UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-27552
REALCO, INC.
(Exact name of registrant as specified in its charter)
New Mexico 85-0316176
State or other jurisdiction of (I.R.S. Employer
incorporation or other organization Identification No.)
1650 University Boulevard, N.E., Suite 5-100, Albuquerque, New Mexico, 87102
(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
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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____.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $24,256,642
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: On December 16, 1996, based on the price quoted by NASDAQ, the market
value was $5,797,500.
The number of shares outstanding of each of the Registrant's classes of voting
stock, as of December 16, 1996, was:
No Par Value Common: 2,845,000 shares.
Series A Preferred: 82,569
Series B Preferred: 217,859
Series D Preferred: 24,297
PART I
ITEM 1: DESCRIPTION OF BUSINESS
General
The Registrant'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.
The Registrant was organized in 1983 as a private company and its business was
that of an investment company providing funds to others in the form of loans or
equity interests through September 30, 1994. Through its wholly owned
subsidiary, MMAD Industries, Inc.,(MADD) a New York corporation (now named Great
American Equity Corporation and referred to hereafter as "GAEC"), it was engaged
in the business of arranging and participating in secured loans involving
various forms of real estate acquisitions and ventures. Beginning October 1,
1994, the Registrant changed its business strategy and developed a plan to
create a financial group of interrelated companies to provide a full range of
real estate services.
On March 14, 1995, the Registrant entered into an agreement and plan of
Reorganization with a New Mexico corporate holding company and certain of that
company's shareholders, which resulted in the Registrant's acquisition of
several wholly-owned subsidiaries including Charter Building and Development
Corp. (Charter), a residential home building contractor and Hooten-Stahl,
Inc.(Hooten/Stahl) a real estate brokerage business. Pursuant to the
Reorganization certain of the acquired corporations's shareholders exchanged all
of their Common Stock, representing approximately 98% of the outstanding stock,
for an aggregate of 82,569 shares of the Registrant's Series A Preferred Stock
and 228,859 shares of the Registrant's Series B Preferred Stock. Since the
acquisition, the Registrant has conducted its activities through it`s three
wholly-owned operating subsidiaries; GAEC, Charter and Hooten/Stahl.
Following the acquisition of Charter and Hooten/Stahl, the Registrant, on
February 2, 1996, successfully concluded a public offering of securities, at
which time Charter began a marketing effort to obtain agreements with additional
builders in the Albuquerque area, to build and market homes under fee
arrangements. Charter has secured two such contracts whereby Charter is building
homes under the trade name of each of the builders. In addition to a
construction fee, Hooten/Stahl has secured an exclusive marketing agreement for
the marketing of those Charter built branded homes.
On April 22, 1996, the Registrant announced that it had commenced residential
construction lending activity. GAEC entered into a participation agreement with
a local bank, which agreement is contemplated to provide an annual residential
home construction funding budget of approximately $24 million. As of September
30, 1996, the Registrant and its bank partner had $3,025,400 in outstanding
loans and/or funding commitments, of which approximately $965,000 is the
Registrant's participation. The Registrant expects to commit approximately $3
million of its funds to this project, while the bank will provide approximately
$9 million of matching funds. This kind of loan generally matures within six
months and the Registrant anticipates that upon repayment of outstanding loans
the funds will be reinvested in the continuation of this lending activity.
Also on April 22, 1996, the Registrant announced that it had entered into a
joint venture with its PHS, Inc., subsidiary and CTX Mortgage Company, a full
service residential mortgage provider. The joint venture began operations at
each of its three Hooten/Stahl branch locations. By October 31, 1996, the joint
venture was fully operational and recorded nominal income for the month of
September, 1996.
On July 1, 1996, the Registrant acquired all of the outstanding and issued
common shares of stock of Amity, Inc., (Amity), an Albuquerque, New Mexico based
general contractor specializing in commercial construction, including commercial
tenant improvements and residential remodeling. The Registrant exchanged 24,297
shares of its Series D Convertible Preferred Stock, $10.00 per share liquidation
value, bearing 3% cumulative dividend, for all of the issued and outstanding
Amity shares. The total value of the transaction was $242,970, which was a
$100,000 premium in excess of the audited net worth of Amity at June 30, 1996.
Operating Strategy
All of the Registrant's business activities are located in the metropolitan area
of Albuquerque, New Mexico. Since the completion of its Initial Public Offering,
the Registrant has expanded its lending and construction activities and has
added new services to its core of businesses' in a continuing effort to become a
one stop source for small to medium size independent home builders and
developers who may need to acquire financing, building materials, marketing and
sales support.
The Registrant believes that it can capitalize on its operating methods and
strategies, which it is formulating in its existing market, for expansion to
other geographical areas. For example, the Registrant believes that expansion to
other markets may be achieved by its acquisition of either real estate or
building companies. Once such a business is acquired, the strategy will be to
export to its new market the entire array of business activities of the
Registrant.
On a continuing basis, the Registrant has been exploring a variety of
acquisition opportunities, consisting of service, product and distribution
businesses. The Registrant's acquisition strategy complements the plan of
internal growth charted for its existing activities.
Inventory Acquisition and Development
During the fiscal period ended September 30, 1996 the Registrant made several
acquisitions of undeveloped land for development of residential home sites. The
land purchases were made through joint venture arrangements, whereby the
Registrant or one of its subsidiaries became a 50% equity partner in the
venture. The Registrant and/or its participating subsidiary, usually provides
funding for the joint ventures by arranging primary and subordinate secondary
secured land acquisition and development loans. First position secured loans are
generally provided by local banks with whom the Registrant has credit
facilities, on such terms and conditions as are customary in the geographical
market in which the Registrant does business. Subordinate second position,
secured loans are generally provided by combination of Registrant funds and
outside third party participants. This tier of subordinated debt is generally
granted an "Equity Kicker" in the form of additional preferential payments per
residential lot sold, in addition to the return of principal and interest.
Interest, terms and conditions are customary in the market in which the
Registrant does business. The Registrant is almost always requested by the first
position lender, (bank) to guarantee the entire debt obligations.
On July 5, 1996, Charter acquired 50 completed building residential home sites,
located on the west side of Albuquerque, New Mexico. During fiscal 1996, Charter
acquired an additional 40 building sites at that same location, completing a
contractual agreement with the developer of the property. The total acquisition
value of the 90 residential home sites was $3 million. Only the initial purchase
of 50 home sites was financed by bank loans. On July 5, 1996, the Registrant
executed a mortgage and promissory note in the amount of $1,100,000, secured by
initial acquisition of 50 home sites. The note bears floating interest equal to
one percent above the prime rate published in Reserve Statistical Release H. 15.
Interest on the note is payable quarterly and principal is reduced by the
payment of a lot release provision. The maturity of the note is January 5, 1997,
which may be extended for one additional year subject to payment by the
Registrant of a fee equal to one percent of the then outstanding principal
balance of the note.
