will broaden the Company's focus on
financial services and is expected to close in January 2000.
Results of Operations
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Based upon the various lines of business in which the Company is engaged, it has
defined the following operating segments for purpose of financial accounting and
reporting: Real Estate Brokerage Segment, Residential Construction and Land
Development Segment, Commercial Construction Segment, and Financial Services
Segment.
The Company currently operates within the Albuquerque, New Mexico, Phoenix,
Arizona, and to a lesser extent Irvine, California 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.
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).
Fiscal 2000 vs. 1999
The residential resale market softened in Albuquerque and Phoenix in fiscal
2000. Additionally, as a result of continuing consolidations and mergers within
the industry, competition for market share and quality sales associates
increased in the current year.
This segment experienced a pre-tax loss of $1,727,000 for 2000 as compared
to a pre-tax loss of $495,000 in 1999. Brokerage commissions and fees increased
$2,400,000 or 9% to $28,025,000 for 2000, while the company dollar (the portion
of brokerage commissions and fees retained by the Company) only increased
$286,000 or 4% to $7,296,000. The increase in company dollar was more than
offset by an increase in selling, general and administrative expenses of
$928,000 or 13% to $7,994,000 and an increase in depreciation and interest
expense of $534,000 or 101% to $1,064,000. The decline in company dollar
percentage from 27% in 1999 to 26% in 2000, as well as increased operating
expenses are discussed in more detail below.
The operations of PPP-NM resulted in a pre-tax loss of $1,462,000 for 2000,
as compared to $1,097,000 for 1999. 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 were comparable between the
periods, resulting in less than a 1% decrease between the periods, $8,871,000
for 2000 as compared to $8,905,000 for 1999, company dollar actually decreased
$182,000 or 8%. This decline in company dollar from 24.6% to 23% 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.
Selling, general and administrative expenses of PPP-NM decreased $183,000
or 6% to $2,852,000 in 2000, but depreciation and amortization expense increased
$106,000 or 91% to $223,000, and interest expense increased $213,000 or 113% to
$402,000. The increase in interest expense is primarily attributable to interest
charges in intercompany working capital advances, which are eliminated in
consolidation, and to a lesser extent, interest paid on capital leases for
furniture and equipment in the new office facility. The increase in depreciation
and amortization expense is also the result of capital expenditures for the new
office facility.
Management continues to implement changes at PPP-NM in an effort to expand
the revenue base 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, $38,000 was utilized in 1999, $98,000 was
utilized in 2000, and a $108,000 credit was recorded as a revision of estimate
in 2000, resulting in an accrued liability of $29,000 at September 30, 2000,
which represents the anticipated present value of future obligation associated
with these abandoned facilities. The revision of estimate was deemed appropriate
in 2000, as the Company was able to secure tenants for these facilities for the
remaining lease term and was also able to minimize its costs incurred to make
these facilities ready for new tenants.
PPP-AZ recognized a pre-tax loss of $39,000 in 2000 compared to a pre-tax
profit of $663,000 in 1999. While revenues increased $2,542,000 or 17% to
$17,673,000 in 2000, the increase in company dollar was limited to $506,000 or
12% to $4,660,000. This decline in company dollar (from 27% to 26%) is
attributable to market pressures to recruit and retain agents, as well as recent
acquisitions of existing brokerages which had been paying higher splits to
agents. This trend is being addressed by management through gradually converting
agents to existing commission plans, as well as adjusting operating expenses as
discussed below.
Selling, general and administrative expenses of PPP-AZ increased $1,004,000
or 29% to $4,442,000 which is directly related to growth in the number of
offices and agents. Depreciation and amortization increased $175,000 or 196% to
$264,000 in 2000 as a result of rapid amortization of intangibles associated
with the acquisition of Farnsworth Realty & Management Company and depreciation
associated with recent updates to office facilities.
Management is actively reducing overhead where possible and is also
evaluating agent commission plans and pass-through expenses to 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 a pre-tax loss of $135,000 in 2000 as compared to pre-tax earnings of
$11,000 in 1999. Brokerage commissions and fees decreased $108,000 or 7% to
$1,481,000 resulting in a decrease of $37,000 or 6% to $627,000 in company
dollar. The overall decline in production was primarily the result of timing
associated with closing significant transactions, as the commercial brokerage
business is typically comprised of several large transactions. Selling, general
and administrative expenses increased $106,000 or 18% to $708,000 in 2000. This
increase is attributable to management's growth initiative for this subsidiary,
which expanded its Albuquerque facilities to accommodate additional agents and
opened an office in Las Cruces, New Mexico. It is anticipated that these
increased facilities and operating costs will result in improved profitability
in the future as new agents increase productivity.
Fiscal 1999 vs. 1998
Total brokerage commissions and fees for this segment increased $3,274,000
or 15%, to $25,625,000 in 1999. This increase is primarily attributable to
additional revenues of $2,722,000 generated by PPP-AZ and $494,000 generated by
First Commercial. PPP-AZ generated these additional revenues through $1,372,000
of internal growth and $1,902,000 as a result of Winn Realtors contributing
twelve months of operations in 1999, as opposed to eight months in 1998; while
First Commercial's increase was attributable entirely to internal growth. This
segment experienced a pre-tax loss of $495,000 for 1999 as compared to a
$530,000 loss in 1998. The decrease in the loss is the result of several factors
discussed in more detail below.
PPP-NM experienced a pre-tax loss of $1,097,000 in 1999, as compared to a
$1,250,000 loss in 1998. This decrease of $153,000 is primarily attributable to
$273,000 of lease abandonment costs accrued in the prior year, as offset by
nominal changes in recurring operating expenses and company dollar.
While PPP-AZ did increase its brokerage revenues by 22% in 1999 to
$15,131,000, and increase its company dollar to 27%, as compared to 25% in 1998,
operating expenses increased $1,137,000, or 48% to $3,530,000 in 1999. As a
result, of these factors, pre-tax earnings only increased 38% to $663,000 in
1999. This increase in operating expenses is attributable to the higher sales
volume, as well as higher facility costs associated with this subsidiary's
expansion throughout the Phoenix metropolitan area.
First Commercial recognized pre-tax earnings of $11,000 for the 1999
period, as compared to a pre-tax loss of $101,000 in 1998. This improvement in
operations is the result of an increase in company dollar of $215,000 or 47%
over 1999, which is attributable to a 45% increase in revenues. The increase in
company dollar was offset by a $103,000 or 19% increase in operating expenses.
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.
Fiscal 2000 vs. 1999
Residential construction and land sales increased $1,704,000 or 9% to
$21,220,000 in 2000. This increase in sales, as reduced by lower margins in
construction and land sales, resulted in additional gross profits of $68,000 or
3% in 2000. While this increase is nominal in relation to total gross profits of
$2,370,000 in 2000, net earnings from this segment decreased $458,000 to
$465,000 in 2000. This decrease is primarily attributable to a non-recurring
other income item in the amount of $550,000 recognized in 1999, which is
discussed in more detail below.
Residential construction sales of $18,272,000 represent a 7% increase over
1999. This increase resulted from strong production in the first, second and
fourth, as offset by a third quarter decrease. Gross profit margins on such
sales decreased from 9.8% to 8.7% in 2000, yielding gross profits of $1,594,000
as compared to $1,685,000 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.
Sales of developed lots increased $585,000 or 25% to $2,948,000 in 2000.
This increase is largely attributable to the sale of three estate sized lots
which totaled $510,000. 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 remained constant at approximately 26%, resulting in
gross profits of $776,000 in 2000.
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 $184,000 and $15,000 at
September 30, 2000 and 1999, respectively.
Selling, general and operating expenses increased $174,000 or 16% to
$1,240,000 in 2000. Of this increase, $122,000 is attributable to residential
construction operations and $52,000 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 significant items affecting comparability between the periods is a
$122,000 decline in interest expense resulting from debt reduction in the
ordinary course of business, a $27,000 decrease in depreciation and amortization
expense, a $111,000 increase in other income (excluding the aforementioned
$550,000) which consists of construction management fees and sales commission
spreads, and an $65,000 decrease in equity earnings of investees.
Fiscal 1999 vs. 1998
Residential construction and land sales increased $8,120,000 or 71% to
$19,516,000 in 1999. This increase in revenues, as well as better profit margins
contributed to a $1,893,000 increase in gross profit to $2,302,000 in 1999. As a
result the additional gross profits and other income of $550,000 received in a
lawsuit settlement relating to the operations of the land development division,
this segment recognized a pre-tax profit of $923,000 in 1999 compared to a
pre-tax loss of $968,000 in 1998.
Residential construction sales for the period increased $7,028,000 or 69%
over 1998. This increase was attributable to the line of value engineered houses
being received well by the marketplace upon its introduction in the fourth
quarter of 1998. This product line also contributed an increase in gross profit
margin from 4.8% to 9.8% in 1999.
Sales of developed lots increased $1,091,000 or 86% to $2,363,000 in 1999.
This increase was primarily the result of Charter's higher demand for lots due
to the aforementioned increase in residential construction sales. Gross profits
on such sales increased $690,000 to $617,000 in 1999. Negative gross profits
were recognized on lot sales in 1998 as a result of impairments recorded on
certain lot inventories.
Other significant factors affecting revenues of this segment were equity
earnings of investees and other income. Specifically, equity earnings of
investees decreased $127,000 to $36,000 in 1999, as a result of the completion
of profitable joint venture and other income increased $569,000 to $624,000. The
increase in other income relates to $550,000 received in connection with a
lawsuit. Specifically, an agreement reached on December 30, 1998 provided for
the Company to receive certain residential homesites valued at approximately
$550,000 in consideration for its 50% interest in a joint venture, which
received an award of $1,633,000 in a lawsuit. As this award was expected to go
through an extensive future appeal process, management determined this exchange
was in the best interest of the Company after considering risk and future legal
costs.
