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October 26, 1999
REII INC (REIC)
Quarterly Report (SEC form 10QSB)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Revenue Sources
The company generates revenue primarily from the rental of residential property, representing approximately 80% of total revenues, and real estate management services, representing approximately 20% of total revenues. The Company plans to increase revenues by acquiring existing and/or developing new residential properties and commercial real estate.
Financial Condition and Liquidity
The Company's long-term debt to capital (long-term debt and stockholders' equity) ratio at September 30, 1999 and December 31, 1998 was 90.0% and 85.5%, respectively.
The Company's source of working capital is from rental operating activities and prior capital contributions from stockholders. The Company has not borrowed any moneys from financial institutions for working capital needs. All debts of the Company are from first mortgages on income producing properties.
Net cash provided by operating activities for the nine month periods ended September 30, 1999 and 1998 was negative $2,694 and positive $508, respectively. The negative cash flow in 1999 was primarily due to payment of current liabilities.
The Company recently upgraded its computer systems to be year 2000 compliant. The Company has not been informed of any material risks associated with its vendors regarding year 2000 compliance, however, there is no guarantee that such risks do not exist and will not have an adverse effect on operations. Management is continuing to assess any impact that the transition to the year 2000 will have on operations. Due to the nature of the Company's business, it is not anticipated that any impact would be material, however the cost of a potential impact is not determinable. Management of the Company believes that there are no commitments, uncertainties, or contingent liabilities that will have a materially adverse effect on the consolidated financial position or future results of operations of the Company. Capital Expenditures and Financing Requirements
The Company purchased five (5) residential rental properties from Garfield Ricketts, a 60% shareholder, for $544,000 on December 18, 1998. The purchase price was based on the total of the properties' market values established by an independent appraiser. The acquisition was financed with bank mortgages in the amount of $359,100 and mortgages to Garfield Ricketts in the amount of $184,900.
Capital expenditures for improvements to income producing properties during the nine month periods ended September 30, 1999 and 1998 totaled $2,642 and $7,084, respectively. Capital expenditures for purchases of office equipment and furniture during the nine month periods ended September 30, 1999 and 1998 totaled $1,643 and $2,431, respectively. Net cash flows from financing activities for the nine month period ended September 30, 1999 was $23,527, which included net proceeds of $37,312 from refinancing two existing mortgages on income producing rental properties. There were no real property acquisitions during the nine month periods.
The Company has an agreement represented by a Letter of Intent to purchase 20 residential rental properties and one commercial office property from Garfield Ricketts, a majority stockholder. Purchase price upon acquisition will be the properties' market value, based on independent appraisals. Market value of the 21 properties is currently approximately $2 million, based on Multiple Listing Service's market analysis, which tracks sales prices of comparable properties within the area. Terms of the agreement require the Company to assume, refinance, or pay off the balance due on the first mortgages on the properties of approximately $1,302,000 as of December 31, 1998, and pay the balance of the market value to Garfield Ricketts in cash or other form of payment acceptable to him. All properties to be acquired will be subject to an updated independent property appraisal.
The Company will require funds to acquire additional income producing properties and/or real estate related entities. The Company will seek to borrow funds from financial institutions and raise money through the offering of its common stock. Management believes that the Company can continue to operate and meet its obligations via working capital from operating and financing activities. Management is of the opinion that inflation has not and will not have a material effect on the operations of the Company. Results of Operations
The following table sets forth for the periods indicated, the percentages which selected items in the Company's Statements of Operations bear to total revenues:
Three Month Period Nine Month Period
Ended September 30 Ended September 30
1999 1998 1999 1998
________ ________ ________ ________
Revenues
Rental Income 80.9% 47.5% 78.6% 61.0%
Management Services 16.8% 22.6% 16.8% 27.0%
Commissions 02.3% 29.7% 04.5% 11.8%
Interest and Other 00.0% 00.2% 00.1% 00.2%
________ ________ ________ ________
Total Revenues 100.0% 100.0% 100.0% 100.0%
________ ________ ________ ________
Expenses
Direct Expenses:
