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 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1997
[ ] 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:
$30,550,788
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 23, 1997, based on the price quoted by NASDAQ, the
market value was $5,585,000.
The number of shares outstanding of each of the Registrant's
classes of voting stock, as of December 23, 1997 , was:
No Par Value Common: 2,780,000 shares.
Series A Preferred: 82,569
Series B Preferred: 212,859
Series D Preferred: 23,919
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 investment
company providing funds to others in the form of loans or equity.
Through its wholly owned subsidiaries, it engaged in the
business of arranging and participating in secured loans
involving various forms of real estate acquisitions and
ventures. Beginning in October, 1994, it 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.
In March , 1995, the acquisited 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. 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.
Following the acquisition of Charter and Hooten/Stahl, the
Registrant, in February , 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.
In April , 1996, the Registrant commenced residential
construction lending activity. Its lending subsidiary, Great
American Equity Corporation, Inc ("GAEC"), has entered into two
such participation agreements with local banks, which agreements
are contemplated to provide an annual residential home
construction funding budget of approximately $24 million. As of
September 30, 1997, the Registrant and its bank partners had
approximately $3,115,000 in outstanding loans and/or funding
commitments, of which approximately $779,000 is the
Registrant's participation. The Registrant had expected to
commit approximately $3 million of its funds to this project,
while the banks will provide approximately $9 million of matching
funds, however, new home construction is lagging behind
the previous year and consequently the Registrant does not
anticipate funding its lending capacity during the ensuing fiscal
year. 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 in April , 1996, the Registrant's subsidiary PHS, Inc.
entered into a joint venture with 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 1996, the joint venture was fully
operational and PHS, Inc. recorded approximately $249,000 as
its share of income for the year ended September, 1997.
In July , 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.
In January , 1997 the Registrant acquired for cash and notes,
Mull Realty Co., Inc., a residential and commercial brokerage
company which primarily conducts its business in Northwest
Phoenix and to a lesser extent, in central Phoenix, Arizona.
This company operates under the trade name of Prudential
Preferred Properties. For the twelve months ended December 31,
1997, the company is expected to exceed the projected pretax
earnings threshold associated with the purchase agreement. The
company is currently seeking new acquisition opportunities in the
greater Phoenix area. The Registrant expects to introduce its
residential mortgage origination business into the Phoenix,
Arizona area by placing at least one new office of PHS Mortgage
Co., an affiliate, within Prudential Preferred Properties
offices.
On May 1, 1997, the Registrant acquired for cash selected assets
and liabilities of First Commercial Real Estate Services, Inc.,
an Albuquerque, New Mexico based commercial brokerage company.
Since the acquisition, First Commercial has introduced several
construction and financing opportunities to other of the
Registrants subsidiaries and affiliates including the formation
within First Commercial of a property management division.
On August 1, 1997, the Registrant participated in the purchase of
all outstanding common stock of Miller & Schroeder, Inc., a
financial services firm, by MI Acquisition Corporation, (MI)..
The Registrant through a combination of Company cash and
borrowings acquired approximately 13% ownership of MI and the
Registrant's President has been appointed to its Board of
Directors. The Registrant and Miller & Schroeder Financial have
begun to cross market some of its services and products.
Operating Strategy
The Registrant's business activities are located in the
metropolitan area of Albuquerqe, New Mexico and Phoenix,
Arizona. Since February of 1996, the Registrant has expanded
its financial, construction and brokerage activities to its core
of business 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, marketing and sales
support.
The Registrant believes that it can capitalize on its
operating methods and strategies, which it is introducing to
its existing markets, 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 year ended September 30, 1997 the Registrant
acquired a parcel of undeveloped land for development of
residential golf home sites located in Rio Rancho, New Mexico and
fourteen fully developed home sites in the Northeast foothills
of Albuquerque, New Mexico. The undeveloped land purchase and
development costs are completely bank financed while the fully
developed building homesite purchased were financed by a
combination of the Registrant's working capital funds and bank
financing.
Financing of existing residential homesite inventories of the
Registrant are generally first position secured loans which 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 a 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 sometimes requested by the first position
lender, (bank) to guarantee the entire debt obligations.
The Registrant has from time to time acquired residential
building home sites by utilizing its available cash,
consequently, a significant portion of the Registrants
residential homesite building inventory is unencumbered.
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 undeveloped land
located in the Northeast quadrant of Albuquerque, New Mexico,
and develope 82 residential home sites. The purchase price
of the undeveloped land was $2,825,000. The land purchase and
funds required to fully develop the property were borrowed from
a bank and from the seller of the property. The Registrant
executed a first mortgage and note on the property in the amount
of $2,500,000 and a second mortgage and note in the amount of
$1,556,000. At September 30, 1997, the balance of the combined
first and second mortgage liabilities were approximately
$760,000.
As of September 30, 1997, the Registrant owned or controlled
through various joint venture arrangements and purchase
agreements, over 230 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 other
home builders and individuals.
Hooten/Stahl currently represents approximately 50
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 qualified 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 continues
to undertake 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 has allowed it to
remain profitable during downturns in the cycle and attempt to
build a dominance in its markets during such times, however,
there can be no assurance that this strategy will be successful.
Employees
As of September 30, 1997, the Registrant, including its
subsidiaries, had 112 full and part time employees. They were
employed as follows: corporate, 8 full-time: residential and
commercial construction, 30 full-time and 2 part-time; and
real estate brokerage, 47 full-time and 25 part-time. In
addition, real estate brokerage has approximately 370 sales
associates who are independent contractors. The construction
segment of the Registrant 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 6,600 square feet of office space at $4,100 per
month for its executive and construction 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' lease arrangement is considered a below market lease
as to terms and square foot cost when compared to all other
leases currently in effect within the building.
The Registrant leases space for three real estate brokerage
offices, all located within the Albuquerque, New Mexico
metropolitan area. Leases include space ranging from 8,600 square
feet to 13,900 square feet at monthly rental costs ranging from
$8,600 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 $103,200. The lease with Mr. Hooten
expired on January 31, 1997, and has continued to be in effect on
a month to month basis. Lease terms and conditions have remained
unchanged throughout the fiscal year and are expected to remain
unchanged for the ensuing fiscal year.
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. The only litigation in which the Registrant
is involved that might be considered other than routine and
ordinary is the following:
On April 11, 1997, the City of Albuquerque instituted
condemnation proceedings related to a parcel of land upon which
the registrant has a joint venture financing arrangement for
development. This matter is more fully described in the
Registrants 10-QSB filing of June 30, 1997. There has been
continuing correspondence, verbally and written between the legal
counsel for both parties in an effort to settle the matter,
however, no settlement has been achieved and litigation may be
necessary to determine the value of the property.
