U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from ______________ to______________
Commission file number 0-27552
REALCO, INC.
(Exact name of small business issuer as specified in its charter)
New Mexico 85-0316176
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 University Blvd., N.E., Suite 100
Albuquerque, New Mexico 87102
(Address of principal Executive offices)
(505) 242-4561
(Issuer's telephone number)
_______________________________________________________________________________
(Former name, former address and former three-months, if changed since last
report)
Check whether the issuer has (1) filed all documents and reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or 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 ______
The number of shares of the registrants no par value common stock, the
issuers only class of common stock, outstanding as of May 14, 1996, was:
2,845,000
Transitional Small Business Format (check one) Yes [ ] No [XX]
PART I. FINANCIAL INFORMATION.
Item 1. FINANCIAL STATEMENTS
REALCO, INC.
CONDENSED BALANCE SHEET
March 31, 1996
(Unaudited)
ASSETS
Cash and cash equivalents ................................ $ 7,052,517
Restricted cash .......................................... 560,939
Securities available for sale ............................ 216,984
Accounts and notes receivable ............................ 2,710,248
Inventories .............................................. 8,647,695
Property & equipment (net) ............................... 786,963
Investments - equity method .............................. 699,660
Deferred income taxes .................................... 83,125
Other assets ............................................. 1,564,420
-----------
$22,322,551
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ............................................ $ 148,871
Lease obligations ........................................ 232,143
9.5% subordinated notes .................................. 5,750,000
Construction advances and notes
payable, collateralized by inventories .................. 3,290,576
Accounts payable and accrued
liabilities ............................................. 1,412,507
Escrow funds held for others ............................. 560,939
-----------
Total liabilities .................................. 11,395,036
Stockholders' equity
Series A preferred stock - authorized
83,000 shares; issued and
outstanding, 82,569 shares ............................. 825,690
Series B preferred stock - authorized
230,000 shares; issued and
outstanding, 222,859 shares ............................ 2,223,590
Series C preferred stock - authorized
80,000 shares, issued and
outstanding, none ...................................... --
Common stock no par value;
authorized, 6,000,000 shares, issued
and outstanding, 2,845,000 shares ...................... 7,712,461
Retained earnings ....................................... 151,944
Unrealized gains on available-for-sale
securities, net of tax ................................. 13,830
-----------
10,927,515
-----------
$22,322,551
===========
See accompanying notes to consolidated financial statements
REALCO, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Brokerage commissions and fees ......................... $ 2,657,872 $ 632,419 $ 5,146,295 $ 632,419
Sales of homes ......................................... 1,563,883 849,667 3,994,357 849,667
Sales of developed lots ................................ 69,000 -- 708,092 --
Equity in net earnings of investees .................... 91,262 (30,874) 137,660 (30,874)
Interest and other, net ................................ 215,184 17,619 306,211 53,943
----------- ----------- ----------- -----------
4,597,201 1,468,831 10,292,615 1,505,155
COSTS AND EXPENSES
Cost of brokerage revenue .............................. 1,793,953 459,087 3,568,485 459,087
Cost of home sales ..................................... 1,365,979 766,671 3,559,406 766,671
Cost of developed lots sold ............................ 68,045 -- 712,883 --
Selling, general and administrative .................... 1,022,197 286,101 2,077,959 322,760
Depreciation and amortization .......................... 92,893 21,021 160,228 21,021
Interest and other expense ............................. 98,371 2,129 114,815 2,129
----------- ----------- ----------- -----------
4,441,438 1,535,009 10,193,776 1,571,668
----------- ----------- ----------- -----------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle ............................... 155,763 (66,178) 98,839 (66,513)
INCOME TAX EXPENSE (BENEFIT) ............................. 51,060 (30,085) 29,880 (29,785)
----------- ----------- ----------- -----------
Income (loss) before cummulative
effect of change in accounting principle ............ 104,703 (36,093) 68,959 (36,728)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ................................... -- -- -- 15,870
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) .................................. 104,703 (36,093) 68,959 (20,858)
=========== =========== =========== ===========
Earnings (loss) per common share
Earnings (loss) before cumulative effect of
change in accounting principle ...................... $ 0.04 $ (0.02) $ 0.03 $ (0.02)
Cumulative effect of change in accounting
principle ........................................... -- -- -- 0.01
----------- ----------- ----------- -----------