Depreciation 05.6% 09.2% 17.8% 10.2%
Interest 36.2% 14.1% 30.1% 16.9%
Real Estate Taxes 13.7% 09.0% 12.9% 10.8%
Repairs and Maintenance 10.8% 09.9% 11.0% 16.0%
Utilities 02.5% 05.7% 02.4% 04.7%
Insurance 06.9% 05.6% 06.5% 05.9%
Other Direct Expenses 05.2% 01.5% 03.6% 03.2%
________ ________ ________ ________
Total Direct Expenses 80.9% 55.0% 84.3% 67.7%
________ ________ ________ ________
General and Administrative Expenses:
Office Occupancy Expense 06.9% 08.6% 06.7% 11.0%
Office Expense 03.6% 03.4% 02.2% 03.9%
Professional Fees 04.6% 00.4% 09.9% 01.5%
License, Dues, and Fees 00.9% (02.4)% 10.8% 02.3%
Depreciation and Amortization 14.3% 10.7% 13.3% 12.7%
Other Administrative Expenses 05.2% 08.0% 05.4% 09.5%
________ ________ ________ ________
Total General and
Administrative Expenses 35.5% 28.7% 48.3% 40.9%
________ ________ ________ ________
Total Expenses 116.4% 83.7% 132.6% 108.6%
________ ________ ________ ________
Income (Loss) Before Benefit/(Provision)
for Taxes (16.4)% 16.3% (32.6)% (08.6)%
Provision for Taxes 0.00% 00.0% 00.0% 00.0%
________ ________ ________ ________
Net Loss (16.4)% 16.3% (32.6)% (08.6)%
________ ________ ________ ________
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Nine Months Ended September 30, 1999 Compared With Nine Months Ended
September 30, 1998
Net Income (Loss) The Company reported a net loss of $36,387 for the nine months ended September 30, 1999, compared to a net loss of $5,500 for the nine months ended September 30, 1998. The losses were primarily due to depreciation, refinancing fees, legal fees paid to register with the National Association of Securities Dealers, and write off of organization costs in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-5 on reporting the costs of start-up activities.
Revenues Total revenues for the nine months ended September 30, 1999 increased by $47,507 (74.1%) to $111,645 from $64,138 for the nine months ended September 30, 1998. The increase was due primarily to rental income received from the addition of five (5) new rental properties, which were purchased in December 1998.
Direct Expenses Direct expenses for the nine months ended September 30, 1999 increased by $50,719 (116.9%) to $94,111 (84.3% of total revenues) from $43,392 (67.7% of total revenues) for the nine months ended September 30, 1998. The increase was due primarily to the addition of five (5) new rental properties, which were purchased in December 1998.
General and Administrative Expenses General and administrative expenses for the nine months ended September 30, 1999 increased by $27,675 (105.4%) to $53,921 (48.3% of total revenues) from $26,246 (40.9% of total revenues) for the nine months ended September 30, 1998. The increase was due primarily to fees paid to refinance two mortgages in 1999, legal fees paid to register with the National Association of Securities Dealers, and write off of organization costs in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-5 on reporting the costs of start-up activities.
Income Taxes There were no provisions for income tax for the nine month periods ended September 30, 1999 and 1998 because the Company was operating at a loss. Three Months Ended September 30, 1999 Compared With Three Months Ended September 30, 1998
Net Income (Loss) The Company reported a net loss of $5,773 for the three months ended September 30, 1999, compared to net income of $4,170 for the three months ended September 30, 1998. The loss in 1999 was primarily due to depreciation, refinancing fees, legal fees paid to register with the National Association of Securities Dealers, and write-off organization costs in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-5 on reporting the costs of start-up activities. Revenues Total revenues for the three months ended September 30, 1999 increased by $9,643 (37.8%) to $35,180 from $25,537 for the three months ended September 30, 1998. The increase was due primarily to rental income received from the addition of five (5) new rental properties, which were purchased in December 1998.
Direct Expense Direct expenses for the three months ended September 30, 1999 increased by $14,389 (102.4%) to $28,446 (80.9% of total revenues) from $14,057 (55.0% of total revenues) for the three months ended September 30, 1998. The increase was due primarily to the addition of five (5) new rental properties, which were purchased in December 1998.
General and Administrative Expenses General and administrative expenses for the three months ended September 30, 1999 increased by $5,197 (71.1%) to $12,507 (35.5% of total revenues) from $7,310 (28.7% of total revenues) for the three months ended September 30, 1998. The increase was due primarily to fees paid to refinance two mortgages in 1999, legal fees paid to register with the National Association of Securities Dealers, and write off of organization costs in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-5 on reporting the costs of start-up activities.
Income Taxes There were no provisions for income tax for the three month periods ended September 30, 1999 and 1998 because the Company was operating at a loss.
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