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,
1997.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Registrant's common stock is traded on the Nasdaq National
Market tier of The Nasdaq Stock market and is quoted on the
National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol RLCO. The following table
sets forth from February, 1996 through September 30, 1997,
the range of the high and low last reported sale prices as
reported by NASDAQ.
High Low High Low
____ ___ ____ ___
Fiscal 1997 Fiscal 1996
First Quarter 3 5/8 2 N/A
Second Quarter 3 1/8 2 6 4 5/8
Third Quarter 2 7/8 2 1/4 5 3/4 5 3/8
Fourth Quarter 4 2 1/4 4 3 1/8
On December 23, 1997, the last sale price for the common stock,
as reported by NASDAQ, was $2.75 per share. As of December 23,
1997, 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.
Operation by Segment
Revenues of the Company are generated through the following
segments: (1) real estate brokerage both residential and
commercial; (2) construction both residential and commercial,
including land development activities, and (3) financing
activities which include residential construction lending through
participation agreements with banks, land acquisition and
development loans for single family residential subdivisions, and
from recognition of revenues generated by other entities in which
the Company owns equity interests whose businesses currently
consist of commercial and residential mortgage lending, and to a
minor extent, property and casualty insurance. The Company may
participate from time to time as a 50% joint venture partner
while affiliated companies may act as a financier, mortgage
banker or insurance agent to the joint venture. The Company
recognizes its share of income from affiliate investee's profits
and losses on the equity recognition method.
The Company currently operates its business within the
Albuquerque, New Mexico and Phoenix, Arizona metropolitan areas.
Since inception, management has planned expanding the Company's
businesses and business concepts to other geographical areas,
preferably within the southwest, that have similar demographics.
Because of the various businesses in which the Company is
engaged, it has defined the following business segments for
purposes of accounting for revenue, costs and expenses: Real
Estate Brokerage Segment, Construction and Land Development
Segment and Financial Services Segment. These areas of the
Company's business are more fully discussed below.
Real Estate Brokerage Segment:
The real estate brokerage segment consists of Prudential
Hooten/Stahl, Realtors, Prudential Preferred Realty (formerly
Mull-Smith, Inc.) and First Commercial Real Estate Services,
Inc.. The Company transferred ownership of the preceding
subsidiaries to another existing subsidiary now named Real
Estate Brokerage Services, Inc. (REBS) during the year. This
transfer did not affect operations of this segment; however,
operations for 1997 are not comparable to 1996 because 1997
includes Prudential Preferred Realty for nine months and First
Commercial Real Estate Services, Inc. for five months.
Total revenues from brokerage commissions and fees from
unaffiliated customers increased $4,001,000 to $14,487,000 in
1997, an increase of 38% over 1996. The Arizona brokerage
company provided commissions and fees of $5,116,000 for it's
nine months operations in 1997. The Albuquerque companies
(including $388,000 of commercial brokerage fees for 1997)
realized an overall reduction in commissions and fees to
unaffiliated customers of $1,115,000 to $9,370,000, a reduction
of 11% compared to 1996. This reduction followed the general
trend for the Albuquerque market for the period. In addition,
Albuquerque commissions paid to independent contractor agents and
the operating and administrative expenses were 71% and 34%
respectively of the 1997 overall commission income; with each
being an increase over the comparable 70% and 30% ratios for
Albuquerque in 1996. These cost increases were partly due to
increased competition for top agents and increased services
provided all agents and customers all in efforts to retain
market share. The Albuquerque companies realized an operating
loss of ($541,000) for 1997 compared to an operating loss of
($354,000) in 1996. The Arizona company, Prudential Preferred
Properties, contributed $479,000 in operating profits with
commissions paid agents and operating and administrative expenses
running 69% and 22% respectively. The lower commission splits
and operating expenses reflect the Phoenix market where sales
volumes continue high and competition for agents (including semi-
retired agents) and the demand for expensive operating services
have not been as strong.
Market conditions in residential resale activity have recently
improved slightly in the Albuquerque area and estimates are for a
continued modest increase for the coming year. Competition
continues strong, especially in services rendered customers.
There have been recent mergers of local realtors reportedly to
afford enhanced services in this new internet world of
residential real estate information. This has also apparently
caused a drop in the total number of agents remaining active in
the local area. Albuquerque management is currently implementing
changes to increase market share by the addition of lower
commission split agents, while reducing the percentage and amount
of operating costs. Management anticipates that such changes
could significantly reduce the operating loss from the
Albuquerque residential brokerage activities for the year ending
in 1998. The Arizona company anticipates continued good earnings
and is looking for opportunities to expand business operations in
the Phoenix market.
The Albuquerque commercial brokerage activity did not contribute
significantly for its five months operations in 1997, producing a
pre-tax loss of ($45,000). However, the addition of property
management personnel and the integration of brokerage activity
with financing sources and commercial construction company
capabilities using value engineering, all within the Registrant,
should enhance the profit contribution in the near future.
Success in this latter activity could lead management to export
this combination to other market areas.
Assets dedicated to the real estate brokerage segment increased
$1,821,000 to $3,456,000 in 1997 over 1996, primarily due to the
acquisition of the Arizona residential real estate brokerage
company and the Albuquerque commercial real estate brokerage
operations. Depreciation expense increased from these additions
and from capital expenditures in 1997.
Construction and Land Development Segment:
The construction and land development segment operates in the
Albuquerque and Rio Rancho, New Mexico metropolitan area, and
consists of Charter and Amity. This segment also includes The
Company's equity in earnings of joint ventures where the Company
or a wholly-owned subsidiary owns a 50% non-management interest
in land development activities which involve the acquisition of
raw land for development into residential home site lots which
may be sold to Charter or to other builders. The other builders
generally have their homes marketed by Prudential Hooten/Stahl,
Inc. and may have construction financing through programs
offered by the the Registrant's financial services group.
Revenues from residential construction by Charter increased
$602,000 to $11,291,000 in 1997, an increase of 6% over 1996.
Operating profit for Charter declined $521,000 from a profit of
$423,000 in 1996 to a loss of ($98,000) for 1997, a decline of
123% from 1996. Costs of construction for Charter increased
$771,000 to $10,597,000 in 1997, and operating costs increased
$108,000 to $791,000 in 1997. Costs of construction and
operating costs were 94% and 7% of construction revenues in 1997
compared to 90% and 6% respectively for 1996. A 1997 general
decline in the new home market in Albuquerque, especially in the
$150,000 to $200,000 price range for Charter homes, contributed
to the significant drop in operating profit from residential
construction. Models and speculative (spec) homes completed in a
newly opened west side subdivision were several thousand dollars
higher than comparable sized houses offered by other builders.