Net earnings (loss) per common share .................. $ 0.04 $ (0.02) $ 0.03 $ (0.01)
=========== =========== =========== ===========
Weighted average shares outstanding ...................... 2,460,385 1,845,000 2,151,011 1,845,000
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
REALCO, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
March 31,
1996 1995
Cash flows from operating activities
Net earnings (loss) .......................... $ 68,959 $ (36,729)
Adjustments to reconcile net earnings to net
cash used by operating activities
Depreciation and amortization .............. 160,228 21,021
Distributions from investees in excess
of net earnings .......................... 21,100 32,540
(Gain) loss on sale of securities .......... (77,774) 3,478
Cummulative effect of change in
accounting principle ..................... -- (14,416)
Change in operating assets and liabilities
(Increase) in accounts receivable ....... (1,837,321) 175,784
(Increase) in inventories ................ (2,381,883) (205,841)
(Increase) in other assets ............... (32,577) 46,693
Decrease in accounts payable and
accrued liablilities ................... (1,432) (890,790)
Increase in deferred tax asset ........... (28,070) (38,035)
------------ ------------
Net cash used by operating activities ........ (4,108,770) (906,295)
------------ ------------
Cash flows from investing activities
Purchases of property and equipment ......... (96,311) (8,076)
Proceeds from sale of securities ............ 144,757 --
Purchases of equity securities .............. -- (94,372)
Cash acquired from purchase of Old Realco ... -- 469,932
------------ ------------
Net cash provided from investing activities .. 48,446 367,484
Cash flows from financing activities
Construction advances and notes
payable, net .............................. (815,359) 363,270
Payments on capital lease obligations ....... (43,228) (6,076)
Proceeds from issue of subordinated notes ... 5,160,625 --
Proceeds from issue of common stock ......... 6,172,974 --
Purchase of Series B preferred stock ........ (5,000) --
------------ ------------
Net cash provided from financing activities .. 10,470,012 357,194
------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS .............................. 6,409,688 (181,617)
Cash and cash equivalents at beginning
of period ................................... 642,829 1,113,534
------------ ------------
Cash and cash equivalents at end
of period ................................... $ 7,052,517 $ 931,917
============ ============
See accompanying notes to consolidated financial statements
REALCO, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed balance sheet as of March 31, 1996, the statements of operations
for the three month and six month periods ended March 31, 1996 and 1995 and the
statements of cash flows for the six month periods ended March 31, 1996 and 1995
have been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position as of March 31, 1996 and the results of
operations and cash flows for the three and six month periods ended March 31,
1996 and 1995 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the registrant's registration
statement. The results of operations for the periods ended March 31,1996 are not
necessarily indicative of the operating results for the full year.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed using the weighted number of common
shares outstanding of 1,845,000 for the three and six month periods ended March
31, 1995 and 2,460,385 and 2,151,011 for the three and six month periods ended
March 31, 1996, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS GENERAL
The Company's revenues are generated through commercial and residential
real estate brokerage services, general residential home construction sales, and
various financing activities.
The historical financial information at March 31, 1996 is not comparable to
March 31, 1995 because in March, 1995, the Company changed its business with the
acquisition of Old Realco, a real estate brokerage services and general
residential home construction company. Revenues for the Company prior to the
acquisition in March 1995, were generated through various financing activities
in which the Company has been continuously involved since its inception in 1983.
Since March, 1995, the Company's operating results have included the operating
results of the acquired company.
Pursuant to a prospectus dated February 2, 1995, the Company publicly sold
one million common shares of its stock and 5,000 Units, each Unit consisting of
$1,000 in principal amount of a 9.5% Subordinated Sinking Fund Note and 120
Warrants to purchase 120 shares of the Company's Common Stock. The Underwriter
for the Unit Offering exercised its over allotment privilege and sold an
additional 750 Units on behalf of the Company. The Company received from the
Underwriters approximately $11,444,000, a sum which represents the total sales
proceeds of the Underwriting less commissions and underwriters offering
expenses. The Registrant's increase of assets including cash during this
reporting period are a result of the public offering concluded in February of
1996. The Company expects that the net proceeds from the public offering in
addition to its existing operating bank lines will be sufficient to satisfy its
liquidity and capital resource requirements for fiscal year 1996.