On February 12, 1996 the Registrant acquired 25 completed building residential
home sites located in the Northeast quadrant of Albuquerque, Registrant executed
a mortgage and promissory note in the amount of $696,000, secured by the
acquired property. The note bears floating interest equal to one and one-half
percent above the prime rate of interest published in Federal Reserve
Statistical Release H.15. Interest on the note is payable quarterly and
principal is reduced by the payment of a lot release provision. The maturity of
the note is February 12, 1997, which may be extended for one additional year,
subject to payment by the Registrant of a fee equal to one percent of the then
outstanding principal balance of the note.
On June 26, 1996, the Registrant purchased from a bank with whom the Registrant
has a banking relationship, a mortgage and note representing an outstanding
indebtedness of a real estate joint venture in which Charter is a 50% joint
venturer. The original balance of the note was $1,050,000, dated February 23,
1995, which matured on February 23, 1996. The Bank and Borrower had been
negotiating a renewal of the note on terms acceptable to both parties. A
mutually agreeable renewal of the note was not consummated, and the Registrant
acquired the note from the bank. The Registrant agreed to extend the
indebtedness to the Joint Venture to February 23, 1997. The note is not subject
to any default provisions and is performing as expected.
On July 29, 1996, Charter, entered into a joint venture agreement, (Success
Venture), in which Charter became a 50% joint venturer. The joint venture
acquired 19.4839 acres of undeveloped land, located in the Northeast quadrant of
Albuquerque, New Mexico, for the purpose of developing 85 residential home
sites. The purchase price of the undeveloped land was $2,825,165. The land
purchase and funds required to fully develop the property were borrowed from a
bank and from the seller of the property. On September 3, 1996, the Registrant
executed a first mortgage and note on the property in the amount of $2,500,000.
The note bears floating interest equal to one percent above the prime rate of
interest of Chase Manhattan Bank of New York. Interest on the note is payable
quarterly and principal is reduced by the payment of a lot release provision.
The maturity of the note is December 3, 1998. On September 3, 1996, the
Registrant executed a second mortgage and note on the property in the amount of
$1,555,699. The second mortgage note bears floating interest equal to one
percent above the prime rate of interest of Chase Manhattan Bank of New York.
Interest on the note is payable quarterly and principal is reduced by the
payment of a lot release provision. The maturity of the second mortgage note is
also December 3, 1998.
As of December 15, 1996, the Registrant owned or controlled through various
joint venture arrangements, over 335 developed or currently under development,
home sites within the Albuquerque, New Mexico metropolitan area. Inventory of
home sites controlled by the Registrant, are utilized by Charter and are also
available for sale to home builders and individuals.
Hooten/Stahl currently represents approximately 45 independent home custom
builders in an exclusive marketing arrangement. These builders are part of a
"Builders Group" within the Hooten/Stahl client base. Any of the builders in the
"Builders Group" may draw on the available building site inventory controlled by
the Registrant. In addition, any independent builder within the "Builders Group"
may secure residential construction loans from the Registrant's GAEC lending
subsidiary.
Competition and Market Factors
Each of the Registrant's subsidiaries competes principally on the basis of
reputation in the community in which it serves. However, the Registrant competes
in a highly competitive environment typical of all real estate dependent
companies. All of the Registrant's subsidiaries compete with companies, nearly
all of which have greater financial resources than the Registrant. It is for
that reason that the Registrant has undertaken to form strategic alliances with
other companies with greater financial resources and expertise.
The Registrant believes that the host of services it currently offers will
appeal to small and medium size builders and developers. Since its Initial
Public Offering, Hooten/Stahl has nearly doubled the number of independent
custom builders in its "Builder Group". The ability of the Registrant to expand
its business is due in part to the addition of new capital from the public
securities offering.
The real estate industry, and the Registrant's business, is cyclical and is
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
property taxes, changes in consumer preferences and demographic trends. The
Registrant believes that its strategy of vertical integration will allow it to
remain profitable during downturns in the cycle and to build a dominance in its
market during such times, however, there can be no assurance that this strategy
will be successful.
Employees
As of September 30, 1996, the Registrant, including its subsidiaries, had 94
full and part time salaried employees. They were employed as follows: Realco, 9
full-time: Charter, 9 full-time and 5 part-time; Amity, 16 full-time and 1
part-time, and Hooten/Stahl, 33 full-time and 21 part-time. In addition,
Hooten/Stahl has approximately 142 sales associates who are independent
contractors. Charter and Amity normally hire independent subcontractors to
provide the skilled labor needed to construct their projects.
ITEM 2: DESCRIPTION OF PROPERTIES
The Registrant leases, on a month to month basis, approximately 3,000 square
feet of office space at $500 per month for its executive offices. Mr. James A.
Arias, the Registrant's President, is a part owner of the building in which the
executive offices are located.
The Registrant leases space for three real estate brokerage offices, Charter and
Amity construction subsidiaries, all located within the Albuquerque, New Mexico
metropolitan area. Leases include space ranging from 2,100 square feet to 13,900
square feet at monthly rental costs ranging from $2,100 per month to $13,900 per
month. One lease is with the Registrant's Executive Vice President and Chairman
of Hooten/Stahl, Mr. Bill E. Hooten. Prior to entering into the lease with Mr.
Hooten, the Registrant acquired an independent determination of fairness and
reasonableness of the lease and its annual rental of $103,250. The lease with
Mr. Hooten expires on January 31, 1997, and the Registrant anticipates that it
will be renewed for a comparable period and at a comparable rental.
ITEM 3: LEGAL PROCEEDINGS
The Registrant is subject to certain legal claims from time to time and is
involved in litigation that has arisen in the ordinary course of its business.
It is the Registrant's opinion that it either has adequate legal defenses to
such claims or that any liability that might be incurred due to such claims will
not, in the aggregate, exceed the limits of the Registrant's insurance policies
or otherwise result in any material adverse effect on the Registrant's
operations or financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1996.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol RLCO. The Registrant's common stock was not
traded until the conclusion of the initial public offering of the common stock
in February, 1996. The following table sets forth from February, 1996 through
September 30, 1996, the range of the high and low last reported sale prices as
reported by NASDAQ. The quotations shown represent inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may not reflect
actual transactions.
Stock Quotations:
High Low
---- ---
Fiscal 1996
First Quarter N/A
Second Quarter 6 4 5/8
Third Quarter 5 3/4 5 3/8
Fourth Quarter 4 3 1/8
On December 16, 1996, the last sale price for the common stock, as reported by
NASDAQ, was $3.00 per share. As of December 20, 1996, there were approximately
700 beneficial holders of the common stock.
The transfer Agent for the Registrant's Common Stock is American Stock Transfer
& Trust Registrant, 40 Wall Street, New York City, New York 10005, telephone:
(718) 921-8275.
The Registrant 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 earnings in order to finance the continued
development of its business. Payment of dividends is within the discretion of
the Registrant's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Registrant, among
other factors.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
The Registrant's revenues are generated through commercial and residential real
estate brokerage services, general residential and commercial construction
sales, and various financing activities.
The historical financial information for the twelve months ended September 30,
1996, is not comparable to the twelve months ended September 30, 1995, because
in March, 1995, the Registrant changed its business with the acquisition of its
real estate brokerage services and general residential home construction
businesses. Revenues for the Registrant prior to the acquisition in March 1995,
were generated through various financing activities in which the Registrant has
been continuously involved since its inception in 1983. Since March, 1995, the
Registrant's operating results have included the operating results of the
acquired businesses.