Revisions were made during the year, however, such homes
required discounted prices and the ongoing cost of advertising
and maintaining models and specs added to operating costs in
relation to revenues. Charter follows the completed contract
method for residential home building and sales, and accordingly
capitalizes interest and property taxes into inventory and cost
of sales. Charter's inventory of developed lots and models,
specs and presold homes under construction average about
$10,000,000. During 1997, a significant portion of inventory
consisted of slow moving developed lots and models and spec
homes, which were accumulating capitalized interest, taxes and
other carrying costs and thereby reducing gross margins when
sold.
Charter management has redesigned models with reduced prices per
square foot in order to better meet competition and be closer to
the price range that is expected to remain fairly strong in the
Albuquerque, New Mexico area.
Charter sold 61 new homes at an average sales price of about
$180,000. At September 30, 1997, Charter had over 230 lots in
nine subdivisions available for new homes, either owned directly
by Charter or by affiliated land development operations or under
contract for purchase by Charter. The lots may be used by
Charter or sold to other builders as market conditions warrant.
Charter has a backlog of 26 homes under contract at September
30, 1997 with an indicated revenue of approximately $4,903,000.
Revenues from commercial construction and remodeling increased
$632,000 to $1,750,000 in 1997, an increase of 56% over the
three months of Amity's operations included in 1996. Operating
profits increased from $8,600 in 1996 to $164,800 in 1997 with a
cost of construction being 78% and operating expenses 12% of
revenues. Amity had limited success with a program whereby
Prudential Hooten/Stahl sales agents provided leads for
remodeling contracts. However, participation with affiliate
First Commercial Real Estate Services, Inc. have recently
produced commercial construction jobs. The recent relocation and
expansion of Amity's offices and the addition of personnel with
construction value engineering expertise, is expected to increase
Amity's revenue and continue it's profitability in the coming
year.
Earnings from equity in land development joint ventures increased
$256,000 to $458,000 in 1997, an increase of 127% over 1996.
Two development joint ventures in Rio Rancho, New Mexico, (a
community adjacent to the northwest corner of Albuquerque and
home of a billion dollar plant of Intel substantially expanded in
recent years) contributed all of the $201,000 venture equity
earnings in 1996. Lot sales decreased in 1997 as subdivisions
neared completion and home building activity declined with the
completion of the Intel construction activity. The Rio Rancho
ventures contributed equity earnings in 1997 of $45,000 prior to
termination of the joint ventures effective July 1, 1997. On
that date, the Company purchased all of the interest of Boyle
Development Company, the managing co-venturer, in both ventures (
Village Joint Venture and Stonehenge at High Resort). The
venture interests were purchased for $800,000 which was
approximately $122,000 more than the Boyle Development Company
net book value in the ventures. Included among the undeveloped
land contained in the ventures was a 100 lot golf course
residential subdivision fully permitted and with development
construction just under way. The Company also assumed an
acquisition loan of $1,050,000 and a development loan of
$1,600,000 from a bank with which the Company has various other
banking relations. The $122,000 cost over book value was
assigned to cost of this land. Completion of development of
this land is expected early in calendar 1998.
The remaining earnings from equity in land development joint
ventures were from two new ventures. Success Joint Venture was
organized in 1996 to develop a subdivision in the far Northeast
Heights of Albuquerque, New Mexico, containing 82 lots ranging in
price from $48,000 to $85,000 with most in the upper range. The
development construction began in November, 1996, with lot sales
as early as December, 1996. Through September 30, 1997, sales
of 60 lots had been completed generating earnings of $841,000
with 50% thereof or $420,500 included herein. Management
anticipates completion and closure of this joint venture in 1998.
Vinyards Joint Venture was organized in 1996 and in 1997
purchased land in the valley adjacent to and north of
Albuquerque, which was approved for construction of 125 home
building sites. After all financing and permitting was in
place, but before construction began, The City of Albuquerque
filed a lawsuit to condemn the property and paid through the
courts, $7,905,000 to Vinyards Joint Venture. This lawsuit is
still pending with Vinyards Joint Venture alleging a greater
value for the land. Management cannot predict final settlement,
however management anticipates some increase with such amount
being sufficient to produce profits one half of which would
accrue to the Company. The $7,905,000 already received generated
a small gain after retiring all obligations and providing an
allowance for future legal expenses. The Company's share of
the net earnings was $4,800 reported in 1997.
Assets identified to the residential construction activity
increased $2,891,000 to $14,857,000 in 1997, an increase of 24%
over 1996. The primary increase was approximately $2,946,000 of
land held by the land development division of the Company rather
than being held by a joint venture with only the Company's 50% of
net equity being on the balance sheet.
Financial Services Segment:
The financial services segment consists of The Company (Realco)
and GAEC and PHS, lnc. (, formerly Hooten/Stahl Management
Company, an inactive company). Operations include equity
earnings of various finance entities.
Equity earnings from investees consisted principally of (1) 20%
interest in First American Title of New Mexico, which share was
$47,000 in 1997 compared to $58,000 in 1996, (2) 50% interest in
PHS Mortgage partnership, which share was $249,000 in 1997
compared to a start up loss of ($9,800) in 1996, and (3) 13%
interest in MI Acquisition Corporation, which share was $30,000
for it's two months operations of August and September 1997.
First American Title Company of New Mexico is an 80% owned
subsidiary of First American Title Company, California, a
publicly held corporation. The New Mexico company serves the
Albuquerque area and the reduced earnings in 1997 reflects the
softening of the residential real estate market in 1997. The
Company's 20% equity, stated at $166,000 at September 30, 1997,
was sold to First American Title for $500,000 cash in November,
1997.
PHS owns a 49.99% interest in PHS Mortgage Company, (the
"Partnership") a New Mexico general partnership managed by
general partner CTX Mortgage Ventures Corporation (CTX
Ventures). The Partnership was organized in April, 1996, for the
purpose of originating and selling mortgage loans and to be
involved in other mortgage banking activities related thereto.
Partnership revenues consist of servicing rights sold,
origination and other fees , gain on sale of mortgages and
interest. Operations presently cover only the Albuquerque
Prudential Hooten/Stahl brokerage offices with real estate agents
therein providing leads and/or referrals for Partnership
services. Management is currently initiating practices to
increase participation by the independent contractor agents in
this activity. Additionally, management is considering expanding
such service to The Company's Arizona brokerage business.
MI Acquisition Corporation was organized to acquire from proceeds
of a private stock offering together with anticipated debt
financing in the amount of approximately $5,900,000, all the
outstanding common stock of Miller & Schroeder, Inc, a financial
services firm which derives a majority of its revenue from the
underwriting, sale and trading of securities by its principal
operating subsidiary, Miller & Schroeder Financial, Inc. The
Company purchased 100,000 shares of common stock in MI
Acquisition Corporation for $1,000,000, representing a 13%
interest in shares outstanding at September 30, 1997.
