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 June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES ACT OF 1934
For the transition period from ---------- to----------
Commission file number 0-27552
REALCO, INC.
(Exact name of small business issuer as specified in its
charter)
New Mexico 85-0316176
(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification No.)
1650 University Blvd., N.E., Suite 100
Albuquerque, New Mexico 87102
(Address of principal Executive offices)
(505) 242-4561
(Issuer's telephone number)
--------------------------
(Former name, former address and former fiscal year, 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 XX No
------- -------
The number of shares of the registrants no par
value common stock, the issuers only class of
common stock, outstanding as of August 13, 1997, was:
2,804,000
Transitional Small Business Format (check one)
Yes [ ] No[XX]
PART I. FINANCIAL INFORMATION.
Item 1. FINANCIAL STATEMENTS
REALCO, INC.
CONDENSED BALANCE SHEET
June 30, 1997
ASSETS (Unaudited)
<TABLE>
<S> <C>
Cash and cash equivalents $5,488,941
Restricted cash 414,394
Securities available for sale 223,784
Accounts and notes receivable 4,086,930
Inventories 10,475,098
Property & equipment (net) 978,482
Investments - equity method 1,479,684
Deferred income taxes 30,693
Other assets 2,210,078
-----------
$25,388,084
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 5,083,331
Lease obligations 121,830
Construction advances and notes
payable, collateralized by inventories 5,679,503
Accounts payable and accrued
liabilities 2,661,822
Escrow funds held for others 414,394
-----------
Total liabilities 13,960,880
-----------
Stockholders' equity
Preferred stock - $10.00 per share liquidating
value - authorized 500,000 shares
Series A - issued and outstanding
82,569 shares 825,690
Series B - issued and outstanding
217,859 shares 2,178,590
Series D -issued and outstanding
24,297 shares 242,970
Common stock no par value;
authorized, 6,000,000 shares, issued
2,845,000 shares 7,712,461
Retained earnings 534,338
Unrealized gains on available-for-sale
securities, net of tax 15,792
-----------
11,509,841
Less cost of 38,000 shares held in treasury 82,637
-----------
11,427,204
-----------
$25,388,084
===========
The accompanying notes are an integral part of these statements.
</TABLE>
REALCO, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three months Three months
Ended Ended
June 30, June 30,
1997 1996
<TABLE>
REVENUES
<S> <C> <C>
Brokerage commissions and fees $ 4,759,100 $2,817,629
Sales of homes 2,845,870 2,734,670
Sales of developed lots 440,500 163,767
Equity in net earnings of investees 174,429 117,950
Interest and other, net 595,698 287,247
----------- -----------
8,815,597 6,121,263
COSTS AND EXPENSES
Cost of brokerage revenue 3,333,212 1,969,437
Cost of home sales 2,568,699 2,557,253
Cost of developed lots sold 447,744 151,925
Selling, general and administrative 1,702,003 1,063,879
Depreciation and amortization 113,084 112,775
Interest and other expense 158,383 128,169
----------- -----------
8,323,125 5,983,438
----------- -----------
Income before provision
for income taxes 492,472 137,825
INCOME TAX EXPENSE 191,500 50,620
----------- -----------
NET EARNINGS BEFORE PREFERRED
STOCK DIVIDEND REQUIREMENT 300,972 87,205
PREFERRED STOCK DIVIDEND REQUIREMENT 30,547 28,725
----------- ---------
NET EARNINGS AVAILABLE FOR COMMON
SHARES $ 270,425 $ 58,480
========== =========
Earnings per common share $ 0.10 $ 0.03
Earnings after preferred
stock dividend requirement $ 0.09 $ 0.02
========= =========
Weighted average shares outstanding 2,820,489 2,845,000
----------- -----------
The accompanying notes are an integral part of these statements.