Results of Operations
Construction and lot sales increased by $4,955,083 to $12,812,009 in 1996, an
increase of 63% over 1995. Housing demand for new construction for the fiscal
period ended September 30, 1996, was slightly lower than for the period ended
September 30, 1995. Overall, construction and lot sales was 53% of revenues in
1996 as compared to 57% of total revenues in 1995. The increase in revenue was
primarily due to the recognition of a full twelve months of operation during
1996, verses recognition of seven months of operations during the fiscal period
ended September 30, 1995.
Revenues from brokerage commissions and fees increased by $4,811,013 to
$10,485,508 in 1996, an increase of 85% over 1995. This increase was primarily a
result of an increased marketing campaign which was began in 1995 and continued
through 1996, the recognition of a full twelve months of operation during 1996,
verses recognition of seven months of operations during the fiscal period ended
September 30, 1995.
Revenues from equity in net earnings of companies in which the Registrant has
invested increased by $200,487 to $270,984 in 1996, an increase of 284% over
1995. Earnings attributed to land development joint ventures increased by
$176,112 to $203,361 in 1996, an increase of 645% over 1995. There was also an
increase in net earnings from the Registrant's equity earnings in First American
Title Company of New Mexico and other miscellaneous investments of $24,375 in
1996. These increases were primarily due to the recognition of a full twelve
months of operation during 1996, verses recognition of seven months of
operations during 1995.
Gross profit from the Registrant's construction and lot sales, increased
$585,456 to $1,124,745 in 1996, a net increase of 109% over 1995. Gross profit
percentage increased from 6.9% in 1995 to 8.8% in 1996. This increase in gross
profit percentage in 1996, resulted primarily from the Registrant's increased
inventory of speculative ("spec") homes. The Registrant expanded its spec home
and lot inventory in anticipation of sales demand. Changes in typical price
ranges for single family residential housing moved down slightly during 1996,
causing longer delays between the completion of construction and sale of spec
homes. The increase in the holding period of the spec inventory was offset by
increased margins which were the result of continuously re-engineering home
building plans with a view towards reducing costs. The Registrant has been
replacing sold spec homes with new spec homes priced to sell at prices which are
currently influencing market conditions. The Registrant believes that its
marketing strategy to quickly satisfy changing housing trends and buyer demands
will preserve the continuity of new home construction revenues, however, there
can be no assurances that such measures will be successful.
The Registrant's gross margin from brokerage commissions and fees increased
$1,468,033 to $3,076,303 in 1996, an increase of 91.3%. Gross profit percentage
increased from 28.3% in 1995 to 29.3% in 1996. The primary factor which
contributed to the increase was greater gross revenue in 1996 compared to 1995
and a smaller increase in the cost of brokerage revenue for 1996 compared to
1995. The Registrant has undertaken a review of all brokerage expenses to
improve the gross margin during 1997.
Selling, general and administrative expenses increased by 77% to $4,220,119 in
1996 from $2,384,385 in 1995. This increase is primarily due to the following
factors. The Registrant experienced additional costs associated with its public
offering, related ongoing general and administrative costs and the recognition
of a full twelve months of operations during 1996, verses recognition of seven
months of operations during the fiscal period ended September 30, 1995.
Depreciation and amortization expense was $360,572 in 1996 as compared to
$138,665 in 1995. The increase was primarily due to the following factors.
Consolidation of the March 1, 1995 acquisition increased the Registrant's
depreciation base, increasing the amount of amortization and the recognition of
a full twelve months of operation during 1996, verses recognition of seven
months of operations during 1995.
Interest expense was $423,340 in 1996 as compared to $27,041 in 1995. The
Registrant capitalizes certain interest costs for land development and home
construction and includes such capitalized interest in the cost of the home. The
increase in interest expense for 1996 was primarily attributable to interest
associated with the $5,750,000 of 9.5% Subordinated Notes issued as part of the
public offering of the Registrant's securities.
Net income before preferred stock dividend requirement for 1996 was $132,142
compared to a loss of $49,820 for 1995. Increase in net income was a result of a
combination of all the factors discussed previously.
The Registrant is subject to a dividend requirement on preferred stock issued to
stockholders of acquired businesses as previously discussed. The Registrant's
9.50% Subordinated Notes contain restrictions on the ability of the Registrant
to issue dividends. As of September 30, 1996, $66,071 was available for payments
of dividends under the terms of the 9.50% Subordinated Notes. On February 28,
1996, the Registrant paid a dividend to holders of Series A, 6%, Convertible
Preferred Stock, of $49,541. All other dividends payable to holders of Series A.
Series B and Series D Preferred Stock have not been paid, and under the terms of
its Preferred Stock agreements, such dividends will continue to accumulate until
paid.
Liquidity and Capital Resources
In February, 1996, the Registrant publicly sold one million common shares of its
common stock at $7.00 per share and 5,750 Units consisting of $1,000 in
principal amount of a 9.5% Subordinated Sinking Fund Note and 120 Warrants To
purchase 120 shares of common Stock. The Registrant received net proceeds from
the sale of approximately $11,250,000.
The Registrant's principal sources of liquidity are cash flow from operating
activities, bank borrowings under both term and revolving credit facilities and
approximately $4,480,880 of the Registrant's unrestricted cash and cash
equivalents. At September 30, 1996, the Registrant had approximately $10 million
revolving interim construction and inventory lines of credit with various banks.
In addition, the Registrant is in the process of renewing approximately $6
million of expired commitments with two banks with whom the Registrant has long
standing relationships.
The Registrant believes that the cash flow from its operations, available bank
credit lines and its unrestricted cash balance, will sustain its current
operations and anticipated internal growth during fiscal 1997.
Inflation and Effects of Changing prices
Almost all aspects of the Registrant's operations are affected by inflation,
which can cause increases in the price of land, raw materials, subcontract
labor, cost of capital and affordable availability of capital to fund the
various business activities of the Registrant. Inflation may result in lower
gross profits and reduction in revenues from each of the Registrant's
activities. The Registrant believes that the vertical integration strategy which
it is pursuing, will provide some insulation from cyclical and inflationary
pressures. The Registrant believes in its ability to capture a variety of profit
opportunities by making available a broad assortment of its products and
services to the niche market it has identified, however, there are no assurances
that the Registrant will succeed, should it actually experience such a cyclical
or inflationary period.
ITEM 7: FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
The Shareholders
Realco, Inc.