GAEC provides financing for the acquisition and development of
residential home subdivisions and interim construction loans to
certain clients of Prudential Hooten/Stahl. GAEC loan fees
increased $454,000 to $529,000 in 1997, an increase of almost
600% over 1996. Various home builder loans and subdivision loans
arranged by GAEC provided significant contributions to the 1997
revenue and operating profit. Loan fees earned by GAEC have
nominal related costs and therefore high percentage operating
profits.
Interest earned through use of uncommitted funds is reported
separately along with related interest expense primarily on the
$5,750,000 of 9.5% subordinated notes payable. Such uncommitted
funds may be used in participation with banks, individuals and
other financial institutions in financing home builder interim
construction loans and loans for the acquisition and development
of residential subdivisions. Interest and other income
increased $1,077,000 to $1,760,000 in 1997, an increase of 158%
over 1996.
ITEM 7: FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
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, 1997 and 1996,
and the related consolidated statements of earnings,
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, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for the years
then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
November 14, 1997
Realco, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30,
1997 1996
__________ __________
ASSETS
Cash and cash equivalents $ 4,242,305 $ 4,480,880
Restricted cash 402,979 486,559
Securities available for sale 199,291 188,435
Accounts and notes receivable, net (note E) 2,353,852 3,718,826
Inventories (note B) 13,578,721 10,321,533
Costs and estimated earnings in
excess of billings on uncompleted
contracts (note C) 228,272 307,433
Property and equipment, net (note F) 928,416 795,816
Investments - equity method (note D) 1,980,163 895,596
Deferred income taxes (note H) - 87,734
Other assets 2,440,306 1,325,108
__________ __________
$26,354,305 $22,607,920
========== ==========
LIABILITIES
Notes payable (note G) $ 6,949,493 $ 5,627,240
Lease obligations (note I) 104,800 187,535
Construction advances and notes
payable, collateralized by
inventories (note G) 5,139,284 3,389,012
Billings in excess of costs and
estimated earnings on
uncompleted contracts (note C) 100,638 -
Accounts payable and accrued liabilities 2,260,896 1,784,917
Deferred income taxes (note H) 69,339 -
Escrow funds held for others 402,979 486,559
__________ __________
Total liabilities 15,027,429 11,475,263
STOCKHOLDERS' EQUITY (note N)
Preferred stock - authorized, 500,000 shares
Series A - issued and outstanding,
82,569 shares in 1997 and 1996,
stated at liquidation value 825,690 825,690
Series B - issued and outstanding,
212,859 shares in 1997 and 217,859
shares in 1996, stated at liquidation
value 2,128,590 2,178,590
Series D - issued and outstanding,
23,919 shares in 1997 and 24,297
shares in 1996, stated at liquidation
value 239,190 242,970
Common stock - no par value;
authorized, 6,000,000 shares;
issued, 2,845,000 shares in 1997
and 1996 7,712,461 7,712,461
Retained earnings 495,585 165,588
Unrealized gains on available-for-sale
securities, net of taxes 18,749 7,358
__________ __________
11,420,265 11,132,657
Less 32,000 shares common
stock held in treasury in 1997
- at cost 93,389 -
__________ ____________
11,326,876 11,132,657
__________ __________
$26,354,305 $22,607,920
========== ==========
The accompanying notes are an integral part of these statement.
Realco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
1997 1996
__________ __________
REVENUES
Brokerage commissions and fees $14,486,945 $10,485,508
Construction sales 13,041,022 11,807,150
Sales of developed lots 1,153,500 1,004,859
Equity in net earnings of investees (note D) 789,313 270,984
Interest and other, net 1,080,008 688,141
__________ __________
30,550,788 24,256,642
COSTS AND EXPENSES
Cost of brokerage revenue 10,275,373 7,409,205
Cost of construction sales 11,607,850 10,672,952
Cost of developed lots sold 1,073,467 1,014,312
Selling, general, administrative, and other 5,879,596 4,220,119
Depreciation and amortization 501,752 360,572
Interest 683,753 423,340
__________ __________
30,021,791 24,100,500
__________ __________
Earnings before income taxes 528,997 156,142
INCOME TAX EXPENSE (note H) 199,000 24,000
__________ __________
NET EARNINGS 329,997 132,142
PREFERRED STOCK DIVIDEND REQUIREMENT 120,575 117,846
__________ __________
NET EARNINGS APPLICABLE TO
COMMON SHARES $ 209,422 $ 14,296
=========== =========
EARNINGS PER COMMON SHARE
Net earnings per common share
before preferred stock dividend
requirement $ .12 .05
=========== =========
Net earnings per common share
after preferred stock dividend
requirement $ .07 $ .01
=========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,829,837 2,498,005
========== =========
The accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1997 and 1996
<TABLE>
Series A Series B Series D
preferred stock preferred stock preferred Stock Common
6% cumulative 3% cumulative 3% cumulative stock
_______________ _______________ _______________ ___________
<S> <C> <C> <C> <C>
Balance at October 1, 1995 $825,690 $2,228,590 $ - $1,229,750
Sale of common stock - - - 6,178,174
Sale of common stock warrants - - - 304,537
Issuance of Series D preferred stock
in business acquisition (Note K) - - 242,970 -
Retirement of Series B preferred stock - (50,000) - -
Change in unrealized gains on available
- -for-sale securities, net of Taxes of $304 - - - -
Dividends paid on Series A preferred stock - - - -
Net earnings - - - -
_______ _________ _______ _________
Balance at September 30, 1996 825,690 2,178,590 242,970 7,712,461
Retirement of Series B preferred stock - (50,000) - -
Retirement of Series D preferred stock - - (3,780) -
Change in unrealized gains on available
-for-sale securities, net of taxes
of $7,757 - - - -
Purchase of common stock for treasury - - - -
Net earnings - - - -
________ __________ ________ __________
Balance at September 30, 1997 $825,690 $2,128,590 $239,190 $7,712,461
======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
Realco, Inc. and subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1997 and 1996
<TABLE>
Unrealize
gains (losses)
on available for Total
Retained sale securities Treasury stockholders'
earnings net of tax stock equity
_________ ________________ _________ ______________
<S> <C> <C> <C> <C>
Balance at October 1, 1995 $ 82,987 $ 7,570 $ - $ 4,374,587
Sale of common stock - - - 6,178,174
Sale of common stock warrants - - - 304,537
Issuance of Series D preferred stock
in business acquisition (Note K) - - - 242,970
Retirement of Series B preferred stock - - - (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 165,588 7,358 - 11,132,657
Retirement of Series B preferred stock - - - (50,000)
Retirement of Series D preferred stock - - - (3,780)
Change in unrealized gains on available
-for-sale securities, net of taxes
of $7,757 - 11,391 - 11,391
Purchase of common stock for treasury - - (93,389) (93,389)
Net earnings 329,997 - - 329,997
________ __________ _________ ___________
Balance at September 30, 1997 $495,585 $ 18,749 $(93,389) $ 11,326,876
======== ========== ========== ============
The accompanying notes are an integral part of this staement.