Certain bank and residential lot debt has been paid from proceeds of the
offering, resulting in an increase of $2,381,883 in inventories, such
inventories consisting of finished residential building lots and spec homes held
for immediate sale, while notes payable collateralized by specific inventories
declined by $788,226. The balance of funds not required for daily working
capital is maintained in insured money market funds.
In April, the Registrant's subsidiary Great American Equity Corporation,
began to make available interim residential construction loans to certain
independent residential builders represented by the Company's Prudential
Hooten/Stahl subsidiary shall commence shortly. This financing activity is being
conducted through a participation agreement with a bank with whom the Company
has a working relationship. In April, 1996, the Registrant announced it has
concluded a joint venture arrangement with CTX Mortgage Ventures, Inc., a
subsidiary of CENTEX Corporation, a New York stock Exchange listed company,
through which the Registrant and it's joint venture partner, will operate a
residential mortgage company. Operations will commence upon the receipt of the
necessary regulatory approvals, which approvals are expected shortly.
Both the above referenced financing activities had been previously
discussed in the Company's prospectus dated February 2, 1996, incorporated
herein by reference.
Typically, the quarter ended March 31, of each year represents the
beginning of improved gross margins for both the real estate brokerage and
residential construction subsidiaries. The real estate brokerage company
experiences the highest commission splits between the company and its sales
associates during the quarter ended March 31, 1996, primarily due to graduated
commission arrangements which favors sales associates as they achieve annual
volume goals. The quarterly results ended March 31, while generally improved
over the previous reporting period, is adversely impacted by seasonal low
listing and sales activities for the months of December and January. The
residential construction company also experiences seasonal slowness of sales and
construction during this reporting period, such reduced activity is typically
influenced by weather and a natural seasonal weakness for home purchases. While
the third and fourth quarters of the registrant's fiscal period generally are
considered the most active and hence most profitable, a recent surge in
residential mortgage rates may impact this segment of the registrant's business.
Should higher interest rates become a factor, the Registrant expects to employ
such marketing techniques as mortgage rate buy-downs, a practice whereby a home
builder pays to buy-down rates and make available to the residential home buyer
a more favorable financing package. While such marketing techniques improve
sales activities, its impact on profitability is adverse.
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
REVENUES:
Brokerage commissions and fees were $2,657,872 compared to $632,419,
construction and lot sales were $1,632,883 compared to $849,667, and other
income was $91,262 compared to a loss of $30,874 during the quarter ended March
31, 1996 compared to the quarter ended March 31, 1995. Revenues from Company
financing activities for the period ended March 31, 1996 were $215,184, compared
to $17,619 for the period ended March 31, 1995..
Historical financial information at March 31, 1996 is not comparable to
March 31, 1995 because in March, 1995, the Company changed its business with the
acquisition of the real estate brokerage and residential construction company.
Prior to the acquisition of March, 1995, the Company's revenues were generated
through a variety of financing activities.
Brokerage commissions and fees as a percentage of total revenues for the
comparable quarters ended March 31, 1996 and March 31, 1995 were 57.8% and
43.1%, construction and lot sales as a percentage of total revenue for the
quarter were 35.5% and 57.8%, income from equity investees as a percentage of
total revenues for the quarter was 2.0% and -2.1%, financing activities as a
percentage of total revenues for the quarter was 4.7% and 2.0% of total revenues
in the comparable quarters ended 1996 and 1995 respectively. The reason for the
increases is due primarily to the recognition of only one month of operating
revenues of Old Realco, which was acquired in March 1995 and the full
recognition of all operations of the Registrant for the period ended March 31,
1996.
GROSS PROFIT:
The Company's gross margin from construction and lot sales was $198,859
during the quarter ended March 31, 1996 compared to $82,996 during the quarter
ended March 31, 1995. The Company continued to increase its lot inventory during
this period because the Company continued to experienced certain shortages of
available construction sites in strategic locations within the Albuquerque
metropolitan area. The Company generally signs fixed contracts for the sale of
its homes, however, the Company has undertaken to increase it's speculative home
inventory in various of its residential subdivisions in order to satisfy the
local buying trend.