We have audited the accompanying consolidated balance sheets of Realco, Inc. and
Subsidiaries, as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the consolidated results of
their operations and their consolidated cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note N to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1995.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
November 15, 1996
Realco, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30,
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents ...................... $ 4,480,880 $ 642,829
Restricted cash ................................ 486,559 483,144
Securities available for sale .................. 188,435 225,935
Accounts and notes receivable (note E) ......... 3,718,826 872,927
Inventories (note B) ........................... 10,321,533 6,265,812
Costs and estimated earnings in excess of
billings on uncompleted contracts (note C) ... 307,433 --
Property and equipment, net (note F) ........... 795,816 819,846
Investments - equity method (note D) ........... 895,596 720,760
Deferred income taxes (note H) ................. 87,734 59,230
Other assets ................................... 1,325,108 690,826
----------- -----------
$22,607,920 $10,781,309
=========== ===========
LIABILITIES
Notes payable (note G) ......................... $ 5,627,240 $ 176,002
Lease obligations (note I) ..................... 187,535 275,371
Construction advances and notes payable,
collateralized by inventories (note G) ....... 3,389,012 4,078,804
Accounts payable and accrued liabilities ....... 1,784,917 1,393,401
Escrow funds held for others ................... 486,559 483,144
----------- -----------
Total liabilities ................... 11,475,263 6,406,722
STOCKHOLDERS' EQUITY (note P)
Series A preferred stock - authorized,
83,000 shares; issued and
outstanding, 82,569 shares in 1996
and 1995, stated at liquidation value ....... 825,690 825,690
Series B preferred stock - authorized,
230,000 shares; issued and outstanding,
217,859 shares in 1996 and 222,859
shares in 1995, stated at liquidation
value ....................................... 2,178,590 2,228,590
Series C preferred stock - authorized,
80,000 shares; issued and outstanding,
none ........................................ -- --
Series D preferred stock - authorized,
24,297 shares; issued and outstanding,
24,297 shares in 1996, stated at
liquidation value ........................... 242,970 --
Common stock - no par value; authorized,
6,000,000 shares; issued and
outstanding, 2,845,000 shares in 1996
and 1,845,000 shares in 1995 ................ 7,712,461 1,229,750
Retained earnings ............................. 165,588 82,987
Unrealized gains on available-for-sale
securities, net of taxes .................... 7,358 7,570
----------- -----------
11,132,657 4,374,587
----------- -----------
$22,607,920 $10,781,309
=========== ===========
The accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
1996 1995
------------ ------------
REVENUES
Brokerage commissions and fees ................ $ 10,485,508 $ 5,674,495
Construction sales ............................ 11,807,150 7,573,124
Sales of developed lots ....................... 1,004,859 283,802
Equity in net earnings of investees (note D) .. 270,984 70,497
Interest and other, net ....................... 688,141 206,828
------------ ------------
24,256,642 13,808,746
COSTS AND EXPENSES
Cost of brokerage revenue ..................... 7,409,205 4,066,225
Cost of construction sales .................... 10,672,952 7,025,070
Cost of developed lots sold ................... 1,014,312 292,567
Selling, general, administrative, and other ... 4,220,119 2,384,385
Depreciation and amortization ................. 360,572 138,665
Interest ...................................... 423,340 27,041
------------ ------------
24,100,500 13,933,953
------------ ------------
Earnings (loss) before income
taxes and cumulative effect
of change in accounting principle 156,142 (125,207)
INCOME TAX (BENEFIT) EXPENSE (note H) ........... 24,000 (59,517)
------------ ------------
Earnings (loss) before cumulative
effect of change in accounting
principle ........................ 132,142 (65,690)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (note N) ...................... -- (15,870)
------------ ------------
NET EARNINGS (LOSS) ................ 132,142 (49,820)
PREFERRED STOCK DIVIDEND REQUIREMENT ............ 117,846 64,100
------------ ------------
NET EARNINGS (LOSS) APPLICABLE TO
COMMON SHARES .................... $ 14,296 $ (113,920)
============ ============
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) before cumulative effect of
change in accounting principle and preferred
stock dividend requirement .................. $ .05 $ (.04)
Cumulative effect of change in accounting
principle ................................... -- .01
------------ ------------
Net earnings (loss) per common share before
preferred stock dividend requirement ........ $ .05 $ (.03)
============ ============
Net earnings (loss) per common share after
preferred stock dividend requirement ........ $ .01 $ (.06)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ...... 2,498,005 1,845,000
============ ============
The accompanying notes are an integral part of these statements.
<TABLE>
Realco, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1996 and 1995
<CAPTION>
Unrealized
gains
(losses)on
Series A Series B Series D available
preferred preferred preferred for sale Total
stock 6% stock 3% stock 3% Common Retained securities, stockholders'
cumulative cumulative cumulative stock earnings net of tax equity
----------- ----------- ---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 ..... $ -- $ -- $ -- $ 1,230,750 $ 132,807 $ -- $ 1,363,557
Effect of accounting change,
net of taxes of $32,423
(note N) ..................... -- -- -- -- -- (48,634) (48,634)
Purchase of 185,000 shares
of common stock .............. -- -- -- (147,250) -- -- (147,250)
Sale of 185,000 shares of
common stock ................. -- -- -- 146,250 -- -- 146,250
Issuance of Series A preferred
stock in business acquisition
(note K) ..................... 825,690 -- -- -- -- -- 825,690
Issuance of Series B preferred
stock in business acquisition
(note K) ..................... -- 2,288,590 -- -- -- -- 2,288,590
Retirement of Series B
preferred stock .............. -- (60,000) -- -- -- -- (60,000)
Change in unrealized gains
(losses) on available-for-sale
securities, net of taxes of
$37,469 -- -- -- -- -- 56,204 56,204
Net loss ....................... -- -- -- -- (49,820) -- (49,820)
---------- ---------- ---------- ----------- ---------- --------- ------------
Balance at September 30, 1995 .. 825,690 2,228,590 -- 1,229,750 82,987 7,570 4,374,587
Sale of common stock ........... -- -- -- 6,178,174 -- -- 6,178,174
Sale of common stock warrants .. -- -- -- 304,537 -- -- 304,537
Issuance of Series D preferred
stock in business acquisition
(Note K) ..................... -- -- 242,970 -- -- -- 242,970
Retirement of Series B
preferred stock .............. -- (50,000) -- -- -- -- (50,000)
Change in unrealized gains on
available-for-sale securities,
net of taxes of $304 ......... -- -- -- -- -- (212) (212)
Dividends paid on Series A
preferred stock .............. -- -- -- -- (49,541) -- (49,541)
Net earnings ................... -- -- -- -- 132,142 -- 132,142
---------- ----------- ---------- ----------- ---------- --------- ------------
Balance at September 30, 1996 .. $ 825,690 $ 2,178,590 $ 242,970 $ 7,712,461 $ 165,588 $ 7,358 $ 11,132,657
========== =========== ========== =========== ========== ========= ============
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
<TABLE>
Realco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) ............................................. $ 132,142 $ (49,820)
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization ............................... 360,572 138,665
Accretion of discount on notes payable ...................... 36,823 --
Distributions from investees in excess of net earnings (net
earnings in excess of distributions) ...................... (112,248) 154,503
(Gain) loss on sale of securities available for sale ........ (80,296) 591
Cumulative effect of change in accounting principle ......... -- (15,870)
Changes in operating assets and liabilities
(Increase) decrease in restricted cash .................... (3,415) 6,612
Increase in accounts receivable ........................... (399,562) (40,911)
(Increase) decrease in inventories ........................ (3,924,721) 1,877,481
Decrease in net billings related to costs and estimated
earnings on uncompleted contracts ....................... 41,886 --
(Increase) decrease in other assets ....................... 56,417 (113,224)