Selling, general and administrative expenses increased $172,000 or 19% to
$1,066,000 in 1999. Such increase was a direct result of increased staffing
requirements to administer the growth in operations generated by this segment in
1999. Depreciation and amortization increased from $123,000 to $127,000 in 1999
and interest expense increased $282,000 to $851,000 in 1999. The increase in
interest expense is attributable to a $103,000 increase in construction interest
and a $179,000 increase in land development interest. The increase in
construction interest of 18% is directly attributable to the increased activity
of Charter and the increase in land development interest is attributable to
expensing interest incurred in 1999 on two projects which capitalized in 1998 as
the projects were under development.
Commercial Construction Segment:
Commercial construction operations, consist of Realco Construction (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. In 2000
the Company amended the articles of incorporation of Amity, Inc. to change its
name to Realco Construction, Inc. in an effort to establish stronger name
recognition outside the Albuquerque metropolitan area.
Fiscal 2000 vs. 1999
Revenues from commercial construction operations totaled $5,960,000 for
2000 as compared to $3,188,000 for 1999, resulting in a 87% increase. This
increase consists of $1,806,000 which is primarily attributable to increased
tenant improvement and non-recurring specialty projects, and $966,000
attributable to veterinary clinic revenues generated through the August 1999
acquisition of TI. Gross profits on such revenues were 10.6% or $636,000 in
2000, as compared to 11.5% or $367,000 in 1999. The decline in gross profit
margin is primarily attributable to cost overruns associated with two
significant projects in 2000.
The $269,000 increase in gross profits on construction revenues was more
than offset by a $322,000 or 64% increase in operating expenses for 2000. These
factors, as well as a $28,000 reduction in other income resulted in a pre-tax
loss of $184,000 for 2000 compared to a pre-tax loss of $103,000 for 1999.
The increase in operating expenses is primarily the result of the TI
acquisition which provided among other things, an administrative infrastructure
to support a much higher volume of construction operations and to a lesser
extent start-up costs associated with California operations. In recent months,
reductions have been made to operating expenses and are now considered to be at
a level which management believes will result in profitable operations in fiscal
2000.
Fiscal 1999 vs. 1998
Revenues from commercial construction operations totaled $3,188,000 in
1999, an increase of $1,464,000 or 85% over 1998. Despite this increase in
revenues, a decrease in gross profit margins and a $197,000 or 75% increase in
general and administrative expenses resulted in a pre-tax loss of $103,000 for
1999, as compared to a pre-tax loss of $66,000 in 1998. The increase in general
and administrative expenses for the 1999 period consisted of $126,000 associated
with internal growth and $71,000 associated with the acquisition of TI which did
not provide any significant revenues for 1999.
Financial Services Segment:
The financial services segment consists of operations of the parent company,
Great American Equity Corporation (GAEC) and 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 ("MI"), the parent
company of Miller & Schroeder Inc., an investment banker specializing in debt
securities.
Fiscal 2000 vs. 1999
The financial services segment, which also includes certain unallocated
operating expenses of the parent company, realized a pre-tax profit of $123,000
as compared to $111,000 for the 1999 period. This nominal increase in earnings
was effected by several factors; the most significant of which include a $81,000
decrease in equity earnings of investees, and a $98,000 decrease in interest
expense due to scheduled principal reductions in outstanding debt.
Net equity earnings recognized by PHS from its partnership interest in a
mortgage banker totaled $254,000 for the 2000 period, as compared to $353,000 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 in 2000 as compared to earnings of
$140,000 in 1999 relating to its investment in MI. The decrease in profitability
is primarily attributable to declines in sales and trading revenues of this
company and certain restructuring costs incurred. 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.
The Company recognized equity earnings of $176,000 from its minority
interest in a partnership which sold its sole asset operations (a strip shopping
center) for a gain. This minority interest is the result of venture capital
operations of the Company prior to its reorganization and public offering in
1996.
Additionally, this segment realized other comprehensive income of $757,000,
net of income taxes on unrealized appreciation of available for sale securities
in 2000. Such unrealized appreciation is primarily attributable to two
investments, Change Technology Partners, Inc. ("CTPI") and Southwest Capital
Corporation "(Southwest"). As a result of past venture capital operations, the
Company owned stock in these two corporations which were inactive entities that
maintained SEC registration and were traded in the over the counter market. In
the past year, CTPI entered into a securities purchase agreement with a venture
capital company and Southwest entered into a securities purchase agreement with
a broker and dealer of securities. As a result of these transactions,
substantial stock price appreciation occurred and the Company recognized other
comprehensive income of $806,000, net of deferred income tax liabilities of
$537,000. Such other comprehensive income is a component of equity and is not
recognized in the statement of operations.
Fiscal 1999 vs. 1998
The financial services segment, which includes certain unallocated
operating expenses of the parent company, realized a pre-tax profit of $111,000
in 1999 as compared to a pre-tax profit of $205,000 in 1998. The decrease is
primarily attributable to the $334,000 gain recognized on the sale of First
American Title, an equity method investee, in the 1998 period for which there
was no comparable activity in 1999, as offset by a $198,000 reduction in
operating expenses in 1999. Other significant items affecting operating results
are as follows.
Net equity earnings recognized by PHS, Inc. from its interest in PHS
Mortgage Company totaled $353,000 for the 1999 period, as compared to $317,000
in 1998. This increase is the result of continued growth in the operations of
this venture within the Albuquerque market as well as its recent expansion into
the Phoenix market.
The Company recognized equity earnings of $140,000 for the 1999 period as
compared to $13,000 in 1998 for its investment in MI Acquisition Corporation.
This increase in earnings of $127,000 is primarily attributable to the closing
of more investment banking deals in 1999.
Earnings from GAEC were comparable between the periods, $34,000 in 1999 as
compared to $46,000 in 1998. While earnings were comparable, revenues decreased
by $115,000 and expenses decreased $104,000. These decreases were the result of
a reduction in financing activities performed by this subsidiary as a result of
an increase in working capital being utilized by the real estate brokerage and
construction operations.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity consists primarily of cash, trade accounts receivable,
inventories and construction advances collateralized by inventory. It is
anticipated that future cash needs will be financed primarily by cash flows from
operations, future advances under construction loans and if needed, other
financing arrangements, which may become available to the Company.
The Company's current 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, recurring operating losses and debt reduction requirements,
management believes that it will be necessary to secure additional financing to
sustain the Company's operations and anticipated growth for the ensuing twelve
months.
On December 12, 2000, the Company received notification from one of its lenders,
that it does not intend to renew a master construction loan agreement which
matures on December 31, 2000. Such agreement provides for borrowings of up to
$4,000,000 on individual home construction projects, including up to $900,000 on
speculative and model homes. The lender further indicated that any loans
outstanding under this agreement at December 31, 2000 will be permitted to
remain outstanding, in accordance with previously existing terms and conditions.
As a result of existing credit facilities with other lenders, this notification
is not expected to impact the Company's ability to construct pre-sold homes. In
the event the Company is not able to replace this credit facility or expand its
current ability to finance speculative and model homes with other lenders, a
reduction in the number of speculative and model homes constructed in the next
fiscal year may occur.
The Company does not have any material commitments for capital expenditures for
fiscal 2000.
Impact of Inflation
- -------------------
The Company's business is significantly affected by general economic conditions,
particularly by inflation and its generally associated adverse effect on
interest rates. Although inflation rates have remained low in recent years, any
significant raise in inflation rates would likely affect the Company's revenues
and earnings power by reducing demand for real estate purchases.
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.
ITEM 7A: 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Certified Public Accountants
Shareholders
Realco, Inc.
We have audited the accompanying consolidated balance sheets of Realco, Inc. and
Subsidiaries, as of September 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Realco, Inc. and
Subsidiaries, as of September 30, 2000 and 1999, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule II for each of the three years in the period ended
September 30, 2000. In our opinion, this schedule presents fairly in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
November 17, 2000
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
(Dollars in thousands)
2000 1999
-------- --------
ASSETS
Cash and cash equivalents $ 1,876 $ 3,688
Restricted cash 341 367
Available for sale securities 1,578 -
Accounts and notes receivable, net 2,670 1,899
Cost and estimated earnings in excess of
billings on uncompleted contracts 156 482
Inventories 10,462 14,932
Property and equipment - at cost, net 1,786 1,935
Investments - equity method 792 1,744
Investments - cost method 1,210 -
Deferred income taxes - 117
Costs in excess of net assets acquired, net 2,126 1,605
Other assets 645 1,043
-------- --------
$ 23,642 $ 27,812
======== ========
LIABILITIES
Notes payable $ 4,464 $ 5,214
Lease obligations 509 743
Construction advances and notes payable,
collateralized by inventories 4,495 6,797
Accounts payable and accrued liabilities 3,296 4,293
Billings in excess of cost and estimated
earnings on uncompleted contracts 231 -
Escrow funds held for others 341 367
-------- --------
Total liabilities 13,336 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
in 2000 and 2,894,038 shares in 1999 7,965 7,909
Accumulated deficit (1,342) (408)
Accumulated other comprehensive income 757 -
------- -------
10,308 10,429
Less common stock held in treasury - at cost,
700 shares in 2000 and 11,000 shares in 1999 2 31
-------- --------
10,306 10,398
-------- --------
$ 23,642 $ 27,812
======== ========
See accompanying notes.