</TABLE>
Realco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
1997 1996
________ _______
Cash flows from operating activities
Net earnings $ 329,997 $ 132,142
Adjustments to reconcile net
earnings to net cash used in
operating activities
Depreciation and amortization 501,752 360,572
Accretion of discount on notes payable 55,235 36,823
Net earnings in excess of distributions
from investees (657,505) (112,248)
Gain on sale of securities available for sale (47,094) (80,296)
Changes in operating assets and liabilities (net
of businesses acquired)
Decrease (increase) in restricted cash 85,590 (3,415)
________ ________
Increase in accounts receivable (384,293) (399,562)
Decrease (increase) in inventories 322,705 (3,924,721)
Decrease in net billings related to costs and
estimated earnings on uncompleted contracts 179,799 41,886
Decrease (increase) in deferred tax asset 167,000 (38,255)
(Increase) decrease in other assets (273,632) 56,417
Increase (decrease) in accounts payable and
accrued liabilities 339,556 (10,551)
Increase (decrease) in escrow funds held for
others (85,590) 3,415
________ ________
Net cash provided by (used in) operating
activities 533,520 (3,937,793)
Cash flows from investing activities
Purchases of property and equipment (283,542) (208,487)
Payments for businesses acquired (1,424,144) -
Advances on notes receivable (718,906) (3,059,185)
Receipts on notes receivable 1,465,089 580,556
Proceeds from sale of securities available
for sale 195,490 147,280
Purchase of securities available for sale (90,413) (30,000)
Purchase of investments - equity method (1,045,900) (62,588)
Cash acquired in business acquisitions 251,913 71,159
Net cash used in investing activities (1,650,413) (2,561,265)
Cash flows from financing activities
Construction advances and notes payable, net 587,424 (689,792)
Proceeds from borrowings under revolving and
long-term debt 500,000 4,709,491
Payments on revolving, capital lease, and
long-term debt (115,717) (115,760)
Sale of common stock - 6,178,174
Sale of common stock warrants - 304,537
Dividends paid on preferred stock - (49,541)
Purchase of common stock (93,389) -
_________ __________
Net cash provided by financing activities 878,318 10,337,109
_________ __________
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (238,575) 3,838,051
Cash and cash equivalents at beginning of year 4,480,880 642,829
_________ _________
Cash and cash equivalents at end of year $ 4,242,305 $ 4,480,880
========= =========
Cash paid during the year for:
Income taxes $ 88,000 $ 3,700
Interest 684,000 664,000
Noncash financing and investing activities:
In 1997, the Company acquired all the common stock of Mull Realty
Company for $1,159,144. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired, including cash of $205,912 $1,282,077
Cash paid (359,144)
Issuance of note payable (800,000)
________
Liabilities assumed $ 122,933
========
In 1997, the Company purchased the net assets and business of
First Commercial Real Estate Services, Inc. for $265,000. In
conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired $ 268,500
Cash paid (265,000)
________
Liabilities assumed $ 3,500
========
In 1997, the Company purchased the remaining 50% partnership
interest in Village Joint Venture and Stonehenge at High Resort
Joint Venture for $800,000. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired, including cash of $46,002 $3,697,038
Cash paid (800,000)
Previous equity basis investment (618,938)
_________
Liabilities assumed $2,278,100
=========
In 1997, the Company exchanged a $50,000 note receivable for
5,000 shares of Series B preferred stock and $3,780 of furniture
and fixtures for 378 shares of Series D preferred stock. In
1996, the Company exchanged a $50,000 note receivable for 5,000
shares of Series B preferred stock in 1996.
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 accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Realco, Inc., a New Mexico corporation, and Subsidiaries (the
Company) has operations 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 customers are primarily in the vicinity of Albuquerque, New
Mexico except for a real estate broker in Sun City, Arizona.
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, 1997. 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, 1997 is approximately $514,000 ($1,025,000 for
1996) in a single money market fund and approximately $999,000
($1,057,000 for 1996) 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. The Company provides credit
to its customers under ordinary trade terms. Receivables for
real estate contracts are generally collateralized by the real
estate.
5. Inventories
___________
Inventories are carried at the lower of cost or estimated net
realizable value and include all acquisition costs, direct
labor and benefits, project interest, materials unique to or
installed in the project, subcontractor cost, and a
proportional overhead allocation charge.
6. Property and Equipment
______________________
Depreciation is provided in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated
service lives of three to ten years using straight-line and
accelerated methods.
Impairment losses are recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by these
assets are less than the assets' carrying amount.
Assets acquired under capital leases are recorded at the lower
of fair market value or the present value of future minimum
lease payments. These leases are amortized on the straight-
line method over the 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 Per Common Share
_________________________
Earnings 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% or which the Company is able to exercise significant
influence over operations are accounted for on the equity
method. Accordingly, the consolidated statements of earnings
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.
10. Intangible Assets
_________________
Cost in excess of net assets of businesses acquired with a net
value of approximately $1,278,000 and $384,000 at September 30,
1997 and 1996, respectively, is included in other assets and is
being amortized using the straight-line method over fifteen or
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. Stock Options
_____________
The Company applies APB Opinion 25 and related interpretations
in accounting for its stock options. Accordingly, compensation
expense is only recognized for grants of options which include
an exercise price less than the market price of the stock at
the date of the grant.
13. Recently Issued Accounting Pronouncement
________________________________________
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, which establishes standards for computing
and presenting earnings per share, and SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information, which
establishes standards for the way that public business
enterprises report information about operating segments or
annual financial statements and requires that these enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. The Company will
adopt these pronouncements in 1998; the effect of adoption is
not expected to have a material impact on the consolidated
financial statements of the Company.
14. Reclassifications
_________________
Certain reclassifications have been made to the 1996
consolidated financial statements to conform to the 1997
presentation.
NOTE B - INVENTORIES
During the years ended September 30, 1997 and 1996, the Company
incurred and capitalized approximately $303,000 and $301,000,
respectively, of interest costs. Capitalized interest costs
charged to cost of construction sales were approximately
$343,000 and $323,000 for the years ended September 30, 1997
and 1996, respectively.
Inventories consist of the following as of September 30:
1997 1996
_________ _________
Land and improvements under development $ 9,350,468 $ 5,464,200
Houses in progress 3,249,361 3,598,516
Model homes 978,892 1,258,817
__________ __________
$13,578,721 $10,321,533
========== ==========
Houses in progress include homes under contract of
approximately $1,585,000 and $1,174,000 at September 30, 1997
and 1996, respectively.