Decrease in accounts payable and accrued liabilities ...... (10,551) (111,067)
Increase (decrease) in escrow funds held for others ....... 3,415 (559,991)
Increase in deferred tax asset ............................ (38,255) (27,600)
------------ ------------
Net cash provided by (used in) operating activities ..... (3,937,793) 1,259,369
Cash flows from investing activities
Purchases of property and equipment ............................. (208,487) (215,504)
Advances on notes receivable .................................... (3,059,185) --
Receipts on notes receivable .................................... 580,556 136,190
Proceeds from sale of securities available for sale ............. 147,280 17,408
Purchase of securities available for sale ....................... (30,000) (43,013)
Purchase of investments - equity method ......................... (62,588) --
Cash acquired in business acquisition ........................... 71,159 469,933
------------ ------------
Net cash provided by (used in) investing activities ..... (2,561,265) 365,014
Cash flows from financing activities
Construction advances and notes payable, net .................... (689,792) (2,095,896)
Proceeds from borrowings under revolving and long-term debt ..... 4,709,491 66,655
Payments on revolving, capital lease, and long-term debt ........ (115,760) (64,847)
Sale of common stock ............................................ 6,178,174 146,250
Sale of common stock warrants ................................... 304,537 --
Dividends paid on preferred stock ............................... (49,541) --
Purchase of common stock ........................................ -- (147,250)
------------ ------------
Net cash provided by (used in) financing activities ..... 10,337,109 (2,095,088)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... 3,838,051 (470,705)
Cash and cash equivalents at beginning of year .................... 642,829 1,113,534
------------ ------------
Cash and cash equivalents at end of year .......................... $ 4,480,880 $ 642,829
============ ============
Cash paid during the year for:
Income taxes .............................................. $ 3,700 $ 242,000
Interest .................................................. 664,000 255,000
</TABLE>
Noncash financing and investing activities:
In 1996, the Company acquired all of the common stock of Amity, Inc. in exchange
for the issuance of 24,297 shares of Series D preferred stock. In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired, including cash of $71,159 ........ $ 726,052
Preferred stock issued for assets of Amity, Inc. ................ (242,970)
---------
Liabilities assumed ..................................... $ 483,082
=========
The Company exchanged a $50,000 note receivable for 5,000 shares of Series B
preferred stock in 1996 and a $60,000 note receivable for 6,000 shares of Series
B preferred stock in 1995.
In 1995, the Company acquired substantially all of the common stock of Old
Realco in exchange for the issuance of 82,569 shares of Series A and 228,859
shares of Series B preferred stock. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired, including cash of $469,933 ..... $ 11,697,042
Preferred stock issued for assets of Old Realco ............... (3,114,280)
------------
Liabilities assumed ................................... $ 8,582,762
============
The accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Realco, Inc. (the "Company"), a New Mexico corporation, has operations, since
the acquisition of its current business effective March 1, 1995, which include
single-family home construction; real estate brokerage sales through a franchise
from Prudential Real Estate Affiliates, Inc.; joint ventures for building lot
development; and, to a lesser extent, commercial construction and financial
services. Its operations and activities are primarily in the vicinity of
Albuquerque, New Mexico and its customers are also in this area.
Realco, Inc. and Subsidiaries is comprised of Realco, Inc. and the following
wholly owned subsidiaries: Hooten/Stahl, Inc., Charter Building & Development
Corporation, Hooten/Stahl Commercial Investment, Inc., PHS, Inc., Home Equity &
Guaranty Corporation, Great American Equity Corporation, Towne Park, Inc., and
Amity, Inc. ("Amity").
In February, 1996, the Company completed the sale in an initial public offering
of 1,000,000 shares of common stock, $5,750,000 subordinated sinking fund notes,
and 690,000 common stock purchase warrants to purchase Company common stock at
$8.40 per share. The common stock was issued for approximately $6,178,000, net
of offering expenses of approximately $822,000. The subordinated sinking fund
notes were issued for approximately $4,770,000, net of offering costs and
discounts of approximately $980,000. The common stock purchase warrants which
became immediately exercisable upon closing of the offering were allocated a
portion of proceeds based upon estimated fair value of approximately $304,000,
net of approximately $41,000 offering costs, and remain outstanding at September
30, 1996. Offering proceeds were used to repay borrowings under construction
loans, acquire residential building sites, fund advances under notes, and
provide working capital.
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
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.
Included in cash and cash equivalents at September 30, 1996 is approximately
$1,025,000 in a single money market fund and approximately $1,057,000 in a
savings account at a single financial institution.
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. No allowance was
required at September 30, 1996 and 1995. 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.
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 lesser of the primary lease term
or estimated economic lives.
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.
8. Earnings (Loss) Per Common Share
--------------------------------
Earnings (loss) per common share has been computed on the basis of the weighted
average shares outstanding during the year. The series preferred stock and
common stock warrants are common stock equivalents; however, they are
antidilutive and are not included in the per share computations.
9. Investments
-----------
Investments in affiliated companies and joint ventures owned 20% to 50% are
accounted for on the equity method. Accordingly, the consolidated statements of
operations include the Company's share of the affiliated entities' net earnings.
Available-for-sale securities are carried at fair value with the unrealized
gains and losses excluded from earnings and reported in a separate component of
stockholders' equity, net of tax effects. Prior to 1995, such investments were
carried at fair value with unrealized gains and losses included in earnings (see
Note N).
10. Intangible Assets
-----------------
Cost in excess of net assets of businesses acquired included in other assets is
being amortized using the straight-line method over twenty years.
The Company assesses the recoverability of cost 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. The
Company believes that no impairment has occurred and that no reduction in the
estimated useful life is warranted.
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. Recently Issued Accounting Pronouncement
----------------------------------------
In March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets for which disposal
is expected. The Company will adopt SFAS No. 121 in the first quarter of 1997;
however, the effect of adoption has not been determined.
13. Reclassifications
-----------------
Certain reclassifications have been made to the 1995 consolidated financial
statements to correspond with the 1996 presentation.
NOTE B - INVENTORIES
During the years ended September 30, 1996 and 1995, the Company incurred and
capitalized approximately $301,000 and $228,000, respectively, of interest
costs. Capitalized interest costs charged to cost of construction sales were
approximately $323,000 and $256,000 for the years ended September 30, 1996 and
1995, respectively.
Inventories consist of the following:
1996 1995
----------- -----------
Land and improvements under development ........ $ 5,464,200 $ 3,134,735
Houses in progress ............................. 3,598,516 1,683,570
Model homes .................................... 1,258,817 1,447,507
----------- -----------
$10,321,533 $ 6,265,812
=========== ===========
Houses in progress include homes under contract of approximately $1,174,000 and
$1,225,000 at September 30, 1996 and 1995, respectively.
NOTE C - COSTS AND ESTIMATED EARNINGS 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, 1996.
There were no contracts accounted for on the percentage-of-completion method as
of September 30, 1995.