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
(Dollars in thousands, except per share amounts)
2000 1999 1998
-------- -------- --------
REVENUES
Brokerage commissions and fees $ 28,025 $ 25,625 $ 21,984
Construction sales 24,232 20,340 11,848
Sales of developed lots 2,948 2,363 1,272
Equity in net earnings of investees 400 545 506
Interest and other 402 911 785
-------- -------- --------
56,007 49,784 36,395
COSTS AND EXPENSES
Cost of brokerage revenue 20,729 18,615 16,254
Cost of construction sales 22,001 18,287 10,953
Cost of developed lots sold 2,172 1,746 1,345
Selling, general, administrative,
and other 10,642 9,101 8,126
Depreciation and amortization 896 601 522
Interest 889 998 711
-------- -------- --------
57,329 49,348 37,911
-------- -------- --------
Earnings (loss) before income taxes (1,322) 436 (1,516)
INCOME TAX EXPENSE (BENEFIT) (388) 160 (336)
-------- -------- --------
NET EARNINGS (LOSS) (934) 276 (1,180)
PREFERRED STOCK DIVIDEND REQUIREMENT 112 (4) 120
-------- -------- --------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ (1,046) $ 280 $ (1,300)
======== ======== ========
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net earnings (loss) per common
share before preferred stock
dividend requirement $ (.32) $ .10 $ (.42)
======== ======== ========
Net earnings (loss) per common
share after preferred stock
dividend requirement $ (.36) $ .10 $ (.47)
======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,900,015 2,774,609 2,777,452
========= ========= =========
See accompanying notes.
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 2000, 1999 and 1998
(Dollars in thousands)
Series A Series B Series D
preferred preferred preferred
stock 6% stock 3% stock 3% Common
cumulative cumulative cumulative stock
---------- ---------- ---------- --------
Balance at October 1, 1997 $ 826 $ 2,129 $ 239 $ 7,712
Purchase of common stock
for treasury - - - -
Comprehensive loss
Net loss - - - -
Other comprehensive loss
Unrealized loss on
investments, net - - - -
Comprehensive loss
---------- ---------- ---------- --------
Balance at September 30, 1998 826 2,129 239 7,712
Redemption of Series A
preferred stock (27) - - -
Conversion of Series D
preferred stock - - (239) 239
Issuance of treasury stock
in acquisition - - - (42)
Comprehensive income
Net earnings - - - -
Other comprehensive income
Unrealized gain on
investments, net - - - -
Comprehensive income
---------- ---------- ---------- --------
Balance at September 30, 1999 799 2,129 - 7,909
Purchase of common stock
for treasury - - - -
Issuance of treasury stock - - - (8)
Issuance of common stock
in acquisition - - - 1,445
Cancellation of common
stock acquired - - - (1,381)
Comprehensive loss
Net loss - - - -
Other comprehensive income
Unrealized gain on
investments, net - - - -
Comprehensive loss
---------- ---------- ---------- --------
Balance at September 30, 2000 $ 799 $ 2,129 $ - $ 7,965
========== ========== ========== ========
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended September 30, 2000, 1999 and 1998
(Dollars in thousands)
Accumulated
Retained other
earnings Treasury comprehensive
(deficit) stock income(loss) Total
---------- --------- ------------- --------
Balance at October 1, 1997 $ 496 $ (93) $ 18 $ 11,327
Purchase of common stock
for treasury - (131) - (131)
Comprehensive loss
Net loss (1,180) - - (1,180)
Other comprehensive loss
Unrealized loss on
investments, net - - (45) (45)
--------
Comprehensive loss (1,225)
---------- --------- ------------- --------
Balance at September 30, 1998 (684) (224) (27) 9,971
Redemption of Series A
preferred stock - - - (27)
Conversion of Series D
preferred stock - - - -
Issuance of treasury stock
in acquisition - 193 - 151
Comprehensive income
Net earnings 276 - - 276
Other comprehensive income
Unrealized gain on
investments, net - - 27 27
--------
Comprehensive income 303
---------- --------- ------------- --------
Balance at September 30, 1999 (408) (31) - 10,398
Purchase of common stock
for treasury - (12) - (12)
Issuance of treasury stock - 41 - 33
Issuance of common stock
in acquisition - - - 1,445
Cancellation of common
stock in acquired - - - (1,381)
Comprehensive loss
Net loss (934) - - (934)
Other comprehensive income
Unrealized gain on
investments, net - - 757 757
--------
Comprehensive loss (177)
---------- --------- ------------- --------
Balance at September 30, 2000 $ (1,342) $ (2) $ 757 $ 10,306
========== ========= ============= ========
See accompanying notes.
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
(Dollars in thousands)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net earnings (loss) $ (934) $ 276 $ (1,180)
Adjustments to reconcile net earnings
(loss) to net cash provided by
(used in) operating activities
Depreciation and amortization 896 601 522
Accretion of discount on notes payable 42 49 55
(Net earnings in excess of distributions)
distributions in excess of earnings
from investees (197) 126 (7)
Gain on sale of equity method investment - - (334)
Gain on sale of available for sale
securities (118) (50) (57)
(Gain) loss on sale of property
and equipment (5) 10 41
Provision for deferred income taxes (388) 167 (328)
Changes in operating assets and
liabilities (net of businesses acquired)
Decrease (increase) in restricted cash 26 (197) 233
(Increase) decrease in accounts
receivable (828) 137 242
Decrease (increase) in inventories 4,600 1,828 (3,181)
Decrease (increase) in net billings
related to costs and estimated
earnings on uncompleted contracts 557 (406) 128
Decrease (increase) in other assets 98 (192) 240
(Decrease) increase in accounts
payable and accrued liabilities (1,141) 1,107 292
(Decrease) increase in escrow funds
held for others (26) 197 (233)
-------- -------- --------
Net cash provided by (used in)
operating activities 2,582 3,653 (3,567)
Cash flows from investing activities
Purchases of property and equipment (420) (634) (317)
Proceeds from sale of property and
equipment 271 5 2
Payments for businesses acquired (853) (455) (426)
Advances on notes receivable (157) (578) (773)
Receipts on notes receivable 272 1,449 656
Purchase of securities available for sale (995) (688) (504)
Proceeds from securities available for sale 1,007 906 467
Purchase of equity method investments - (63) -
Proceeds from sale of equity method
investment - - 500
Cash acquired in business acquisitions 47 - 292
-------- -------- --------
Net cash used in investing
activities (828) (58) (103)
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30,
(Dollars in thousands)
2000 1999 1998
-------- -------- --------
Cash flows from financing activities
Construction advances and notes, net (2,402) (2,297) 3,955
Payments on revolving, capital lease, and
long-term debt (1,198) (1,391) (608)
Proceeds from borrowing under revolving
and long-term debt 13 20 -
Issuance of treasury stock 33 - -
Purchase of treasury stock (12) - (131)
Redemption of preferred stock - (27) -
-------- -------- --------
Net cash provided by (used in)
financing activities (3,566) (3,695) 3,216
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,812) (100) (454)
Cash and cash equivalents at beginning
of year 3,688 3,788 4,242
-------- -------- --------
Cash and cash equivalents at end of year $ 1,876 $ 3,688 $ 3,788
======== ======== ========
Cash paid (received) during the year for:
- -----------------------------------------
Income taxes $ - $ - $ (184)
Interest 902 1,002 711
Noncash financing and investing activities:
- -------------------------------------------
In 2000, the Company sold an office building for $165 which was leased back
under market rental rates. Consideration received consisted of $135 in cash and
a vacant lot valued at $130 as reduced by a liability assumed of $100. The
resulting gain on sale of $42 is being amortized over the lease term.
In 2000, the Company purchased certain net assets and the real estate brokerage
business of Farnsworth Realty & Management Company for $381. In connection with
the purchase, liabilities were assumed as follows:
Fair value of assets acquired, including
an office building $ 410
Cash paid (250)
Issuance of note payable (131)
--------
Liabilities assumed $ 29
========
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30,
(Dollars in thousands)
In 2000, the Company acquired 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 were cancelled and cash of $47 $ 1,546
Stock issued (1,445)
--------
Liabilities assumed $ 101
========
In 1999, the Company purchased the net assets and business of TI Construction,
Inc. through the issuance of 67,000 shares of Company common stock held in
treasury. In connection with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired $ 753
Stock issued (151)
--------
Liabilities assumed 602
========
In 1999 and 1998, capital lease obligations of $731 and $47, respectively, were
incurred when the Company entered into leases for office furniture and
equipment.
In 1998, the Company acquired all the common stock of Cliff Winn, Inc. Realtors
for $426. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired,
including cash of $292 $ 457
Cash paid (426)
--------
Liabilities assumed $ 31
========
See accompanying notes.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Realco, Inc., a New Mexico corporation, and Subsidiaries (the "Company") has
operations which include real estate brokerage sales through a franchise from
Prudential Real Estate Affiliates, Inc.; single- family home construction; land
development; and, to a lesser extent, commercial construction and financial
services. Its operations and customers are primarily in the vicinity of
Albuquerque, New Mexico except for certain real estate brokerage and financial
services operations and customers in Phoenix, Arizona.
The Company's accounting policies reflect industry practices and conform to
generally accepted accounting principles. The more significant policies are
briefly discussed below.
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. Revenue Recognition and Provision for Warranty Claims
The Company constructs single-family homes of short building duration for which
minimal deposits are generally required from the buyer. Revenue is recognized
upon closing. Estimated warranty costs are provided at the time of sale.