NOTE C - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of significant commercial
construction contracts accounted for on the percentage-of-
completion method as of September 30:
1997 1996
________ _________
Costs incurred on uncompleted contracts $ 384,736 $2,988,084
Estimated earnings 29,868 36,134
________ _________
414,604 3,024,218
Less billings to date 286,970 2,716,785
________ _________
$ 127,634 $ 307,433
======== =========
Included in the accompanying consolidated balance
sheets under the following captions
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 228,272 $ 307,433
Billings in excess of costs and estimated
earnings on uncompleted contracts (100,638) -
________ _________
$ 127,634 $ 307,433
======== =========
NOTE D - INVESTMENTS
The following is a summary of investments carried on the equity
method as of September 30:
1997 1996
_________ ________
First American Title Company of
New Mexico, 20% stockholder
interest $ 166,415 $ 144,002
MI Acquisition Corporation, 13%
stockholder interest 1,030,370 -
PHS Mortgage, 50% stockholder
interest 261,915 -
Village Joint Venture - 306,502
Stonehenge at High Resort Joint Venture - 294,410
Success Venture 420,627 100
Vinyards Joint Venture 4,952 -
Other 95,884 150,582
_________ _______
$1,980,163 $ 895,596
========= =======
The Company participates in land development projects under
separate joint venture agreements. The Company's liability is
joint and several for such 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.
NOTE D - INVESTMENTS - CONTINUED
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. Effective July 1, 1997, the Company purchased the
other 50% interest in Village Joint Venture and Stonehenge at
High Resort Joint Venture from Boyle Development Company for a
cash payment of $800,000. This action terminated the joint
ventures, and the assets, liabilities, and subsequent results
of operations are included in the accompanying consolidated
financial statements.
Success Venture was formed in July 1996 with Mesa Verde
Development Corporation and Vinyards Joint Venture was formed
in November 1996 with Rio Grande Curve Ltd. Co.
Summarized financial information of investments carried on the
equity method is as follows:
<TABLE>
As of and for the year ended September 30, 1997
_________________________________________________
First American MI
Title Company Acquisition PHS Joint
of New Mexico Corporation Mortgage Ventures
__________ __________ _________ _________
<S> <C> <C> <C> <C>
Cash $ 765,438 $ 2,145,578 $ 588,166 $ 218,319
Other assets 9,294,676 30,991,355 629,000 1,549,920
__________ __________ _________ _________
$10,060,114 $ 33,136,933 $1,217,166 $ 1,768,239
========== ========== ========= =========
Liabilities $ 9,228,041 $ 25,921,778 $ 688,714 $ 917,081
Equity 832,073 7,215,155 528,452 851,158
__________ ___________ _________ _________
$10,060,114 $ 33,136,933 $1,217,166 $ 1,768,239
========== =========== ========= =========
Revenue earned $ 3,920,670 $ 5,177,778 $ 918,612 $12,433,511
========== =========== ========= ==========
Net earnings $ 234,507 $ 236,159 $ 498,444 $ 866,073
========== =========== ========= ==========
</TABLE>
As of and for the year ended
September 30, 1996
_____________________________
First American
Title Company Joint
of New Mexico Ventures
_____________ __________
[S] [C] [C]
Cash $ 658,776 $ 45,387
Other assets 8,167,839 5,665,952
_________ _________
$ 8,826,615 $ 5,711,339
========= =========
Liabilities $ 8,106,606 $ 4,509,316
Equity 720,009 1,202,023
_________ _________
$ 8,826,615 $ 5,711,339
========= =========
Revenue earned $ 4,155,923 $ 2,359,312
========= =========
Net earnings $ 331,843 $ 606,631
========= =========
In November 1997, the Company sold its 20% stockholder interest in First
American Title Company of New Mexico for $500,000.
NOTE E - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable include the following at
September 30:
1997 1996
_________ _________
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
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 sub-ordinate to the
interest of banks under participation
agreements, collateralized by certain
real estate and homes under
construction, interest due monthly at
the banks' prime rate plus 1%,
principal due as homes are sold, up to
a nine-month term with three-month
renewals considered 778,743 844,256
Notes receivable from various real
estate agents, collateralized by
computer equipment, payable in monthly
installments aggregating approximately
$5,500, including interest at 10%,
with maturity dates through November
2000 126,338 218,747
Note receivable, collateralized by
real estate, interest due monthly at
9%, principal payable as lots are sold
or upon demand 118,000 118,000
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
Brokerage commissions and fees
receivable 554,611 318,907
Construction sales receivable 416,872 154,263
Other advances and receivables 435,034 442,948
_________ _________
2,429,598 3,718,826
Less allowance for doubtful accounts 75,746 -
_________ _________
$2,353,852 $3,718,826
========= =========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
1997 1996
_________ _________
Office equipment, furniture, and fixtures $1,423,922 $ 997,702
Leasehold improvements 159,317 114,948
Automobiles and equipment 113,208 109,052
_________ _________
1,696,447 1,221,702
Less accumulated depreciation and
amortization 768,031 425,886
_________ _________
$ 928,416 $ 795,816
========= =========
NOTE G - DEBT
Debt consisted of the following at September 30:
1997 1996
_________ _________
Subordinated sinking fund notes,
$5,750,000 face amount, 9.5% interest
payable annually, principal payable at
various dates through December 2003
(less $225,342 and $280,577
unamortized discount at September 30,
1997 and 1996, respectively, based on
imputed interest rate of 10.5%) (A) $5,524,658 $5,469,423
Construction and development advances,
collateralized by inventories (B) 1,798,584 1,220,512
Notes payable, collateralized by
inventories (C) 3,340,700 2,168,500
Note payable to Norwest Bank,
collateralized by equity investee
common stock owned by the Company, due
in semiannual installments of $35,700
plus interest at 1% over the bank's
prime rate, through July 2004 500,000 -
Noninterest-bearing note payable to
selling shareholder of Mull Realty
Company, Inc., collateralized by the
common stock of a Company subsidiary,
due in annual installments based upon
a factor of earnings with all
outstanding principal due in April
2001 800,000 -
Revolving line of credit with Norwest
Bank, interest payable monthly at 1.5%
over the bank's prime rate, principal
payable March 1998 100,000 100,000
Other notes payable 24,835 57,817
__________ _________
$12,088,777 $9,016,252
========== =========
(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 and development advances collateralized
by inventories include $523,350 ($497,388 at September
30, 1996) advanced under various interim construction
lines of credit which total $3,600,000. Each project
under these lines of credit requires a separate
construction loan bearing interest at the bank's prime
rate plus 1% (9.5% at September 30, 1997 and 9.25% at
September 30, 1996). Construction and development
advances also include $1,158,424 ($412,290 at September
30, 1996) advanced under other lending guidelines. Each
home to be built under these lending guidelines requires
a separate construction loan at the bank's prime rate
plus 1% (9.5% at September 30, 1997 and 9.25% at
September 30, 1996). Additional construction advances
collateralized by inventories of $116,810 ($310,834 at
September 30, 1996) 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 through April 2000, with variable interest
rates at the banks' prime rates plus 1% or 1.5% (prime
rate was 8.5% and 8.75% at September 30, 1997 and 1996,
respectively) and fixed interest rates of 9% or 10%, with
principal payments due as properties are sold.
