FORM 10-QSB - QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Quarterly or Transition Report
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 December 31, 1995
[ ] 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
___________________________________________________________________
(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 March 15, 1996, was: 2,845,000
Transitional Small Business Format (check one) Yes [ ] No [XX]
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
REALCO, INC.
BALANCE SHEET
(Unaudited)
December 31, 1995
ASSETS
Cash and cash equivalents .................... $ 504,018
Restricted cash .............................. 420,877
Securities available for sale ................ 237,672
Accounts and notes receivable ................ 1,128,642
Inventories .................................. 5,550,359
Property & equipment (net) ................... 817,188
Investments - equity method .................. 631,588
Deferred income taxes ........................ 104,605
Other assets ................................. 665,138
-----------
$10,060,087
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ................................ $ 148,871
Lease obligations ............................ 253,927
Construction advances and notes payable,
collateralized by inventories ............... 3,808,625
Accounts payable and accrued
liabilities ................................. 1,081,903
Escrow funds held for others ................. 420,877
-----------
Total liabilities ...................... 5,714,203
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 ................ 2,228,590
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, 1,845,000 shares .......... 1,229,750
Retained earnings ........................... 47,242
Unrealized gains on available-for-sale
securities, net of tax ..................... 14,612
-----------
4,345,884
-----------
$10,060,087
===========
REALCO, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the 3 months ended
December 31,
1995 1994
---- ----
REVENUES
Brokerage commissions and fees ............... $ 2,488,423 $ --
Sales of homes ............................... 2,430,474 --
Sales of developed lots ...................... 639,092 --
Equity in net earnings of investees .......... 46,398 --
Interest and other, net ...................... 91,027 36,324
----------- -----------
5,695,414 36,324
COSTS AND EXPENSES
Cost of brokerage revenue .................... 1,774,532 --
Cost of home sales ........................... 2,193,427 --
Cost of developed lots sold .................. 644,838 --
Selling, general and administrative .......... 1,055,762 36,659
Depreciation and amortization ................ 67,335 --
Interest and other expense ................... 16,444 --
----------- -----------
5,752,338 36,659
----------- -----------
Loss before provision for income taxes
and cumulative effect of change in
accounting principle ..................... (56,924) (335)
INCOME TAX EXPENSE (BENEFIT) ................... (21,180) 300
Loss before cumulative effect of change
in accounting principle .................. (35,744) (635)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ......................... -- 15,870
----------- -----------
NET EARNINGS (LOSS) ............................ (35,744) 15,235
PREFERRED STOCK DIVIDEND
REQUIREMENT .................................. 29,100 --
----------- -----------
NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES .......................... $ (64,844) $ 15,235
=========== ===========
Earnings (loss) per common share
Earnings (loss) before cumulative effect
of change in accounting principle ......... $ (0.04) $ --
Cumulative effect of change in
accounting principle ...................... -- 0.01
----------- -----------
Net earnings (loss) per common share ........ $ (0.04) $ 0.01
=========== ===========
Weighted average shares outstanding ............ 1,845,000 1,845,000
=========== ===========
REALCO, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the three months
ended December 31,
1995 1994
---- ----
Cash flows from operating activities
Net loss ......................................... $ (35,744) $ (635)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization .................. 67,335 --
Distributions from investees in excess
of net earnings .............................. 89,172 --
Change in operating assets and liabilities
Increase in accounts receivable .............. (255,715) 55,272
Decrease in inventories ...................... 715,453 --
Decrease in other assets ..................... 21,817 --
Decrease in accounts payable and
accrued liabilities ........................ (311,498) (51,360)
Increase in deferred tax asset ............... (50,070) --
--------- ---------
Net cash provided by operating activities ........ 240,750 3,277
--------- ---------
Cash flows from investing activities
Purchases of property and equipment ............. (60,807) --
Purchases of securities available for sale ...... -- (85,000)
Purchases of equity securities .................. -- (34,279)
--------- ---------
Net cash used in investing activities ............ (60,807) (119,279)
--------- ---------
Cash flows from financing activities
Construction advances and notes
payable, net .................................. (297,310) --
Payments on capital lease obligations ........... (21,444) --
--------- ---------
Net cash used in financing activities ............ (318,754) --
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS .................................. (138,811) (116,002)
Cash and cash equivalents at beginning
of period ....................................... 642,829 560,155
--------- ---------
Cash and cash equivalents at end
of period ....................................... $ 504,018 $ 444,153
========= =========
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 December 31, 1995 is not comparable
to December 31, 1994 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 Company expects that the net proceeds from the 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. The balance of funds not required for daily working capital is
maintained in insured money market funds.
It is expected that the financing activities of the Company's subsidiary
Great American Equity Corporation, which will include the availability of
interim residential construction loans to certain independent residential
builders represented by the Company's Prudential Hooten/Stahl subsidiary shall
commence shortly. It is anticipated that this financing activity will be
conducted through a participation agreement with a bank with whom the Company
has a working relationship.