Revenues from significant commercial construction contracts are recognized on
the percentage-of- completion method; accordingly, income is recognized in the
ratio that costs incurred bear to estimated total costs. The aggregate of costs
incurred and income recognized on uncompleted contracts in excess of related
billings is shown as an asset, and the aggregate billings on uncompleted
contracts in excess of related costs incurred and income recognized is shown as
a liability. Certain short-term smaller commercial construction contracts are
accounted for on the completed-contract method, which does not vary
significantly from the percentage-of-completion basis of accounting. Contract
costs include all direct material, subcontractor, supplies, and labor costs and
those indirect costs relating to contract performance. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability,
and final contract settlements may result in revisions to cost and income and
are recognized in the period in which the revisions are determined.
Brokerage commissions and fees earned from real estate brokerage services are
recognized at the time of closing on the underlying real estate sales contracts.
3. Cash, Cash Equivalents, and Restricted Cash
The Company considers money market accounts and all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. The Company maintains its cash and cash equivalents in accounts
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
which may not be federally insured. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk.
In the ordinary course of operations, the Company collects and holds in escrow
funds associated with real estate contract deposits, construction sales contract
deposits, and other escrowed funds. These balances are reflected as restricted
cash with a corresponding liability.
4. Accounts and Notes Receivable
The Company reviews accounts and notes receivable for collectibility and
provides reserves on specific accounts based upon whether the Company believes
that the collection of a specific account is questionable.
The Company provides credit to its customers under ordinary trade terms.
Receivables for real estate contracts are generally collateralized by the real
estate.
5. Inventories
Inventories are carried at the lower of cost or estimated net realizable value
and include all acquisition costs, direct labor and benefits, project interest,
materials unique to or installed in the project, subcontractor cost, and a
proportional overhead allocation charge.
6. Property and Equipment
Depreciation is provided in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives of three to ten years
using straight-line and accelerated methods.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by these assets are less than the assets' carrying amount.
Assets acquired under capital leases are recorded at the lower of fair market
value or the present value of future minimum lease payments. These leases are
amortized on the straight-line method over the primary lease term or over
estimated economic lives in the event ownership of the underlying assets
transfers at the end of the lease term.
7. Income Taxes
Deferred income taxes are provided on temporary differences between the tax
basis of an asset or liability and its reported amount in the consolidated
financial statements that will result in taxable or deductible amounts in future
years. Deferred income tax assets or liabilities are determined by applying the
presently enacted tax rates and laws.
The Company and its subsidiaries file consolidated income tax returns.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
8. Earnings (Loss) Per Common Share
Earnings (loss) per common share is calculated based on the weighted average
number of shares outstanding during the year. Conversion of convertible
preferred stock, warrants and options are antidilutive for all periods
presented.
9. Investments
Investments in affiliated companies and joint ventures owned 20% to 50% or which
the Company is able to exercise significant influence over operations are
accounted for on the equity method. Accordingly, the consolidated statements of
operations include the Company's share of the affiliated entities' net operating
results.
Investments in affiliated companies owned 20% or less and the Company does not
exercise significant influence over operations are accounted for on the cost
method.
10. Intangible Assets
Costs in excess of net assets of businesses acquired are being amortized using
the straight-line method over fifteen or twenty years. Accumulated amortization
of costs in excess of net assets of businesses acquired was $442 and $299 at
September 30, 2000 and 1999, respectively.
The Company assesses the recoverability of costs in excess of net assets of
businesses acquired by determining whether the amortization of the asset balance
over its remaining life can be recovered through the undiscounted future
operating cash flows of the acquired operation. The amount of the impairment, if
any, is measured based on projected discounted future operating cash flows.
11. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures; accordingly, actual results
could differ from those estimates.
12. Stock Options
The Company applies APB Opinion 25 and related interpretations in accounting for
its stock options. Accordingly, compensation expense is only recognized for
grants of options which include an exercise price less than the market price of
the stock at the date of the grant.
13. Advertising Costs
The Company expenses the cost of advertising the first time advertising takes
place. Advertising expense for the years ended September 30, 2000, 1999 and 1998
was approximately $1,485, $1,037 and $990, respectively.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
14. Other Comprehensive Income
Accumulated other comprehensive income consists solely of net unrealized
investment gains (losses). Unrealized gain (loss) on investments consists of the
following at September 30:
2000 1999 1998
-------- -------- --------
Unrealized gain (loss) on investments
arising during the period $ 875 $ - $ (27)
Less reclassification adjustment for
gains (losses) included in net
earnings (loss) 118 (27) 18
-------- -------- --------
Unrealized gain (loss) on investments,
net $ 757 $ 27 $ (45)
======== ======== ========
Due to subsequent declines in market value of certain securities, accumulated
other comprehensive income, net of deferred income taxes, relating to unrealized
gains on available for sale securities was $320 at November 17, 2000. As
recoverability of certain deferred tax assets is based upon future taxable gains
on available for sale securities, this decline would result in an increase in
the Company's valuation allowance for deferred income tax assets of $292.
NOTE B - INVENTORIES
During the years ended September 30, 2000, 1999 and 1998, the Company incurred
and capitalized interest costs of approximately $379, $363 and $285,
respectively. Capitalized interest costs charged to cost of construction sales
were approximately $382, $332 and $333 for the years ended September 30, 2000,
1999 and 1998, respectively.
Inventories consist of the following as of September 30:
2000 1999
-------- --------
Land and improvements under development $ 6,717 $ 8,755
Construction in progress 2,783 5,206
Model homes 962 971
-------- --------
$ 10,462 $ 14,932
======== ========
Construction in progress includes homes under contract of approximately $2,178
and $3,971 at September 30, 2000 and 1999, respectively.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
NOTE C - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of significant commercial construction contracts
accounted for on the percentage-of-completion method as of September 30:
2000 1999
-------- --------
Costs incurred on uncompleted contracts $ 468 $ 893
Estimated earnings 68 162
-------- --------
536 1,055
Less billings to date 611 573
-------- --------
$ (75) $ 482
======== ========
Included in the accompanying consolidated
balance sheets under the following captions
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 156 $ 482
Billings in excess of cost and estimated
on uncompleted contracts (231) -
-------- --------
$ (75) $ 482
======== ========
NOTE D - INVESTMENTS
The following is a summary of investments carried on the equity method as of
September 30:
2000 1999
-------- --------
MI Acquisition Corporation, 11%
stockholder interest in 1999 $ - $ 1,245
PHS Mortgage, 50% stockholder interest 335 279
Success Venture 76 105
Other 381 115
-------- --------
$ 792 $ 1,744
======== ========
Effective May 1, 2000 the Company adopted the cost method of accounting 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 below 10%, which no longer supports accounting
for this investment under the equity method.
The Company has participated in certain land development and residential
construction projects under separate joint venture agreements. The Company's
liability is joint and several for such joint ventures and its 50% share in the
operations is reported on the equity method in the accompanying consolidated
financial statements.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
Summarized financial information of certain investments carried on the equity
method is as follows:
As of and for the year ended September 30, 2000
-----------------------------------------------
PHS Success
Mortgage Venture
----------- -----------
Cash $ - $ 39
Other assets 988 1,398
----------- -----------
$ 988 $ 1,437
=========== ===========
Liabilities $ 260 $ 1,285
Equity 728 152
----------- -----------
$ 988 $ 1,437
=========== ===========
Revenue earned $ 1,270 $ -
=========== ===========
Net earnings (loss) $ 503 $ (58)
=========== ===========
As of and for the year ended September 30, 1999
-----------------------------------------------
MI
Acquisition PHS Success
Corporation Mortgage Venture
----------- ----------- -----------
Cash $ 6,954 $ 78 $ 39
Other assets 62,503 504 171
----------- ----------- -----------
$ 69,457 $ 582 $ 210
=========== =========== ===========
Liabilities $ 58,552 $ 24 $ -
Equity 10,905 558 210
----------- ----------- -----------
$ 69,457 $ 582 $ 210
=========== =========== ===========
Revenue earned $ 34,501 $ 1,599 $ 110
=========== =========== ===========
Net earnings $ 1,223 $ 767 $ 43
=========== =========== ===========
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
As of and for the year ended September 30, 1998
-----------------------------------------------
MI
Acquisition PHS Joint
Corporation Mortgage Ventures
----------- ----------- -----------
Cash $ 1,734 $ 359 $ 309
Other assets 34,385 543 716
----------- ----------- -----------
$ 36,119 $ 902 $ 1,025
=========== =========== ===========
Liabilities $ 26,844 $ 503 $ 229
Equity 9,275 399 796
----------- ----------- -----------
$ 36,119 $ 902 $ 1,025
=========== =========== ===========
Revenue earned $ 31,779 $ 1,214 $ 893
=========== =========== ===========
Net earnings $ 908 $ 635 $ 290
=========== =========== ===========
NOTE E - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable include the following at September 30:
2000 1999
-------- --------
Residential construction advances to various builders subordinate to the
interest of banks under participation agreements; collateralized by certain real
estate and homes under construction, interest due monthly at the banks' prime
rate plus 1%, principal due as homes are sold, up to a nine-month term with
three-month renewals considered $ 35 $ 150
Brokerage commissions and fees receivable 516 530
Construction sales receivable 1,678 909
Other advances and receivables 504 335
-------- --------
2,733 1,924
Less allowance for doubtful accounts 63 25
-------- --------
$ 2,670 $ 1,899
======== ========
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
2000 1999
-------- --------
Office equipment, furniture, and fixtures $ 2,966 $ 2,564
Leasehold improvements 499 577
Automobiles and equipment 134 182
-------- --------
3,599 3,323
Less accumulated depreciation and
amortization 1,813 1,388
-------- --------
$ 1,786 $ 1,935
======== ========
NOTE G - DEBT
Debt consisted of the following at September 30:
2000 1999
-------- --------
Subordinated sinking fund notes, $5,750 face amount, 9.5% interest payable
annually, principal payable at various dates through December 2003 (less $79
and $121 unamortized discount at September 30, 2000 and 1999, respectively,
based on imputed interest rate of 10.5%) (A) $ 4,071 $ 4,829
Construction and development advances;
collateralized by inventories (A)(B) 2,447 3,866
Notes payable; collateralized by inventories
(A)(C) 2,048 2,931
Note payable to Norwest Bank; collateralized by investee common stock owned
by the Company, due in semi-annual installments of $35,700 plus interest at
1% over the bank's prime rate, through July 2004 (A) 286 357
Other notes payable 107 28
-------- --------
$ 8,959 $ 12,011
======== ========
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
(A) Subordinated sinking fund notes and certain construction and development
advances and notes payable collateralized by inventory are subject to various
covenants, the most restrictive of which include minimum net worth requirements,
cash flow coverage requirements, limitations on dividends, and limitations on
debt.