Aggregate future maturities of debt is as follows at September
30, 1997:
<TABLE>
<S> <C>
Year ending September 30
1998 $ 4,285,519
1999 871,400
2000 1,921,400
2001 1,671,400
2002 871,400
Thereafter 2,693,000
__________
12,314,119
Less amount representing
discount on debt 225,342
__________
$ 12,088,777
==========
</TABLE>
NOTE H - INCOME TAXES
The provision for income taxes consists of the following for
the years ended September 30:
<TABLE>
<S> <C> <C>
1997 1996
________ ________
Current $ 32,000 $ 62,255
Deferred 167,000 (38,255)
________ _______
$ 199,000 $ 24,000
======== =======
</TABLE>
The Company's effective income tax rate on continuing
operations differed from the federal statutory rate of 34% as
follows:
<TABLE>
1997 1996
<S> <C> <C>
_______ _______
Income taxes at federal statutory rate $ 179,859 $ 53,088
Effect of graduated rates - (8,943)
Change in valuation allowance (15,966) (25,574)
Nondeductible expenses 30,884 7,227
Dividend exclusion 1,665 (8,326)
Other 2,558 6,528
_______ _______
Total tax expense $ 199,000 $ 24,000
======= =======
</TABLE>
NOTE H - INCOME TAXES - CONTINUED
Components of deferred taxes are as follows at September 30:
<TABLE>
1997 1996
<S> <C> <C>
_______ ______
Assets
Accrued liabilities $ 59,434 $ 62,577
Property and equipment 49,943 36,660
Investments 89,892 89,892
Tax loss carryforward 13,888 22,721
Other - 2,763
Valuation allowance (24,460) (40,426)
_______ _______
$ 188,697 $174,187
======= =======
Liabilities
Investments $ 256,943 $ 75,153
Inventories - 11,300
Other 1,093 -
_______ _______
$ 258,036 $ 86,453
======= =======
</TABLE>
The valuation allowance decreased $15,966 and $25,574 for the
years ended September 30 1997 and 1996, 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 $222,000 and $141,000 at
September 30, 1997 and 1996, respectively.
Capital lease terms range from three to five years and provide
for payments as follows:
<TABLE>
<S> <C>
Year ending September 30
1998 $ 76,008
1999 35,196
_______
Total minimum lease payments 111,204
Amount representing interest 6,404
_______
Present value of net minimum lease payments $ 104,800
=======
</TABLE>
NOTE I - LEASES - CONTINUED
The Company leases certain office facilities and equipment used
in its operations under operating leases. Lease terms range
from three to ten years and provide for payments as follows:
<TABLE>
Year ending September 30
<C> <C>
1998 $ 476,000
1999 357,000
2000 299,000
2001 249,000
2002 287,000
Thereafter 324,000
_________
$1,992,000
=========
</TABLE>
Rental expense under these leases was approximately $601,000
and $564,000 for the years ended September 30, 1997 and 1996,
respectively. Certain of these leases relating to rental
expense of approximately $127,000 and $112,000 for the years
ended September 30 1997 and 1996, 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,
1997 and 1996.
NOTE K - BUSINESS COMBINATIONS
The Company acquired Mull Realty Company, Inc., a real estate
broker, effective January 1, 1997. The acquisition included a
cash payment of approximately $359,000, the issuance of a
noninterest-bearing note payable for $800,000, and future
contingent payments of up to $1,175,000. As installments on
this noninterest-bearing note payable are based upon a factor
of earnings, the terms are not fixed and no discount on debt is
readily determinable. The contingent payments made, if any,
are based on future earnings levels and will result in
additional costs in excess of the net assets acquired to be
amortized over the remaining life of the asset.
Additionally, the Company acquired First Commercial Real Estate
Services, Inc., a commercial real estate broker, effective May
1, 1997, for a cash payment of $265,000.
These business combinations have been accounted for using the
purchase method of accounting and the accompanying consolidated
financial statements include the operations of these real
estate brokers subsequent to the date of acquisition. Costs in
excess of the net assets acquired were approximately $961,000.
The following summarized pro forma unaudited information
assumes these acquisitions had occurred on October 1, 1995:
<TABLE>
Year ended September 30
_________________________
1997 1996
<S> <C> <C>
__________ __________
Revenues $ 32,107,000 $ 30,496,000
Net loss $ (160,000) $ (80,000)
========== ==========
Loss per share $ (.06) $ (.03)
========== ==========
</TABLE>
The Company acquired Amity, Inc. ("Amity"), a commercial
construction contractor, effective July 1, 1996. The Board
approved the issuance of 24,297 shares of Series D preferred
stock, in exchange for common stock representing 100% of the
shares outstanding of Amity. 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. If the
acquisition had occurred on October 1, 1995, the pro forma
revenues, net earnings, and earnings per share would have been
approximately $26,968,000, $14,600, and $.01, respectively.
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:
<TABLE>
1997 1996
<S> <C> <C>
__________ __________
Revenues
Residential construction $ 11,290,953 $ 10,689,087
Real estate broker
Sales to unaffiliated customers 14,486,945 10,485,508
Intersegment sales 405,009 406,100
Financial services 876,743 276,399
Commercial construction 1,750,069 1,118,063
Other sales 1,153,500 1,004,859
Interest and other
Sales to unaffiliated customers 992,578 682,726
Intersegment sales 766,980 -
Eliminations (1,171,989) (406,100)
__________ __________
Total $ 30,550,788 $ 24,256,642
========== ==========
Operating profit (loss)
Residential construction $ (97,610) $ 423,478
Real estate broker (61,058) (354,356)
Financial services 843,042 230,436
Commercial construction 164,830 8,562
Other sales 120,067 (9,453)
___________ _________
Total $ 969,271 $ 298,667
=========== =========
Assets
Residential construction $ 14,856,678 $ 11,965,756
Real estate broker 3,436,032 1,615,150
Financial services 1,707,052 2,608,838
Commercial construction 767,169 724,548
__________ __________
Identifiable assets 20,766,931 16,914,292
Equity investments - other 2,025,238 241,891
Corporate assets 969,319 1,112,176
Other assets 2,592,817 4,339,561
__________ __________
Total $ 26,354,305 $ 22,607,920
========== ==========
Depreciation and amortization
Residential construction $ 103,612 $ 77,675
Real estate broker 249,199 178,078
Commercial construction 22,868 3,859
Other 126,073 100,960
__________ ________
Total $ 501,752 $ 360,572
========== ========
Capital expenditures
Residential construction $ 188,331 $ 97,859
Real estate broker 79,418 88,818
Financial services - 17,629
Commercial construction 8,679 1,900
Other 7,114 2,281
_________ _________
Total $ 283,542 $ 208,487
========= =========
</TABLE>
Operating profit consists of total revenues, less costs and
expenses including interest expense allocated to the financial
services segment, but does not include unallocated interest
expense, other income, net equity in earnings of 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 $917,000 and $4,300,000
at September 30, 1997 and 1996, respectively.