</TABLE>
REALCO, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
Nine months Nine months
Ended Ended
June 30, June 30,
1997 1996
REVENUES
<S> <C> <C>
Brokerage commissions and fees $10,464,950 $ 7,963,924
Sales of homes 12,351,549 6,729,027
Sales of developed lots 829,500 871,859
Equity in net earnings of investees 616,607 255,610
Interest and other, net 1,116,074 593,458
----------- -----------
25,378,680 16,413,878
COSTS AND EXPENSES
Cost of brokerage revenue 7,458,315 5,537,922
Cost of home sales 11,396,083 6,116,659
Cost of developed lots sold 854,520 864,808
Selling, general and administrative 4,248,833 3,141,838
Depreciation and amortization 330,098 273,003
Interest and other expense 478,080 242,984
----------- -----------
24,765,929 16,177,214
----------- -----------
Income before provision
for income taxes 612,751 236,664
INCOME TAX EXPENSE 244,000 80,500
----------- -----------
NET EARNINGS BEFORE PREFERRED
STOCK DIVIDEND REQUIREMENT $ 368,751 $ 156,164
PREFERRED STOCK DIVIDEND REQUIREMENT 91,641 86,175
----------- ---- ----
NET EARNINGS AVAILABLE FOR COMMON
SHARES $ 277,110 $ 69,989
========== =========
Earnings per common share $ 0.13 $ 0.07
Earnings after preferred
stock dividend requirement $ 0.10 $ 0.03
========= =========
Weighted average shares outstanding 2,835,130 2,381,496
---------- ----------
The accompanying notes are an integral part of these statements. ----------- -----------
</TABLE>
REALCO, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine months ended
June 30,
1997 1996
Cash flows from operating activities
Net earnings $ 368,751 $ 156,165
Adjustments to reconcile net earnings
to net cash used by operating activities
Depreciation and amortization 330,098 273,003
Accretion of discount on notes payable 41,426 --
Net earnings of investees in excess of
distributions distributions (547,617) (60,115)
Gain on sale of securities (42,680) (77,774)
Provision for deferred income taxes 74,000 --
Change in operating assets and liabilities
Increase in accounts receivable (585,862) (2,710,574)
Increase in inventories (153,565) (3,709,085)
Decrease in net billings related to costs
and estimated earnings on uncompleted
contracts 307,433 --
(Increase) in other assets (930,045) (47,791)
Decrease in accounts payable and
accrued liabilities 876,905 533,556
Increase in deferred tax asset (57,041) (2,985)
---------- ---------
Net cash used by operating
activities (318,197) (5,645,600)
---------- ---------
Cash flows from investing activities
Advances on notes receivable (1,298,123) --
Collections on notes receivable 1,515,881 --
Purchases of property and equipment (801,230) (150,261)
Purchases of investments - equity method (61,000) (62,488)
Purchase of Mull Smith, Inc. (376,404) --
Purchase of securities available for sale (44,781) (30,000)
Proceeds from sale of securities 73,156 144,757
Cash acquired from purchase of Mull Smith, Inc. 205,912 --
---------- ---------
Net cash used in investing
activities (786,589) (97,992)
---------- ---------
Cash flows from financing activities
Construction advances and notes
payable, net 2,290,491 (744,596)
Payments on capital lease obligations and debt (95,007) (65,356)
Proceeds from issue of subordinated notes -- 5,160,625
Proceeds from issue of common stock -- 6,172,974
Purchase of common stock (82,637) --
Purchase of Series B preferred stock -- (5,000)
--------- ---------
Net cash provided from financing
activities 2,112,847 10,518,647
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,008,061 4,775,055
Cash and cash equivalents at beginning
of period 4,480,880 642,829
--------- ---------
Cash and cash equivalents at end
of period $ 5,488,941 $ 5,417,884
============ ===========
The accompanying notes are an integral part of these statements.
REALCO, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The condensed notes as of June 30, 1997, the statements of
operations for the three month and the nine month periods ended June
30, 1997 and 1996 and the statements of cash flows for the nine month
periods ended June 30, 1997 and 1996 have been prepared by the Company
without audit. In the opinion of Management all adjustments (which
include normal recurring adjustments) necessary to present fairly the
financial position as of June 30, 1997 and results of operations and
cash flows for the nine month periods ended June 30, 1997 and 1996 have
been made.