(B) Construction and development advances collateralized by inventories include
amounts advanced under construction loan agreements, other lending arrangements
and buyer financed loans which are payable upon closing. The construction loan
agreement with Wells Fargo Bank, which matures December 31, 2000 requires
separate construction loans for each project and provides among other things,
for borrowings up to $4,000 with interest rates ranging from prime to prime plus
.75%. Total amounts outstanding under the Wells Fargo Bank construction loan
agreement were $814 and $989 at September 30, 2000 and 1999, respectively. The
construction loan agreement with New Mexico Bank & Trust, which matures March
30, 2001 also requires separate construction loans for each project and provides
among other things, for borrowings up to $3,000 with interest rates at prime
plus .75%. Total amounts outstanding under the New Mexico Bank & Trust
construction loan agreement were $887 and $1,079 at September 30, 2000 and 1999.
Each home to be built under other lending arrangements requires a separate
construction loan with interest rates ranging from prime to prime plus 1.5%. The
prime lending rate was 9.5% and 8.25% at September 30, 2000 and
1999,respectively.
(C) Notes payable collateralized by inventories include amounts outstanding on
loan agreements expiring at various dates through November 2001, with variable
interest rates at the banks' prime rates plus .5% to 1.5% (prime rate was 9.5%
and 8.25% at September 30, 2000 and 1999, respectively) and fixed interest rates
of 7.25% or 9% (9% or 10% in 1999), with principal payments due as properties
are sold.
Aggregate future maturities of debt are as follows at September 30, 2000:
Year ending September 30
2001 $ 4,716
2002 1,617
2003 879
2004 1,826
--------
9,038
Less amount representing discount on debt 79
--------
$ 8,959
========
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
NOTE H - INCOME TAXES
The provision for income taxes consists of the following for the years ended
September 30:
2000 1999 1998
-------- -------- --------
Current $ - $ (7) $ (8)
Deferred (388) 167 (328)
-------- -------- --------
(388) $ 160 $ (336)
======== ======== ========
The Company's effective income tax rate on continuing operations differed from
the federal statutory rate of 34% as follows:
2000 1999 1998
-------- -------- --------
Income taxes at federal statutory
rate $ (449) $ 148 $ (515)
Increase (decrease) in valuation
allowance 52 (187) 271
Nondeductible expenses 81 41 38
State income taxes at statutory rate (79) 26 (91)
Adjustment of estimated income tax
liability of prior year 10 127 (49)
Other (3) 5 10
-------- -------- --------
Total tax provision $ (388) $ 160 $ (336)
======== ======== ========
Components of deferred taxes are as follows at September 30:
2000 1999
-------- --------
Assets
Inventories $ 26 $ 72
Accrued liabilities 137 177
Investments 117 105
Tax loss carryforward 638 32
Contributions carryforward 7 -
Valuation allowance (160) (108)
-------- --------
$ 765 $ 278
======== ========
Liabilities
Investments $ 719 $ 134
Property and equipment 46 27
-------- --------
765 $ 161
======== ========
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
A valuation allowance for deferred tax assets is required when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The valuation allowance increased $52 for the year ended September 30,
2000 and decreased $187 for the year ended September 30, 1999.
At September 30, 2000, the Company has net operating loss carryforwards for tax
purposes of approximately $1,594 which will expire in 2020.
NOTE I - LEASES
The Company leases furniture and equipment under long-term leases with ownership
of the furniture and equipment transferred to the Company at the termination of
the leases. Property and equipment include leased furniture and equipment with a
cost of $807 and $778 and accumulated depreciation of $140 and $21 at September
30, 2000 and 1999, respectively.
Capital lease terms range from three to five years and provide for payments as
follows:
Year ending September 30
2001 $ 305
2002 249
2003 7
--------
Total minimum lease payments 561
Amount representing interest 52
--------
Present value of net minimum lease payments $ 509
========
The Company leases certain office facilities and equipment used in its
operations under operating leases expiring at various dates through 2009 and
provide for payments as follows:
Year ending September 30
2001 $ 1,725
2002 1,706
2003 1,424
2004 1,098
2005 779
Thereafter 2,705
--------
$ 9,437
========
Certain facilities are subleased under leases which expire in 2005. Total future
minimum sublease rentals amount to $723 at September 30, 2000.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
Rental expense for all operating leases for the years ended September 30 is as
follows:
2000 1999 1998
-------- -------- --------
Minimum rentals $ 1,604 $ 1,200 $ 989
Sublease rentals (188) (67) (61)
-------- -------- --------
$ 1,416 $ 1,133 $ 928
======== ======== ========
Certain of these leases relating to rental expense of approximately $172, $137
and $117 for the years ended September 30, 2000, 1999 and 1998, respectively,
are with related parties.
NOTE J - BUSINESS COMBINATIONS
The Company acquired certain net assets and the residential brokerage operations
of Farnsworth Realty & Management Company ("Farnsworth") effective January 1,
2000. The acquisition included a cash payment of $250, a note payable of up to
$150, and the assumption of $29 in liabilities.
The Company acquired Financial Services Group, Inc. ("FSG"), a financial
services company controlled by the Company's President and Chief Executive
Officer, effective June 1, 2000. This acquisition was made through the issuance
of 680,000 shares of Company common stock. Assets acquired included 650,000
shares of Company common stock which were immediately cancelled.
The Company acquired certain net assets and the operations of TI Construction,
Inc. ("TI"), a commercial construction contractor which specializes in
constructing veterinary clinics, effective August 1, 1999. This acquisition was
made through the issuance of 67,000 shares of Company common stock held in
treasury.
The Company acquired Cliff Winn, Inc. Realtors ("Winn Realtors"), a real estate
broker, effective February 1, 1998. The acquisition included a cash payment of
approximately $426 and future contingent payments of up to $963. As of September
30, 2000, contingent payments of $351 have been made and the future contingent
payments has been reduced to $578. Future contingent payments made, if any, are
based on future earnings levels and will result in additional costs in excess of
net assets acquired to be amortized over the remaining life of the asset.
These business combinations have been accounted for using the purchase method of
accounting and the accompanying consolidated financial statements include the
operations of these entities subsequent to the date of acquisition. Initial
costs in excess of the net assets acquired were approximately $184.
During the year ended September 30, 2000, contingent payments of $552 were made
for past acquisitions which resulted in an increase to costs in excess of net
assets acquired.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
The following summarized pro forma unaudited information assumes the
acquisitions of TI and Winn Realtors occurred on October 1, 1997 and the
acquisitions of Farnsworth and FSG occurred on October 1, 1998:
Years ended September 30,
-------------------------
2000 1999 1998
---------- ---------- ----------
Revenues $ 56,498 $ 56,357 $ 42,578
========== ========== ==========
Net earnings (loss) $ (861) $ 187 $ (1,078)
========== ========== ==========
Earnings (loss) per common share $ (.29) $ .07 $ (.42)
========== ========== ==========
NOTE K - SEGMENT INFORMATION
The Company operates in the following segments: residential construction, real
estate broker, commercial construction, and financial services. Information
concerning the Company's business segments as of and for the years ended
September 30 is as follows:
2000 1999 1998
-------- -------- --------
Revenues
Residential construction
and land development $ 21,220 $19,515 $ 11,396
Real estate broker
Sales to unaffiliated customers 28,025 25,625 21,983
Intersegment sales - - 368
Financial services 642 677 838
Commercial construction 5,960 3,188 1,724
Interest and other
Sales to unaffiliated customers 160 779 453
Intersegment sales 731 646 723
Eliminations (731) (646) (1,090)
-------- -------- --------
Total $ 56,007 $ 49,784 $ 36,395
======== ======== ========
Operating profit (loss)
Residential construction
and land development $ 1,130 $ 1,237 $ (348)
Real estate broker (697) (56) (329)
Financial services (186) 147 325
Commercial construction (155) (91) (49)
-------- -------- --------
Total $ 92 $ 1,237 $ (401)
======== ======== ========
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
2000 1999 1998
-------- -------- --------
Assets
Residential construction
and land development $ 12,924 $ 16,286 $ 17,693
Real estate broker 2,815 4,796 3,920
Financial services 1,980 2,139 3,073
Commercial construction 1,073 1,913 575
-------- -------- --------
Identifiable assets 18,792 25,134 25,261
Equity investments 361 220 544
Corporate assets 2,363 853 828
Other assets 2,126 1,605 1,735
-------- -------- --------
Total $ 23,642 $ 27,812 $ 28,368
======== ======== ========
Depreciation and amortization
Residential construction
and land development $ 100 $ 127 $ 123
Real estate broker 657 339 256
Commercial construction 25 22 18
Other 114 113 125
-------- -------- --------
Total $ 896 $ 601 $ 522
======== ======== ========
Capital expenditures
Residential construction
and land development $ 34 $ 90 $ 147
Real estate broker 351 485 147
Commercial construction 29 17 17
Other 6 42 6
-------- -------- --------
Total $ 420 $ 634 $ 317
======== ======== ========
Operating profit consists of total revenues, less costs and expenses including
interest expense allocated to the financial services segment, but does not
include unallocated interest expense, other income, net equity in earnings of
certain investees, loss on sale of equipment, or income taxes. Identifiable
assets are those assets used in the Company's operations in each area. Other
assets include cash and cash equivalents, available for sale securities, certain
investments accounted for under the equity and cost method, and capitalized debt
issuance costs.