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 - 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, 1997, preferred stock dividends
in arrears were $252,980 ($132,405 for 1996). 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.
During 1997, the Company amended its articles of incorporation
to convert the previously authorized 80,000 shares of Series C
preferred stock to a series of preferred shares which are
unclassified as to rights or preferences. Additionally, this
amendment provides for all shares of Series A, Series B, and
Series D preferred shares which are reacquired by the Company
to be converted to a series of preferred stock which is
unclassified as to rights or preferences. As a result of these
amendments, the Company has 180,923 preferred shares authorized
which are unclassified as to rights and preferences. Such
shares will be fixed with respect to rights and preferences by
the Board of the Company upon issuance.
NOTE O - STOCK OPTIONS
The Company adopted an employee incentive stock plan for
certain key employees during the year ended September 30, 1997.
Options currently outstanding under the plan become exercisable
one year from the date of the grant and expire five years after
the date of the grant. These options are exercisable at not
less than the market value of the Company's stock on the date
of the grant. Accordingly, no compensation cost has been
recognized for these options. Had compensation cost for these
options been determined based on the fair value of the options
at the grant dates consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net
earnings and earnings per share would have been reduced to the
pro forma amounts indicated below for the year ended September
30, 1997. There were no stock options outstanding at September
30, 1996.
Net earnings
As reported $ 209,422
Pro forma 193,322
Earnings per share
As reported $ .07
Pro forma $ .07
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes options-pricing model with
the following weighted-average assumptions used: dividend
yield was estimated to remain at zero; expected volatility of
54%; risk-free interest rates of 5.9%; and an expected life of
one year.
The Black-Scholes options valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
A summary of the status of the Company's fixed stock options as
of September 30, 1997 and changes during the year ended is
presented below:
Number of Weighted average
shares exercise price
_________ _________________
Outstanding at beginning of year - $ -
Granted 35,000 3.30
______
Outstanding at end of year 35,000 $ 3.30
______
Options exercisable at year end - $ -
Weighted-average fair value of options
granted during the year - $ .46
NOTE P - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value
information 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:
<TABLE>
1997 1996
_______________________ _______________________
Carrying Estimated Carrying Estimated
amount fair value amount fair value
<S> <C> <C> <C> <C>
_________ ___________ ________ ___________
Financial assets
Cash, cash equivalents, and
restricted cash $ 4,645,284 $ 4,645,284 $ 4,967,439 $ 4,967,439
Securities available for sale 199,291 199,291 188,435 188,435
Fixed rate notes receivable 244,338 232,090 1,958,452 1,946,428
Floating rate notes receivable 778,743 778,743 844,256 844,256
Financial liabilities
Fixed rate debt (7,027,768) (6,983,417) (6,087,740) (6,088,467)
Floating rate debt (4,261,009) (4,261,009) (2,928,512) (2,928,512)
Financial liabilities for which it is
not practicable to estimate
fair value
Notes payable (800,000) - - -
It was not practicable to estimate the fair value of a noninterest-bearing
note payable which does not have fixed repayment terms.
</TABLE>
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, 1997.
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,
1997 and 1996:
INDEX TO FINANCIAL STATEMENTS
REALCO, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Balance Sheets as of September 30, 1997 and 1996
Statements of Operations for the years ended
September 30, 1997 and 1996
Statement of Stockholders' Equity for the years ended
September 30, 1997 and 1996
Statements of Cash Flows for the year ended
September 30, 1997 and 1996
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 Sept 16, 1996, 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.
10.10 1997 Employee Incentive Stock Option Plan, encorporated herein by
reference to the Registrant's Form 10QSB filed on May 15, 1997.
21 Subsidiaries of the small business issuer
21.1 Prudential Hooten/Stahl, Inc. Realtors - New Mexico -(100%)
21.2 Charter Building and Development Corp. - New Mexico(100%)
21.3 Great American Equity Corporation, Inc. - New York - (100%)
21.4 Amity, Inc. - New Mexico - (100%)
21.5 Prudential Preferred Properties, Inc. (formally) Mull Realty,
Company - Arizona - (100%)
21.6 P.H.S. Inc. - New Mexico - (100%)
21.7 First Commercial Real Estate Services, Inc.- New Mexico - (100%)
21.8 Town Park, Inc. -Nevada- (100%)
21.9 M.I. Acquisition Corp. - Minnesota - (13%)
21.10 Real Estate Brokerage Services Inc. - New Mexico - (100%)
21.11 P.H.S. Mortgage Co. - a New Mexico Partnership - (49.99%)
21.12 Success Joint Venture - a New Mexico Joint Venture - (50%)
21.13 Vinyards Joint Venture - a New Mexico Joint Venture - (50%)
21.14 First American Title Company of New Mexico - New Mexico - (20%)
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.
(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:
None
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 29, 1997
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:
S/Melvin A. Hardison
- ------------------------
Melvin A. Hardison Chief Financial December 29, 1997
Officer/Secretary/Treasurer
S/Bill E. Hooten
- ----------------------
Bill E. Hooten Executive Vice President
and Director December 29, 1997
S/Arthur A. Schwartz
- ---------------------------
Arthur A. Schwartz Director December 29, 1997
S/Marshall Blumenfeld
- ---------------------------
Marshall Blumenfeld Director December 29, 1997
S/Jeffrey S. Silverman
- ---------------------------
Jeffrey S. Silverman Director December 29, 1997
S/Noel Zeller
- ---------------------------
Noel Zeller Director December 29, 1997
S/Martin S. Orland
- ---------------------------
Martin S. Orland Director December 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 4242000
<SECURITIES> 199000
<RECEIVABLES> 2430000
<ALLOWANCES> 76000
<INVENTORY> 13807000
<CURRENT-ASSETS> 0
<PP&E> 1696000
<DEPRECIATION> 768000
<TOTAL-ASSETS> 26354000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
3193000
<COMMON> 7712000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26354000
<SALES> 28681000
<TOTAL-REVENUES> 30551000
<CGS> 22957000
<TOTAL-COSTS> 29338000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 684000
<INCOME-PRETAX> 529000
<INCOME-TAX> 199000
<INCOME-CONTINUING> 209000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