Costs incurred on uncompleted contracts ..................... $2,988,084
Estimated earnings .......................................... 36,134
----------
3,024,218
Less billings to date .................................... 2,716,785
----------
Costs and estimated earnings in excess of
billings on uncompleted contracts ......................... $ 307,433
==========
NOTE D - INVESTMENTS
The following is a summary of investments carried on the equity method as of
September 30:
1996 1995
-------- --------
First American Title Company of New Mexico,
20% stockholder interest ......................... $144,002 $256,659
Village Joint Venture .............................. 306,502 159,635
Stonehenge at High Resort Joint Venture ............ 294,410 188,337
Success Venture .................................... 100 --
Other .............................................. 150,582 116,129
-------- --------
$895,596 $720,760
======== ========
The Company is participating in three development projects, each under a
separate joint venture agreement. The Company's liability is joint and several
for each of the joint ventures. The Company's 50% share in the operations of
certain joint ventures is adjusted for preferential rights of the managing joint
venturers and is reported on the equity method in the accompanying consolidated
financial statements.
Village Joint Venture was formed in March, 1992 and Stonehenge at High Resort
Joint Venture was formed in May, 1993. Each was formed with Boyle Development
Company, managing general venturer. Success Venture was formed in July, 1996
with Mesa Verde Development Corporation. These joint ventures were formed for
the purpose of acquisition, development, and sale or other disposition of
specific parcels of land.
Summarized financial information of First American Title Company of New Mexico
is as follows as of and for the year ended September 30, 1996 and the
seven-month period ended September 30, 1995:
1996 1995
---------- ----------
Cash ................................. $ 658,776 $ 709,539
Other assets ......................... 8,167,839 5,248,604
---------- ----------
$8,826,615 $5,958,143
========== ==========
Liabilities .......................... $8,106,606 $4,674,848
Equity ............................... 720,009 1,283,295
---------- ----------
$8,826,615 $5,958,143
========== ==========
Revenue earned ....................... $4,155,923 $2,450,769
========== ==========
Net earnings ......................... $ 331,843 $ 196,770
========== ==========
Summarized financial information of joint ventures is as follows as of and for
the year ended September 30, 1996 and the seven-month period ended September 30,
1995:
1996 1995
---------- ----------
Cash ............................................. $ 45,387 $ 103,828
Other assets, primarily land and improvements
under development ............................. 5,665,952 3,326,282
---------- ----------
$5,711,339 $3,430,110
========== ==========
Liabilities ..................................... $4,509,316 $2,743,167
Equity .......................................... 1,202,023 686,943
---------- ----------
$5,711,339 $3,430,110
========== ==========
Revenue earned .................................. $2,359,312 $ 393,007
========== ==========
Net earnings .................................... $ 606,631 $ 209,385
========== ==========
NOTE E - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable include the following at September 30:
1996 1995
---------- ----------
Land development financing to an affiliate,
collateralized by certain real estate and a
limited guaranty of the borrowers, interest
due monthly at 8.5%,principal due as developed
lots are sold through July, 1998 ..................... $ 972,292 $ 218,707
Land development financing to an affiliate,
collateralized by certain real estate and a
limited guaranty of the borrowers, interest
due monthly at 9.75%, principal due as lots
are sold through February, 1997 ...................... 426,015 --
Residential construction advances to various
builders subordinate to the interest of a bank
under a participation agreement, collateralized
by certain real estate and homes under construction,
interest due monthly at Chase Manhattan prime plus
1% (9.25% at September 30, 1996), principal due as
homes are sold, up to a nine-month term with three-
month renewals considered ............................ 844,256 --
Notes receivable from various real estate agents,
collateralized by computer equipment, payable in
monthly installments aggregating approximately
$8,100, including interest at 10%, with maturity
dates through September, 1999 ........................ 218,747 --
Notes receivable, collateralized by real estate,
interest due monthly at 9%, principal payable as
lots are sold through January, 1997 .................. 118,000 --
Notes receivable, collateralized by real estate,
payable in monthly installments of $1,275,
including interest at 8%, with outstanding
principal due May, 1997 .............................. 173,398 --
Uncollateralized note receivable from the
Company's executive vice president
(a stockholder), interest due annually at 6%,
principal due June, 1997 ............................. 50,000 100,000
Other advances and receivables ....................... 916,118 554,220
---------- ----------
$3,718,826 $ 872,927
========== ==========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
1996 1995
---------- ----------
Office equipment, furniture, and fixtures .......... $ 997,702 $ 778,422
Leasehold improvements ............................. 114,948 107,400
Automobiles and equipment .......................... 109,052 73,122
---------- ----------
1,221,702 958,944
Less accumulated depreciation and amortization ..... 425,886 139,098
---------- ----------
$ 795,816 $ 819,846
========== ==========
NOTE G - DEBT
Debt consisted of the following at September 30:
1996 1995
---------- ----------
Subordinated sinking fund notes, $5,750,000
face amount, 9.5% interest payable annually,
principal payable at various dates through
December, 2003 (less $280,577 unamortized
discount based on imputed interest rate of
10.5%) (A) ......................................... $5,469,423 $ --
Construction advances, collateralized by
inventories (B) ................................... 1,220,512 2,077,025
Notes payable, collateralized by inventories (C) ... 2,168,500 2,001,779
Revolving line of credit with Norwest Bank,
interest payable monthly at 1.5% over the bank's
prime rate, principal payable March, 1997 .......... 100,000 100,000
Other notes payable ................................ 57,817 76,002
---------- ----------
$9,016,252 $4,254,806
========== ==========
(A) Subordinated sinking fund notes are subject to various covenants, the most
restrictive of which include minimum net worth requirements, limitations on
dividends, and limitations on debt.
(B) Construction advances collateralized by inventories include $497,388
($1,172,545 at September 30, 1995) advanced under various interim construction
lines of credit which total $2,000,000. Each home built under these lines of
credit requires a separate construction loan bearing interest at the bank's
prime rate plus 1% (9.25% at September 30, 1996 and 8.25% at September 30,
1995). Construction advances also include $412,290 ($773,207 at September 30,
1995) advanced under other guidelines which provide up to $8,000,000 in
construction advances. Each home to be built under these lending guidelines
requires a separate construction loan at the bank's prime rate plus 1% (9.25% at
September 30, 1996 and 8.25% at September 30, 1995). Additional construction
advances collateralized by inventories of $310,834 ($131,273 at September 30,
1995) consist primarily of owner-financed construction loans which are payable
upon closing.
(C) Notes payable collateralized by inventories include amounts outstanding on
loan agreements expiring at various dates from January 5, 1997 to February 12,
1997, with interest rates ranging from the banks' prime rates plus 1% (9.75% at
September 30, 1996 and 8.25% at September 30, 1995) to 10% and principal
payments due as properties are sold.