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal proceedings incidental to its normal
business activities. Management of the Company does not believe that the outcome
of each such proceeding or all of them combined will have a material adverse
effect on the Company or its consolidated financial position or operations.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
NOTE M - STOCK AND WARRANTS
Series A voting preferred stock is entitled to dividends when declared and paid
at a 6% cumulative rate payable annually starting January 31, 1996 and payable
each January 31 thereafter. Series B voting preferred stock is entitled to
dividends when declared and paid at a 3% cumulative rate payable annually
starting January 31, 1996 and payable each January 31 thereafter. At September
30, 2000, preferred stock dividends in arrears for Series A were $221 or $2.77
per share ($173 or $2.17 per share for 1999) and Series B were $357 or $1.67 per
share ($292 or $1.37 per share for 1999). Each series of preferred stock has a
liquidation preference of $10 per share, plus all accumulated but unpaid
dividends. Each Series A preferred share is convertible into common shares at $7
per common share on the basis of $10 per preferred share. The Series B preferred
stock is convertible under the same terms; however, the preferred stock value is
$11.11 per share.
In 1999, 2,600 shares of the outstanding shares of Series A voting preferred
stock were redeemed based upon the $10 per share liquidation value and 23,919
shares of Series D voting preferred stock were converted into 47,838 shares of
common stock. To induce conversion, the Series D preferred stock was converted
at a rate of $5 per common share instead of $7 per common share in the original
conversion terms. The excess carrying value of the Series D preferred stock over
the fair value of the common stock given and the value of additional common
stock issued to induce conversion was approximately $116 which is reflected as a
negative return in the Preferred Stock Dividend Requirement in the Consolidated
Statements of Operations.
As a result of its past public offering of certain debt and equity securities,
690,000 warrants to purchase Company common stock at $8.40 per share were
issued. These warrants became immediately exercisable upon closing of the
offering and expire February 1, 2001. All warrants remain outstanding at
September 30, 2000.
During 2000 the Company amended its articles of incorporation to increase the
authorized common shares to 50,000,000.
NOTE N - STOCK OPTIONS
The Company has an employee incentive stock plan for certain key employees.
Options currently outstanding under the plan become exercisable one year from
the date of the grant and expire five years after the date of the grant. These
options are exercisable at not less than the market value of the Company's stock
on the date of the grant. Accordingly, no compensation cost has been recognized
for these options. Had compensation cost for these options been determined based
on the fair value of the options at the grant dates consistent with the method
of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
earnings (loss) and earnings (loss) per common share would have been the
following pro forma amounts for the years ended September 30:
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
2000 1999 1998
-------- -------- --------
Net earnings (loss) applicable
to common shares
As reported $ (1,046) $ 280 $ (1,300)
Pro forma (1,114) 202 (1,386)
Earnings (loss) per share
As reported $ (.36) $ .10 $ (.47)
Pro forma (.38) .07 (.50)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998,
respectively: dividend yield was estimated to remain at zero for all years;
expected volatility of 60% for 2000, 58% for 1999 and 54% for 1998; risk-free
interest rates of 6.7%, 5.5% and 6%, respectively; and an expected life of five
years for all years.
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
A summary of the status of the Company's fixed stock options as of September 30
and changes during the years then ended is presented below:
2000 1999 1998
----------------- ---------------- ----------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------- --------- ------- -------- ------- --------
Outstanding at
beginning of year 195,000 $ 3.21 100,000 $ 3.38 35,000 $ 3.30
Granted 25,000 2.40 105,000 3.06 90,000 3.42
Forfeited (15,000) 3.45 (10,000) 3.38 (25,000) 3.42
------- -------- -------
Outstanding at
end of year 205,000 $ 3.09 195,000 $ 3.21 100,000 $ 3.38
======= ======== =======
Options exercisable
at year end 180,000 $ 3.19
Weighted-average fair
value of options
granted during the
year $ 1.01 $ 1.18 $ 1.09
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
The following information applies to options outstanding at September 30, 2000:
Number outstanding 205,000
Range of exercise prices $2.40 to $3.45
Weighted average exercise price $3.09
Weighted average remaining contractual life 3 years
The Company records proceeds from the exercise of stock options, net of income
tax effects, if any, as additions to common stock.
NOTE O - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value information which
pertains to the Company's financial instruments and does not purport to
represent the aggregate net fair value of the Company. The carrying amounts in
the table below are the amounts at which the financial instruments are reported
in the consolidated financial statements.
All of the Company's financial instruments are held for purposes other than
trading.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
1. Cash, Cash Equivalents, and Restricted Cash - The carrying amount
approximates fair value because of the short maturity and highly liquid nature
of those instruments.
2. Floating Rate Notes Receivable - The carrying amount approximates fair value
because interest rates adjust to market rates.
3. Fixed Rate Debt - The discounted amount of future cash flows using the
Company's current incremental rate of borrowing for similar liabilities is used
to estimate fair value.
4. Floating Rate Debt - The carrying amount approximates fair value because
interest rates adjust to market rates.
REALCO, INC. AND SIBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
(Dollars in thousands, except per share amounts)
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
2000 1999
-------------------- --------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
Financial assets
Cash, cash equivalents, and
restricted cash $ 2,217 $ 2,217 $ 4,055 $ 4,055
Floating rate notes receivable 35 35 144 144
Financial liabilities
Fixed rate debt (5,550) (5,457) (5,605) (5,602)
Floating rate debt (3,409) (3,409) (6,407) (6,407)
NOTE P - NON-RECURRING ITEMS
During the fourth quarter of fiscal 1998, the Company committed to close four
real estate brokerage branch offices and re-establish those offices in a single,
strategically located facility. As a result of this commitment, the Company
incurred charges of $273 related to lease abandonments. Additionally, during
this quarter, the Company determined valuation allowances of $505 were required
on certain inventories, receivables, and other assets. The aggregate effect of
these items was to increase the loss for the fourth quarter of fiscal 1998 by
$606 or $.22 per share.
Of the $273 initial charge relating to lease abandonments, $38 was utilized in
1999, $98 was utilized in 2000, and a revision of estimate of $108 was recorded
in 2000, resulting in an accrued liability of $29 at September 30, 2000, which
represents the anticipated present value of future obligations for abandoned
facilities.
NOTE Q - SUBSEQUENT EVENT
On October 9, 2000 the Company executed a Letter of Agreement with Equity
Securities Investments, Inc. ("ESI"), a Minneapolis based broker and dealer in
securities, whereby the Company will acquire 100% of the outstanding stock of
ESI in a tax-free, stock-for-stock transaction. The agreement provides for the
shareholders of ESI to receive approximately 1,500,000 shares of Company common
stock, such shares representing approximately 30% of the then fully diluted
outstanding common shares. This transaction will broaden the Company's focus on
financial services and is expected to close in January 2001.
On October 10, 2000 the Company notified Prudential Real Estate Affiliates that
it did not intend to renew its franchise agreement for real estate brokerage
sales, which expires in June 2001. The Company is considering private branding
of its real estate operations or another national franchise.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
JAMES A. ARIAS has served as the Company's President, Chief Executive Officer
and a Director since its formation in September 1983. From 1975 to September of
1983, he was a partner of James Bentley & Associates, a financial consulting and
real estate syndication firm in Albuquerque, New Mexico, which was merged into
and became a division of Financial Services Group, Inc., a New Mexico
corporation, of which Mr. Arias is President and a controlling shareholder.
Since 1984, he has served as Manager of S&H Brokerage Inc., N.M., an insurance
broker in Albuquerque, New Mexico, which during the fiscal year became a 49.99%
Company subsidiary. From June 1995 to March 2000 he served as interim sole
Director of Arinco Computer Systems Inc., a publicly traded New Mexico
corporation, which underwent a reverse merger transaction in the current year
and now operates as Change Technology Partners, Inc., a publicly traded Delaware
corporation. In August 1997, at the time when the Company acquired a
shareholding interest in Miller and Schroeder Financial, Inc., a broker dealer
headquartered in Minneapolis, Minnesota Mr. Arias became a Director and Audit
Committee Member of that Company. Mr. Arias is also a Director of Quatro, Inc.,
a New Mexico electronics company. Both Miller and Schroeder and Quatro, Inc. are
privately held corporations. Mr. Arias will devote substantially all of his time
to the affairs of the Company.