Certain information and footnotes normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Form 10KSB for the fiscal year ended September 30, 1996. The results of
operations for the period ended June 30, 1997 are not necessarily
indicative of the operating results for a full year.
EARNINGS PER SHARE
Earnings per share are computed using the weighted avarage number of
common shares outstanding of 2,835,130 for the nine month period ended
June 30,1997 and 2,381,496 for the nine month period ended June 30, 1996,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of the
financial condition and results of operations of the Company during
the nine month period ended June 30, 1997.
Operation by Group
Revenues of the Company are generated through commercial
and residential real estate brokerage services, commercial and
residential home construction sales, and various 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 corporations in which
the Company owns equity interests ("Investees), whose business
currently consists of residential mortgage lending, title
insurance and property and casualty insurance including all forms
of life, accident and health 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 groups for purposes of accounting
for revenue, costs and expenses:
Financial Services Group, Real Estate Brokerage Group and
Construction and Land Development Group. Those areas of the
Company's business are more fully discussed below.
Real Estate Brokerage Group.
The Real Estate Brokerage Group currently consists of
Hooten/Stahl, Inc. and First Commercial Brokerage Services, Inc., both
located in Albuquerque, New Mexico and Mull-Smith, Inc., located in
Sun City, Arizona in the Phoenix metropolitan area. The business of each
of these corporations is that of a real estate brokerage firm.
The Registrant's residential home sales company in Albuquerque,
Prudential Hooten/Stahl, Inc. Realtors, had revenue generated from
commissions and sales of $2,632,000 for the quarter ended June 30, 1997,
compared to $2,922,000 for the quarter ended June 30, 1996.
Approximately $460,000 of the 1996 revenue was from in-house sales for
one developer/ home builder who elected to create his own sales force.
The remaining Hooten/Stahl operation provided an increase in revenue of
about $170,000 or 7% over 1996. The June increase follows the trend
reported by The Albuquerque Board of Realtors whose quarterly figures
show an 18% drop in the March quarter with an increase of 15% for the
June 1997 quarter when compared to 1996.
Although sales have increased during the current quarter, there
is continuing speculation that the Albuquerque market is experiencing
a correction of its current growth pattern. Historically, Albuquerque
has experienced high levels of activity in both construction of new
homes and resale of existing homes on a cyclical basis. Such cycles
occurred from 1969 to 1972, from 1975 to 1978, from 1982 to 1986 and,
most recently, from 1991 through the third quarter of 1996. If the
Albuquerque market is following this cyclical pattern, it may last
for as long as two years prior to experiencing new stimulated growth.
An indication that in Albuquerque, New Mexico, the past three
quarters may not be part of a cyclical period is the fact that
sales have steadily increased since January of 1997, but have not
yet achieved the levels of 1996. The reasons for this increase is
also speculative, with some suggestion that the increased sales may
have been influenced by recent decreases of interest rates. Because of
these cyclical trends in each area of the country, Management believes
that the Company should strive to locate similar businesses in cities
that have cycles differing from those of Albuquerque. For that reason,
the company acquired Prudential Mull-Smith, a real estate brokerage
firm in the Phoenix, Arizona area. This subsidiary which was acquired on
January 1, 1997 has produced revenues of $3,732,000 and a pre-tax profit
of $417,000 during the two quarters.
Construction and Land Development Group.
The Construction and Land Development Group currently
consists of Charter Building & Development Corp., Amity Inc., and
various joint ventures involved in the acquisition and development
of residential subdivisions, all located in the Albuquerque, New
Mexico area.