NOTE H - INCOME TAXES
The provision for income taxes consists of the following for the years ended
September 30:
1996 1995
-------- --------
Current ............................ $ 62,255 $(31,917)
Deferred ........................... (38,255) (27,600)
-------- --------
$ 24,000 $(59,517)
======== ========
The Company's effective income tax rate on continuing operations differed from
the federal statutory rate of 34% as follows:
1996 1995
-------- --------
Income taxes at federal statutory rate ......... $ 53,088 $(42,570)
Effect of graduated rates ...................... (8,943) 16,969
Change in valuation allowance .................. (25,574) (35,870)
Nondeductible expenses ......................... 7,227 8,206
Dividend exclusion ............................. (8,326) (13,360)
Other .......................................... 6,528 7,108
-------- --------
Total tax expense (benefit) ............ $ 24,000 $(59,517)
======== ========
Components of deferred taxes are as follows at September 30:
1996 1995
--------- ---------
Assets
Accrued liabilities ................... $ 62,577 $ 52,768
Property and equipment ................ 36,660 35,069
Investments ........................... 89,892 89,892
Tax loss carryforward ................. 22,721 31,555
Other ................................. 2,763 602
Valuation allowance ................... (40,426) (66,000)
--------- ---------
$ 174,187 $ 143,886
========= =========
Liabilities
Investments ............................ $ 75,153 $ 62,056
Inventories ............................ 11,300 22,600
--------- ---------
$ 86,453 $ 84,656
========= =========
The valuation allowance decreased $25,574 and $35,870 for the years ended
September 30 1996 and 1995, respectively.
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 approximately $313,000 and accumulated depreciation of approximately
$141,000 and $49,000 at September 30, 1996 and 1995, respectively.
Capital lease terms range from three to five years and provide for payments as
follows:
Year ending September 30
1997 ...................................................... $ 93,680
1998 ...................................................... 76,008
1999 ...................................................... 35,196
---------
Total minimum lease payments ................................ 204,884
Amount representing interest ................................ (17,349)
---------
Present value of net minimum lease payments ................. $ 187,535
=========
The Company leases certain property and equipment used in its operations under
operating leases. Lease terms range from three to ten years and provide for
payments as follows:
Year ending September 30
1997 $ 445,379
1998 402,744
1999 272,193
2000 196,044
2001 195,222
Thereafter 518,400
-----------
$ 2,029,982
===========
Rental expense under these leases was approximately $564,000 and $363,000 for
the years ended September 30, 1996 and 1995, respectively. Certain of these
leases relating to rental expense of approximately $112,000 and $71,000 for the
years ended September 30 1996 and 1995, respectively, are with related parties.
NOTE J - EMPLOYEE BENEFIT PLAN
The Company has a deferred compensation plan covering certain eligible key
employees. The plan allows for discretionary incentive contributions by the
Company. Discretionary incentive contributions vest 20% after one year of
service and an additional 20% for each year thereafter. Retirement age under the
plan is age 65 and benefits may be paid as a lump sum or in annual installments
over a period elected by the participant or beneficiary up to ten years. The
plan is a nonqualified deferred compensation plan which can be terminated or
changed by the Company at any time. The Company made no contributions to the
plan during the years ended September 30, 1996 and 1995.
NOTE K - BUSINESS COMBINATIONS
On February 20, 1995, the Board of Directors ("Board") of the Company approved
the acquisition of a New Mexico holding company ("Old Realco"), which comprises
the majority of the Company's current lines of business. The Board approved the
issuance of 82,569 shares of newly authorized Series A preferred stock, $10
stated value, and 228,859 shares of newly authorized Series B preferred stock,
$10 stated value, in exchange for common stock representing approximately 98% of
the shares outstanding of Old Realco. The Series A and Series B preferred stock
receive annual cumulative dividends of $.60 and $.30 per share, respectively,
have specified liquidation preferences, and are convertible into common stock.
This business combination has been accounted for using the purchase method of
accounting and the accompanying consolidated financial statements include the
operations of Old Realco subsequent to its acquisition, which was effective
March 1, 1995. Cost in excess of the net assets acquired was approximately
$310,000.
The Company acquired Amity, a commercial construction contractor, effective July
1, 1996. The Board approved the issuance of 24,297 shares of newly authorized
Series D preferred stock, $10 stated value, in exchange for common stock
representing 100% of the shares outstanding of Amity. The Series D stock
receives annual cumulative dividends of $.30 per share, has specified
liquidation preferences, and is convertible into common stock. This business
combination has been accounted for using the purchase method of accounting and
the accompanying consolidated financial statements include the operations of
Amity subsequent to its acquisition. Cost in excess of the net assets acquired
was $100,000.
The following summarized pro forma unaudited information assumes the acquisition
of Amity had occurred on October 1, 1994:
Year ended September 30,
--------------------------------
1996 1995
------------ ------------
Revenues .............................. $ 26,968,000 $ 15,767,000
============ ============
Net earnings (loss) ................... $ 14,600 $ (113,000)
============ ============
Earnings (loss) per share ............. $ .01 $ (.06)
============ ============
NOTE L - 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:
1996 1995
------------ ------------
Revenues
Residential construction ................. $ 10,689,087 $ 7,573,124
Real estate broker
Sales to unaffiliated customers ........ 10,485,508 5,674,495
Intersegment sales ..................... 406,100 262,876
Financial services ....................... 276,399 --
Commercial construction .................. 1,118,063 --
Other sales .............................. 1,004,859 283,802
Interest and other ....................... 682,726 277,325
Eliminations ............................. (406,100) (262,876)
------------ ------------
Total ................................ $ 24,256,642 $ 13,808,746
============ ============
Operating profit (loss)
Residential construction ................. $ 423,478 $ 242,290
Real estate broker ....................... (354,356) (248,335)
Financial services ....................... 230,436 --
Commercial construction .................. 8,562 --
Other sales .............................. (9,453) (8,765)
------------ ------------
Total .................................. $ 298,667 $ (14,810)
============ ============
Assets
Residential construction ................. $ 11,965,756 $ 7,169,689
Real estate broker ....................... 1,615,150 1,667,435
Financial services ....................... 2,608,838 --
Commercial construction .................. 724,548 --
------------ ------------
Identifiable assets .................... 16,914,292 8,837,124
Equity investments - other ............... 241,891 360,002
Corporate assets ......................... 4,339,561 756,031
Other assets ............................. 1,112,176 828,152
------------ ------------
Total .................................. $ 22,607,920 $ 10,781,309
============ ============
Depreciation and amortization
Residential construction ................. $ 77,675 $ 32,247
Real estate broker ....................... 178,078 84,262
Financial services ....................... 3,428 --
Commercial construction .................. 3,859 --
Other .................................... 97,532 22,156
------------ ------------
Total .................................. $ 360,572 $ 138,665
============ ============
Capital expenditures
Residential construction ................. $ 97,859 $ 78,980
Real estate broker ....................... 88,818 101,552
Financial services ....................... 17,629 --
Commercial construction .................. 1,900 --
Other .................................... 2,281 34,972
------------ ------------
Total .................................. $ 208,487 $ 215,504
============ ============
Operating profit consists of total revenues, less costs and expenses, and does
not include either interest and other income, net equity in earnings of
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, investments accounted for under the equity method,
and capitalized debt issuance costs.
NOTE M - COMMITMENTS AND CONTINGENCIES
The Company is contingently liable on land development loans made by various
lending institutions to joint ventures to which the Company is a 50% general
partner. The Company was contingently liable for approximately $4,300,000 and
$2,500,000 at September 30, 1996 and 1995, respectively.
The Company has agreements to purchase a specified number of lots on an agreed
time schedule for which deposits of approximately $162,000 have been paid. In
the event the lots are not purchased by the Company, the deposits will be
forfeited.