BILL E. HOOTEN served as an Executive Vice President and a Director of the
Company since March 31, 1995. From inception to August 1995, Mr. Hooten served
as the President and a Director of the Company's predecessor Old Realco. He
currently serves as a Director and Chairman of the Finance and Real Estate
Committees of Presbyterian Health Care Services, headquartered in Albuquerque.
ARTHUR A. SCHWARTZ has served as a Director of the Company since November 1994.
For more than the past five years Mr. Schwartz has been President of Masters
Coverage Corp., a successor company of S&H Insurance Brokerage, Inc., of N.Y.,
an insurance broker located in New York, New York. Of which he had been
President and manager. Masters Coverage Corp. is a 50.01% owner of S&H Insurance
Brokerage, Inc., N.M., an insurance brokerage company 49.9% owned by the
Registrant located in Albuquerque, New Mexico.
MARSHALL BLUMENFELD has served as a Director of the Company since its formation
in September 1983. Mr. Blumenfeld was engaged in the private practice of law in
New York, New York, from 1963 until 1997 when he retired from the practice.
MARTIN S. ORLAND was first elected to the Board by the shareholders on March 21,
1997. Mr. Orland is currently self-employed, providing consulting and advisory
services. He retired January 1, 1997 as an employee of Fortis, Inc., where he
served as President of Fortis Private Capital, Inc., a private venture capital
investment business in New York, New York. During the same period, Mr. Orland
was the Executive Vice President of Fortis Advisors, Inc., a corporation that
made investments in commercial real estate and mortgages. Each of these
corporations are subsidiaries of Fortis, Inc., which is a subsidiary of a Dutch
holding company. From April 1993, through August 1996, Mr. Orland was a Director
of Financing for Science International, Inc., a publicly traded corporation, and
served as Director of Continental Bank, a publicly traded financial institution.
These companies were subsequently sold. In 1997, Mr. Orland became a Director of
Quatro, Inc., a New Mexico based electronics company, and is also a Director of
three other privately owned companies.
NOEL ZELLER was first elected to the Board by the shareholders on March 21,
1997. Mr. Zeller is the founder and owner of Zelco Industries, Inc., a New York
consumer products manufacturing corporation, and for more than the past five
years has served as the President of that corporation. He is also the
owner-manager of Zeller Properties LLC, a New York corporation, which is a real
estate investing company.
All directors hold office until the next annual meeting of shareholders or until
their successors have been duly elected and qualified. Executive officers of the
Company are appointed by, and serve at the discretion of, the Board of
Directors.
The following table sets forth certain information concerning the Company's
directors and the Company's executive officers:
Name Age Position
------------------------ --- -------------------------------
James A. Arias(2) 62 President, CEO and Director
Bill E. Hooten 64 Executive Vice President and
Director
Chris A. Bruehl 32 Senior Vice President, CFO
and Secretary/Treasurer
Arthur A. Schwartz(1) 60 Director
Marshall Blumenfeld(1) 66 Director
Martin S. Orland(1) 67 Director
Noel Zeller(2) 64 Director
-----------------------------------
(1) Audit Committee member.
(2) Stock Option Committee member.
Background information for the executive officer, who is not also a director is
as follows:
CHRIS A. BRUEHL has served as Senior Vice President, Chief Financial Office and
Secretary/Treasurer of the Company since March 1999. Prior to that time, Mr.
Bruehl was a Certified Public Accountant employed as an Assurance Services
Manager with Grant Thornton LLP, the Company's independent public accountants
for more than the past five years.
ITEM 11: EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation earned
or awarded to the Company's executive officers during the Company's last three
completed fiscal years ended September 30, 2000, 1999 and 1998. No other
executive office of the Company received compensation in excess of $100,000
during each of the three years ended September 30, 2000.
Annual Long-term
Compensation Compensation
- ----------------------------------------------------------- --------------
Securities
Underlying
Name and Principal Position Year Salary($) Bonus($) Options(#)
- ----------------------------- ----- --------- -------- ----------
James A. Arias, President 2000 $ 98,900 $100,000 -
Chief Executive Officer, 1999 93,000 4,000 -
Chairman of the Board(1) 1998 87,600 - -
Bill E. Hooten, Executive 2000 120,000 - -
Vice President(2) 1999 120,000 - -
1998 120,000 - -
Chris A. Bruehl, Senior 2000 96,200 4,000 5,000
Vice President, Chief 1999 61,800 - 25,000
Financial Officer, 1998 - - -
Secretary/Treasurer(3)
- -----------------------------
Notes to Summary Compensation Table
(1) The Company pays Mr. Arias a monthly base salary, which increases annually
at the rate of 6% per annum as a cost of living adjustment. In addition, Mr.
Arias is to be paid an allowable bonus equal to 10% of pre-tax earnings in
excess of $400,000 during any fiscal year. Mr. Arias received a non- cash bonus
of $100,000 which was accrued by Financial Services Group, Inc. prior to the
acquisition of this company in 2000. Such accrued bonus was satisfied with
certain assets of Financial Services Group, Inc. which existed at the date of
acquisition, thereby resulting in no expense or negative cash flow to the
Company.
(2) Phyllis S. Hooten, the wife of Bill E. Hooten, is employed by the Company as
an interior designer. She has been paid $9,000 per year during the fiscal years
ended 2000, 1999 and 1998. She was also furnished a car that is leased by the
Company for $472 per month. None of this compensation paid or furnished to Mrs.
Hooten is included in the totals of the compensation paid to Mr. Hooten.
(3) Mr. Bruehl was hired in March 1999. Accordingly, compensation reported for
1999 represents a portion of the year and no compensation is reported for 1998.
Option Grants
- -------------
During 2000 the Company granted certain of its directors and an executive
officer options under its Key Employee Incentive Stock Option Plan as follows:
Option/SAR Grants in Last Fiscal Year
- -----------------------------------------------------------------------------
Individual grants
- -----------------------------------------------------------------------------
Number of Percent of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Option/SARs Employees in Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- ------------------- ----------- ---------------- -------- ----------
Chris A. Bruehl 5,000 20% $ 2.40 03/10/05
Arthur A. Schwartz 5,000 20% 2.40 03/10/05
Marshall Blumenfeld 5,000 20% 2.40 03/10/05
Martin S. Orland 5,000 20% 2.40 03/10/05
Noel Zeller 5,000 20% 2.40 03/10/05
Option/SAR Grants in Last Fiscal Year (continued)
- -----------------------------------------------------------------------------
Potential Realized
Value at Assumed
Annual Rates of Stock Alternative:
Price Appreciation Grant Date
for Option Term Value *
- -----------------------------------------------------------------------------
* * Grant Date
5%($) 10%($) Present Value
--------- --------- -------------
Chris A. Bruehl $ 5,050
Arthur A. Schwartz 5,050
Marshall Blumenfeld 5,050
Martin S. Orland 5,050
Noel Zeller 5,050
- --------------
* The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model, with the following weighted
average assumptions: dividend yield rate of zero, expected volatility of 60%,
risk free interest rate of 6.7% and an expected life of five years.
Option Exercises and Year End Values
- ------------------------------------
The table below sets forth, certain information regarding the value of options
held by certain Directors and an Executive Officer at September 30, 2000. There
were no options exercised by the Directors or Executive Officer during the
fiscal year ended September 30, 2000.
Aggregated Option Fiscal Year End Values
- -----------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
September 30, 2000 September 30, 2000
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- ------------- ----------- -------------
Chris A. Bruehl 25,000 5,000 $ - $ -
Arthur A. Schwartz 15,000 5,000 - -
Marshall Blumenfeld 15,000 5,000 - -
Martin S. Orland 15,000 5,000 - -
Noel Zeller 15,000 5,000 - -
Compensation of Directors
- -------------------------
Directors are not currently paid a fee or other compensation for serving as
Directors. However, the Company reimburses each Director for all out of pocket
expenses incurred to attend meetings and grants them options to purchase Company
common stock from time to time under its Key Employee Incentive Stock Option
Plan.
Price Performance Graph
- -----------------------
The following graph compares the total cumulative return of the Company's Common
Stock with the S&P SmallCap 600 Index, the S&P Services (Commercial and
Consumer) Index and the S&P Homebuilding Index. The total cumulative return for
each period is based on the investment of $100 on February 2, 1996, assuming
compounded daily returns and the reinvestment of all dividends. The Company's
Common Stock began trading on February 2, 1996.
[The following table was represented by a graph in the printed material]
S&P Services
Company S&P (Commercial S&P
Common SmallCap and Consumer) Homebuilding
Stock 600 Index Index Index
------- --------- ------------ ------------
February 2, 1996 $ 100 $ 100 $ 100 $ 100
September 30, 1996 48 115 110 89
September 30, 1997 50 157 128 132
September 30, 1998 27 133 110 148
September 30, 1999 31 156 104 125
September 30, 2000 19 194 75 157
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, certain information with respect to the security
ownership of certain beneficial owners and management of the Company's Common
Stock and Preferred Stock ("Voting Shares") as of December 11, 2000. There were
2,959,138 shares of the Company's Common Stock issued and outstanding at
December 11, 2000.
The Preferred Stockholders have voting rights identical to the Common
Stockholders. The Preferred Stockholders have the right to convert all or any
portion of their Preferred Stock to Common Stock. The following table sets forth
the identity of (i) each shareholder who is known by the Company to own
beneficially more than 5% of the outstanding Voting Shares, (ii) each Director,
and (iii) all Officers and Directors as a group. Except as otherwise indicated,
each of the Shareholders listed in the table or included within a group listed
in the table possess sole voting and investment power with respect to the Voting
Stock indicated.