While the residential real estate market in Albuquerque was
declining, the average cost of a residence was increasing. The
Company's residential builder, Charter Homes, experienced revenues of
$2,854,000, and a pre-tax loss of $275,000 during the quarter. During
the quarter ended June 30, 1996, Charters revenues were $2,944,000 and
it contributed $109,000 to the Company's pre-tax profits. The loss
incurred during the current quarter was primarily due to the lack
of sufficient revenues to absorb the administrative overhead and
interest expense associated with the finished lot inventories held by
the Company. Interest expense rose by approximately 16% to
approximately $96,000 as a result of investment in spec homes held for
sale and increased inventory of building lots.
The commercial real estate market in Albuquerque was slow during
the period for Amity, Inc., the Company's commercial builder. They
recognized sales of $447,000 for the quarter ended June 30, 1997 and
contributed $3,000 to the Company's pre-tax profit. Amity was acquired
by the Company on July 1, 1996 and is not included in prior year
numbers.
Combined construction and land development revenues for the
nine months ended June 30, 1997 were $13,246,000, (which includes
revenues of $3,914,000 contributed by Amity, Inc.), compared to
revenues of $7,676,000 for the nine months ended June 30, 1996. Pre-
tax earnings for the nine months ended June 30, 1997, were
$107,000 compared to pre-tax earnings of $112,000 for the nine
months ended June 30, 1996. The decrease in net pre-tax earnings
for the quarter ended June 30, 1997, were primarily due to an
increase in the loss from Charter of $332,000 offset by a $91,000
pre-tax income from Amity and $241,000 increase in income from the
Company's land development investee activities.
At June 30, 1997, Charter had a backlog of 33 units suggesting
sales of $5,958,000, compared to a backlog of 31 units at March
31, 1997; valued at $5,526,000. While new home closings have receded
during this quarter, closings are expected to improve during the next
quarter as a result of projected completion and delivery of homes
currently under construction. It is still not clear at this time what
factors are causing this volatile behavior in housing demand in the
Albuquerque market.
As previously discussed in the Company's Form 10-QSB for the
period ended March 31, 1997, on November 25, 1996, the Company,
through a joint venture purchased approximately 90.5 acres of land
adjacent to Albuquerque to be developed into 125 home building
sites. During the quarter ended March 31, 1997, Albuquerque voters
approved acquisition of certain lands to be preserved as open space.
This parcel was selected as one of the tracts of land to be acquired
by the City and The City filed a lawsuit to condemn the property, See
Litigation below. During the current quarter, the City paid $7,905,000
to the Joint Venture, an amount equal to the City's determination of
the value of the parcel. This amount was sufficient to pay all
obligations of the joint venture including all principal,
interest and preferred return owed to the Company. The Joint Venture
responded to the suit by filing its claim of value for the subject land
of $15,000,000, while the Registrant filed its own claim in the amount
of $1,500,000 in that action. The Registrant's claim is in behalf of
certain of its operating units to seek reimbursement for projected
operating gains from which it has been deprived due to the taking of
the land. To the extent that the price paid for the property is
increased, or the Registrant is successful in receiving restitution for
lost profits either through further negotiations with the City or
through a Court Order, the Company will recognize such proceeds as
additional profit.
Financial Services Group
The Financial Services Group currently consists of all the
Company's businesses and business interests that are not directly
related to its real estate brokerage business or its real estate
construction business. It includes Great American Equity, Inc., a
wholly owned subsidiary that provides financing for the
acquisition and development of residential home subdivisions,
interim construction loans to certain clients of Hooten/Stahl ,
and it owns minority interests in various Investee's whose business'
includes, residential mortgage lending, title insurance and a
general insurance agency which provides a full line of liability,
casualty, life, accident and health insurance, and the Company's
investment portfolio.
This group's income is currently derived primarily from
investee investments and direct lending activities which utilizes
the Company's uncommitted funds. In addition, it further leverages
its investments through the use of participation agreements with
assorted unrelated investors and financial institutions. All corporate
expenses not specifically identifiable as having a direct
relationship to a corporate subsidiary's business activities are
charged to this group. Charges include all corporate general and
administrative costs, which includes interest expense associated with
the Company's publicly held subordinated debt.