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.
NOTE N - CHANGE IN ACCOUNTING PRINCIPLE
Effective October 1, 1994, the Company changed the nature of its business and no
longer operates as an investment company. Therefore, the Company now accounts
for certain of its investments under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and certain others under the cost or
equity method.
The cumulative effect of this change in accounting principle was a reduction of
investments of approximately $33,000, of which $15,870 was reflected in the
consolidated statement of operations and approximately $49,000 was reflected as
unrealized losses on securities, a separate component of equity.
NOTE O - RELATED PARTY TRANSACTIONS
The Company paid management fees to a company owned by a director and officer
for management services provided for the year ended September 30, 1995 of
approximately $61,000, plus applicable taxes.
NOTE P - PREFERRED STOCK
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. Series D
voting preferred stock is entitled to dividends when declared and paid at a 3%
cumulative rate annually starting July 1, 1996 and payable each July 1
thereafter. At September 30, 1996, preferred stock dividends accrued and unpaid
were $132,405. All three series of preferred stock have a liquidation preference
of $10 per share, plus all accumulated but unpaid dividends. Each Series A and
Series D preferred share is convertible into common shares at $7.50 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.
Series C preferred stock is entitled to dividends when declared and paid at a
15% cumulative rate payable annually starting January 31, 1996 and payable each
January 31 thereafter. Series C has a liquidation preference of $50 per share
plus all accumulated and unpaid dividends. Each Series C preferred share is
convertible into common shares at $7.50 per common share on the basis of $62.50
per preferred share.
At September 30, 1996, the Company has authorized 82,703 preferred shares which
are unclassified as to series and any rights, preferences, and series will be
fixed by the Board of the Company upon issuance.
NOTE Q - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value information as of
September 30, 1996 as required by SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments". Such information, which pertains to the Company's
financial instruments, is based on the requirements set forth in SFAS No. 107
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. Securities Available for Sale
-----------------------------
The estimated fair values are based upon quoted market prices.
3. Fixed Rate Notes Receivable
---------------------------
The discounted amount of future cash flows using the current rates at which
similar loans would be made to borrowers is used to estimate fair value.
4. Floating Rate Notes Receivable
------------------------------
The carrying amount approximates fair value because interest rates adjust to
market rates.
5. 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.
6. Floating Rate Debt
------------------
The carrying amount approximates fair value because interest rates adjust to
market rates.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
Carrying Estimated
amount fair value
----------- -----------
Financial assets
Cash, cash equivalents, and restricted cash .... $ 4,480,880 $ 4,480,880
Securities available for sale .................. 188,435 188,435
Fixed rate notes receivable .................... 1,958,452 1,946,428
Floating rate notes receivable ................. 844,256 844,256
Financial liabilities
Fixed rate debt ................................ (6,087,740) (6,088,467)
Floating rate debt ............................. (2,928,512) (2,928,512)
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with Accountants of the kind
described by Item 304 of Regulation S-B at any time during the Registrant's two
(2) most recent fiscal years.
PART III
Pursuant to instruction E(3) to From 10-KSB, the information required by Part
III (Items 9, 10, 11 and 12) is hereby incorporated by reference to the
materials contained in "Election of Directors," "Executive Compensation,"
"Certain Transactions" and "Security Ownership of Certain Beneficial Owners and
Management," contained in the Registrant's definitive proxy materials to be
filed with the Commission within 120 days of September 30, 1996.
PART IV
ITEM 13: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSB
1. Financial Statements, for each of the two years ended September 30, 1996 and
1995:
INDEX TO FINANCIAL STATEMENTS
REALCO, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Balance Sheets as of September 30, 1996 and 1995
Statements of Operations for the years ended
September 30, 1996 and 1995
Statement of Stockholders' Equity for the years ended
September 30, 1996 and 1995
Statements of Cash Flows for the year ended
September 30, 1996 and 1995
Notes to Consolidated Financial Statements
2. Exhibits:
Exhibit
NUMBER DESCRIPTION
2.1* Articles of Merger dated July 12, 1995
3.1* Articles of Incorporation dated August 8, 1983
3.2* Articles of Amendment to Articles of Incorporation dated March 20, 1995
3.3* Articles of Amendment dated July 28, 1995
3.4* Bylaw as amended
10.1* Agreement and Plan or Reorganization dated March 14, 1995
10.2* Employment Agreement dated March 14, 1995, between the Registrant and Mr.
Bill E. Hooten, included as an exhibit to Agreement and Plan of
Reorganization
10.3* Employment Agreement dated March 14, 1995, between the Registrant and Mr.
Melvin A. Hardison, included as an exhibit to Agreement and Plan of
Reorganization
10.4* The Prudential Real Estate Affiliates, Inc. Franchise Agreement with the
Registrant, as amended
10.5* First Security Bank line of construction credit commitment dated December
2, 1994
10.6* Loan Agreement dated July 5, 1994, between Sunwest Bank of Albuquerque
and Charter Building and Development Corp.
10.7* Real Estate lease dated January 1, 1994, between R.R. Rutledge and
Hooten/Stahl, Inc.
10.8* Real Estate lease dated January 1, 1991, between Bill E. Hooten and
Hooten/Stahl, Inc.
10.9* Shopping Center Lease dated December 7, 1993, between Rio Rancho Shopping
Center and Hooten/Stahl, Inc.
21 Subsidiaries of the small business issuer
21.1 Prudential Hooten/Stahl, Inc. Realtors
21.2 Charter Building and Development Corporation, Inc.
21.3 Great American Equity Corporation, Inc.
25.* Form T-1 Statement of Eligibility and Qualification under Trust Indenture
Act of 1939 of a Corporation Designated to act as Trustee
* Filed as an exhibit to the Registrant's Registration Statement under the
Securities Act of 1933, as amended, on Form S-B2 (Registration Statement No.
33-98740-D), and incorporated herein by reference.
All other exhibits required by Item 601 of Regulation S-B are inapplicable to
this Registrant in this filing.
(b) Reports on Form 8-K:
During the last quarter of the period covered by this report, the Registrant
filed the following reports on Form 8-K:
1. On July 1, 1996 the Registrant reported the acquisition of all of the issued
and outstanding shares of Amity, Inc., a New Mexico corporation.
2. On October 7, 1996, the Registrant filed and amendment of Form 8-K/A to
include in the above Form 8-K the required financial information.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: December 26, 1996 REALCO, INC.
By: James A. Arias
-------------------------------------------
James A. Arias, President, Chief Executive
Officer, Chairman of the Board of Directors
In accordance with the Exchange Act, 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 Dated:
Melvin A. Hardison
- ------------------------
Melvin A. Hardison Chief Financial December 26, 1996
Officer/Secretary/Treasurer
Bill E. Hooten
- ------------------------
Bill E. Hooten Executive Vice President
and Director December 26, 1996
Arthur A. Schwartz
- ------------------------
Arthur A. Schwartz Director December 26, 1996
Marshall Blumenfeld
- ------------------------
Marshall Blumenfeld Director December 26, 1996
Jeffrey S. Silverman
- ------------------------
Jeffrey S. Silverman Director December 26, 1996
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