Shares Percent of
Beneficially Outstanding
Name and Address Owned Voting Shares
- --------------------------------------- ------------ -------------
James A. Arias 214,200 6.6%
1650 University Blvd. NE, Suite 5-100
Albuquerque, New Mexico 87102
Nortek, Inc. (1) 200,000 6.2%
50 Kennedy Plaza
Providence, RI 02903
Joseph Zerger Revocable Trust 340,000 10.5%
1550 East Oakland Blvd.
Fort Lauderdale, FL 33334
Arthur A. Schwartz (5) 35,000 1.1%
401 East 80th Street
New York, New York 10021
Marshall Blumenfeld (5) 29,000 *
1338 Van Buren Street
Hollywood, Florida 33019
Bill E. Hooten (2)(3)(4) 270,714 8.4%
1650 University Blvd. NE, Suite 5-100
Albuquerque, NM 87102
MLPF&S CUST EPO (2)(3) 57,855 1.8%
Bill E. Hooten IRRA FBO
1650 University Blvd. NE, Suite 5-100
Albuquerque, NM 87102
Bill E. Hooten and Phyllis S. Hooten (2)(4) 212,859 6.6%
Revocable Trust UTA
1650 University Blvd. NE, Suite 5-100
Albuquerque, NM 87102
Martin S. Orland (5) 1,650 *
52 Centerville Rd.
Holmdel, New Jersey 07733
Noel Zeller (5) 35,000 1.1%
3 Justin Road
Harrison, New York 10528
Chris A. Bruehl (6) 1,000 *
1650 University Blvd. NE, Suite 5-100
Albuquerque, NM 87102
All Executive Officers and
Directors as a Group (2)(4)(7) 585,564 18.1%
- --------------
* less than 1%
Notes to Beneficial Ownership Table
1. Nortek, Inc., a New York Stock Exchange listed company, acquired the shares
as a result of its previous purchase of Ply Gem, Inc., formerly a New York Stock
Exchange listed company. Realco, Inc. has no association with Nortek, Inc. in
any capacity.
2. The 57,855 Series A Preferred Shares and the 212,859 Series B Preferred
Shares have one vote on all matters that may come before a meeting of the
Shareholders. Upon the Offerings being declared effective by the SEC, the
holders of Series A and Series B Preferred Shares have the right to convert, at
any time, their Preferred Shares into Common Stock.
3. The Trust was established for the benefit of Bill E. Hooten as a roll over
account to accept the Series A Preferred Shares previously held in Realco, Inc.
Stock Bonus Trust, Bill E. Hooten, Trustee, for the benefit of Bill E. Hooten.
Mr. Hooten as Trustee has voting and investment power over such shares.
4. Mr. Hooten, an Officer and Director of the Company, has the right to convert
Series A and Series B Preferred Shares into up to 420,488 shares of the
Company's Common Stock over which he has the right to exercise voting and
investment power.
5. Does not include options to purchase 20,000 shares of the Company's common
stock.
6. Does not include options to purchase 30,000 shares of the Company's common
stock.
7. Shares beneficially owned by all Executive Officers and Directors as a group,
include a total of 270,714 Series A and Series B Preferred Shares.
Family relationships
- --------------------
None of the Directors or Executive Officers of the Company are related (as first
cousins or closer) by blood, marriage or adoption.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the past year the Company was a party to the following transaction in
which a certain officer and director had a material interest:
On March 10, 2000, the Independent Directors of the Company approved an
arrangement whereby Bill Hooten, the Company's Executive Vice President, was
permitted to build up to ten speculative homes personally in conjunction with
Charter Building and Development ("Charter"), the Company's residential
construction subsidiary in fiscal 2000. Such homes were constructed and marketed
as Charter homes under a fee arrangement providing for Charter to receive 5% of
direct construction costs as a construction management fee and 1% as warranty
reserve. Additionally, the Company retains sales commissions on such homes.
While the Company is foregoing its normal gross profit on homes under this
arrangement, as offset by the aforementioned fees, this program was deemed to be
in the best interests of the Company due to the fact the Company is bound to
debt reduction requirements on certain lot inventory and lot purchase
requirements, which may not be met based upon current levels of construction
activity. This arrangement allows the Company to better meet such takedown
requirements without assuming the additional risk associated with committing
additional working capital to speculative homes.
As a result of this arrangement, revenues of $191,000 were recognized by the
Company in 2000, which consisted of sales of developed lots and fees revenue.
Any future transactions with officers, directors or 5% beneficial shareholders
of the Company's Common Stock is intended to be on terms no less favorable to
the Company or its affiliates than could be obtained from unaffiliated third
parties and will be approved by a majority of the independent outside members of
the Company's Board of Directors who do not have an interest in the transaction.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
(1) The financial statements filed as part of this report are included in
Item 8.
(2) The financial statement schedule required to be filed as part of this
report consists of Schedule II Valuation and Qualifying Accounts
appearing at the end of this Item.
(3) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------
3.1 Articles of Amendment of Articles of Incorporation dated March
14, 2000 (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
21.1 Real Estate Brokerage Services, Inc.
21.2 Charter Building & Development Corp.
21.3 Great American Equity Corporation
21.4 Realco Construction, Inc.
21.5 PHS, Inc.
21.6 Financial Services Group, Inc.
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
The Registrant filed Form 8-K dated October 25, 2000 during the quarter
ended September 30, 2000 reporting matters under Item 5, Other Events.
(c) The exhibits listed under Item 14 (a) (3) are filed herewith or
incorporated by reference.
(d) Financial statement schedules:
(1) The financial statement schedule listed under Item 14(a)(3) is filed
herewith.
Schedule II - Valuation and Qualifying Accounts:
(Dollars in thousands)
Balance at
beginning Charged to Balance at
of year expense Deductions end of year
----------- ----------- ----------- -----------
Year ended September 30, 2000:
Allowance for doubtful
accounts $ 25 $ 46 $ 8 $ 63
Home construction
warranty reserve 208 254 190 272
Home construction
inventory impairment 180 - 115 65
Reserve for abandonment
of leaseholds 235 - 206 29
Year ended September 30, 1999:
Allowance for doubtful
accounts $ 25 $ 54 $ 54 $ 25
Home construction
warranty reserve 132 166 90 208
Home construction
inventory impairment 270 - 90 180
Reserve for abandonment
of leaseholds 273 - 38 235
Year ended September 30, 1998:
Allowance for doubtful
accounts $ 76 $ 9 $ 60 $ 25
Home construction
warranty reserve 123 108 99 132
Home construction
inventory impairment - 270 - 270
Reserve for abandonment
of leaseholds - 273 - 273
SIGNATURES:
Pursuant to the requirements of Section 13 or 15(d) 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: December 15, 2000 By: /s/ JAMES A. ARIAS
----------------------------------
James A. Arias, President,
Chief Executive Officer, and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ---------------------------- -----------------
/s/ JAMES A. ARIAS President, Chief Executive December 15, 2000
- ----------------------- Officer and Chairman
James A. Arias (Principal Executive Officer)
/s/ CHRIS A. BRUEHL Senior Vice President and December 15, 2000
- ----------------------- Chief Financial Officer
Chris A. Bruehl (Principal Financial and
Accounting Officer)
/s/ BILL E. HOOTEN Executive Vice President December 15, 2000
- ----------------------- and Director
Bill E. Hooten
/s/ ARTHUR A. SCHWARTZ Director December 15, 2000
- -----------------------
Arthur A. Schwartz
/s/ MARSHALL BLUMENFELD Director December 15, 2000
- -----------------------
Marshall Blumenfeld
/s/ NOEL ZELLER Director December 15, 2000
- -----------------------
Noel Zeller
/s/ MARTIN S. ORLAND Director December 15, 2000
- -----------------------
Martin S. Orland
EXHIBIT 3.1
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
REALCO, INC.
Pursuant to the provisions of the New Mexico Business Corporation Act, the
undersigned corporation, Realco, Inc. adopts the following amendments to its
Articles of Incorporation:
FIRST: The name of the corporation is Realco, Inc.
SECOND: The following amendment to Article IV of the Articles of Incorporation
Realco, Inc., as previously amended on March 20, 1995 and March 21, 1997, was
adopted on March 10, 2000, as prescribed by the New Mexico Corporations Act, by
a vote of shareholders sufficient for approval of the Amendment:
ARTICLE IV is amended as follows:
The corporation shall have the authority to issue 50,000,000 shares of
common stock with no par value.
Parts I, II and IV of Article IV, remain unchanged from the prior Articles
of Incorporation, as previously amended.
THIRD: On January 25, 2000, the following series of shares were issued and
outstanding and entitled to receive notice of and to vote at the March 10, 2000
Meeting of Shareholders:
Number of Issued
Title of Stock and Outstanding Shares
-------------------------- ----------------------
Common stock, no par value 2,887,338
Series A Preferred Stock 79,969
Series B Preferred Stock 212,859
FOURTH: The shares of outstanding stock voted for and against the Amendment as
follows:
For the Against the
Title of Stock Amendment Amendment Abstained
-------------------------- --------- ----------- ---------
Common stock, no par value 2,361,876 40,950 -
Series A Preferred Stock 79,969 - -
Series B Preferred Stock 212,859 - -
FIFTH: This Amendment increased the corporations authorized capital by
44,000,000 shares of no par value common stock.
Dated: March 14, 2000
REALCO, INC.
By: /s/ JAMES A. ARIAS /s/ CHRIS A. BRUEHL
------------------------- --------------------------
James A. Arias, President Chris A. Bruehl, Secretary
EXHIBIT 27