The Company's gross margin from brokerage commissions and fees, before
selling, general and administrative expenses of $1,022,197, for the period ended
March 31, 1996 was 32.5% compared to a gross margin of 27.4%, before selling,
general and administrative expenses of $286,101 for the period ended March 31,
1995. The percentage of gross margin recognized during this quarter represents
an increase of 18.6% over the gross profit percentage of commissions and fees
recognized during the quarter ended March 31, 1995
As discussed in the above Revenue section, historical financial information
at March 31, 1996 is not comparable to March 31, 1995. In March 31, 1995, the
Registrant changed its business with the acquisition of the real estate
brokerage and residential construction companies.
The gross margin from the financing activities of the Company are expected
to increase during the third and fourth quarter of the current fiscal year. Such
projected increases are due primarily to the commencement of additional
financing activities which includes residential construction loans to small
independent residential home builders and permanent residential mortgage loans
to individual home buyers. It is expected at this time that the costs associated
with the residential mortgage financing activities by the Company will be modest
in relation to the anticipated revenues.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
The percentage of selling, general, and administrative expenses to total
revenues during the quarter ended March 31, 1996, was 22.2%, compared to 19.5%
for the period ended March 31, 1995. The increase in selling, general and
administrative costs was due to several factors, the most significant of which,
was the operation of the real estate brokerage and home construction companies
for a full quarter of operations. Depreciation, amortization, goodwill, interest
and other expenses for the quarter was $191,264. The Company's residential
brokerage subsidiary experienced a 32.5% gross brokerage commission income
margin for the period ended March 31, 1996 compared to a 27.4% gross margin for
the period ended March 31, 1995.
The Company expects that the costs of selling, general and administrative
expense as a percentage of total Company revenue will gradually decrease as the
Company approaches the remainder of the fiscal period.
NET EARNINGS:
The percentage of net earnings to total revenues for the quarter was 2.3%,
as a result of the previously noted factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from operating
activities, bank borrowing under both term and revolving credit facilities and
approximately $7,053,000 of the Registrant's current cash and cash equivalents.
During the quarter the Company had approximately $3.3 million revolving interim
construction and inventory lines of credit with various banks in the Albuquerque
area.
Due to the public offering of common stock and notes as discussed
previously, the Company believes that the cash flow from its operations and the
net proceeds from the offering of its securities will sustain its operations and
anticipated internal growth during fiscal 1996.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Company is subject to certain legal claims from time to time and is
involved in litigation that has arisen in the ordinary course of business. It is
the Company's opinion that it either has adequate legal defenses to such claims
or than any liability that might be incurred due to such claims will not, in the
aggregate, exceed the limits of the Company's insurance policies or otherwise
result in any material adverse effect on the Company's operations or financial
position. Insofar as known to management, there is no pending or threatened
litigation involving the Company or its assets.
Item 2. CHANGES IN SECURITIES.
None
Item 3. DEFAULTS IN SENIOR SECURITIES.
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) There are no exhibits filed with this Report.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1996.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REALCO, INC.
Date: May 14, 1996 James A. Arias
-------------------------
James A. Arias, President
Date: May 14, 1996 Melvin A. Hardison
---------------------------------------
Melvin A. Hardison, Secretary/Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-30-1996
<CASH> 7052517
<SECURITIES> 216984
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 8647695
<CURRENT-ASSETS> 0
<PP&E> 1818804
<DEPRECIATION> 1031841
<TOTAL-ASSETS> 22322551
<CURRENT-LIABILITIES> 0
<BONDS> 9421590
0
3049280
<COMMON> 7712461
<OTHER-SE> 165774
<TOTAL-LIABILITY-AND-EQUITY> 22322551
<SALES> 1632883
<TOTAL-REVENUES> 4597201
<CGS> 1434024
<TOTAL-COSTS> 3227977
<OTHER-EXPENSES> 1213461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91160
<INCOME-PRETAX> 155763
<INCOME-TAX> 51060
<INCOME-CONTINUING> 104703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104703
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