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 December 31, of each year represents reduced
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 this
period, primarily due to graduated commission arrangements which favors sales
associates as they achieve annual volume goals. The residential construction
company also experiences seasonal slowness of sales and construction during this
period and a portion of the quarterly period ended March 31, such reduced
activity is typically influenced by weather and a natural seasonal weakness for
home purchases.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated.
QUARTER ENDED
December 31,
1994 1995
---- ----
Revenues
Brokerage commissions and fees ....................... --% 43.7%
Construction and lot sales ........................... --% 53.9%
Financing activities ................................. 100.0% 1.6%
Other ................................................ --% 0.8%
----- -----
100.0% 100.0%
Costs and expenses
-----
Cost of brokerage revenue ............................ --% 31.2%
Cost of construction and lot sales ................... --% 49.8%
Selling, general, and administrative ................. 100.9% 19.7%
Other ................................................ --% 0.3%
----- -----
100.9% 101.0%
Earnings from continuing operations
before income taxes ................................ -0.9% -1.0%
Income taxes ......................................... 0.8% -0.4%
Net earnings from continuing operations .............. -1.7% -0.6%
QUARTER ENDED DECEMBER 31, 1995 COMPARED TO QUARTER ENDED DECEMBER 31, 1994
REVENUES:
Brokerage commissions and fees were $2,488,423, construction and lot sales
were $3,069,566, and other income was $46,398 du ring the quarter ended December
31, 1995. Revenues from Company financing activities for the period ended
December 31, 1995 were $91,027, compared to $36,424 for the period ended
December 31, 1994.
Historical financial information at December 31, 1995 is not comparable to
December 31, 1994 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
quarter were 43.7%, construction and lot sales as a percentage of total revenue
for the quarter were 53.9%, other income as a percentage of total revenues for
the quarter was 0.8% and financing activities, as a percentage of total revenues
for the quarter of total revenues declined from, 100% of total revenues in the
comparable quarter of 1994 to 1.6% of total revenues in 1995. The reason for the
decline is due to the lack of brokerage commissions, construction and lot sales
and other investee joint venture revenues during the quarter ended December 31,
1994. Such revenues were not recognized by the Company until the acquisition of
Old Realco was finalized in March, 1995. Revenues from these activities have
been recognized since the date of the acquisition.
GROSS PROFIT:
The Company's gross margin from construction and lot sales was $231,301
during the quarter ended December 31, 1995. The Company continued to increase
its lot inventory during this period because the Company experienced certain
shortages of available construction sites in strategic locations within the
Albuquerque metropolitan area. The shortage of construction sites caused delays
in the start of construction after contracts were signed. The Company generally
signs fixed contracts for the sale of its homes, however, the Company has
undertaken to increase its spec home inventory in various of its residential
subdivisions in order to satisfy the local buying trend. The addition of spec
homes to the Company inventories in order to accelerate sales appears to be
successful.
The Company's gross margin from brokerage commissions and fees, before
selling, general and administrative expenses of $713,891, a gross margin of
28.7%. The percentage of gross margin recognized during this quarter represents
and increase of 0.9% over the annualized gross profit percentage of commissions
and fees recognized by Old Realco. It is not certain that this trend will
continue during the remainder of the current fiscal year.
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 expected commencement of additional
financing activities which will include 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 new 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 December 31, 1995, was 19.7%, an increase of
47.0% from the historical annualized costs of Old Realco. The increase in
selling, general and administrative costs was due to several factors.
Depreciation and amortization expense for the quarter was $67,335, mostly
attributable to fixed assets and goodwill associated with the purchase of Old
Realco in March of 1995. The Company's residential brokerage subsidiary
experienced approximately $60,000 of net conversion expense, an expense
associated with the subsidiary's franchise affiliation with Prudential Real
Estate Associates, an international real estate brokerage franchiser. During the
quarter, the real estate brokerage subsidiary paid regularly scheduled annual
bonuses to managers and administrative personnel.
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 loss to total revenues for the quarter was 0.006%, 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 and bank borrowing under both term and revolving credit facilities.
During the quarter the Company had approximately $3.8 million revolving interim
construction lines of credit with various banks in the Albuquerque area. The
Company's operations provided cash of $240,750 during the quarter ended December
31, 1995.
On February 2, 1996, the Company sold $7 million of common stock equity,
consisting of one million shares of common stock at $7.00 per share and 5,000
Units, each unit consisting of $1,000 in principal amount of 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 it's
over-allotment allowance and purchased an additional 750 Units from the Company.
The net proceeds from this offering of Company securities were approximately
$11,444,000, after deduction of underwriter commissions and the expenses of the
offering. 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 Security Holders.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1995.
Item 5. Other Information.
As stated in Management's discussion, on February 2, 1996, the Company
completed its public offering of its common stock and Units, from which it
netted approximately $11,444,000 of proceeds. Those proceeds are devoted to the
uses described in the prospectus related to the public offering.
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 December 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be singed on its behalf by the
undersigned thereunto duly authorized.
REALCO, INC.
Date: March 15, 1996 James A. Arias
-------------------------
James A. Arias, President
Date: March 15, 1996 Melvin A. Hardison
-------------------------
Melvin A. Hardison, Secretary/
Treasurer and Chief Financial
Officer
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