During the quarter ended June 30, 1997, gross revenues of
$791,000 from this group, was derived from interest, investing gains
and investee equity recognition, while similar revenues for the quarter
ended June 30, 1996 were $297,000. General and administrative expense,
depreciation and interest expense for the quarter ended June 30,
1997 were approximately $298,000, producing a gain of approximately
$494,000 while the similar expense for the quarter ended June 30, 1996
was $264,000, producing pre-tax earnings of approximately $31,000.
Revenues for the nine months ended June 30, 1997 were $1,575,000
compared to revenues of $651,000 for the period ended June 30,1996.
General and administrative expenses, depreciation and interest expense
for the nine months ended June 30, 1997 were approximately $883,000,
producing pre-tax earnings of approximately $693,000, while the similar
expenses for the nine months ended June 30, 1996, was $538,000,
producing pre-tax earnings of approximately $112,000.
The significant increase in revenues and pre-tax earnings for 1997
in the Financial Services Group resulted primarily from 1) increased
financing activities for the Company's builder groups; 2) increased and
new sources for residential and commercial mortgage fees; and 3)
increased interest income from land development financing projects plus
accelerated recognition of participation and profit sharing earnings
from the land development project which was subject to condemnation
action by The City of Albuquerque as previously discussed. Becauese of
the uniqueness of the last item, there is no anticipation that the
Financial Services Group revenue and pre-tax earnings will continue at
the level realized during the quarter ended June 30, 1997.
The Financial Services Group interest expense for the respective
nine month periods was $453,000 for 1997 compared to $220,000 for 1996;
an increase of $233,000. This was primarily due to interest on the
$5,750,000 of subordinated notes which were issued in February, 1996.
The 1996 period included this expense for about five months while it was
present for all nine months in 1997. This interest expense item includes
both the 9.5% stated rate plus amortization of the original
issue discount on the notes.
Consolidated Quarterly and Nine Months
Operating Results for Periods Ended June 30, 1997 and 1996:
Revenues:
The Company's total consolidated revenue for the quarter
ended June 30, 1997 was $8,815,597 compared to $6,121,263 for the
quarter ended June 30, 1996. This $2,694,000 increase over the same
period last year was due primarily to Mull-Smith revenue of $2,073,000
and $308,000 increase in interest and other income from the Financial
Services Group. Revenues for the nine months ended June 30, 1997 were
$25,378,680 compared to $16,413,878 for the same period in 1996. This
$8,965,000 increase in 1997 again was due to the $791,000 of revenues
from Financial Services Group, the revenues of Mull-Smith of $3,732,000
and Amity, Inc. of $3,914,000.
With the exception of interest expense as noted above, other
costs and expenses were somewhat constant as a percentage of related
revenues for the 1997 and 1996 periods. Selling, general and
administrative expenses were slightly higher as a percentage of total
revenues in part due to the lack of sufficient revenues of the
Construction Group to absorb increased overhead of that Group in 1997.
Net Earnings:
The percentage of net earnings before preferred stock dividend
requirements to total revenues was approximately 3.4% for the current
quarter and approximately 1.5% for the nine months period ended June 30,
1997, as a result of the previously noted factors.
Liquidity and Sources of Capital
The Company's principal sources of liquidity are cash flow from
operating activities, bank borrowing under both term and revolving
credit arrangements and the $5,488,941 of current cash and cash
equivalents. During the current quarter, the Company had utilized
approximately $5,679,500 of revolving interim construction and inventory
lines of credit from the approximately $15,000,000 available with
various banks.
The Company believes that the cash flow from its operations and
its current cash and cash equivalents will sustain its operations and
anticipated internal growth for the ensuing twelve months.
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 that any liability that might be
incurred due to such claims will not, in the aggregate exceed the
limits of the Company's operations or financial position. Insofar as
known to management, there is no pending or threatened litigation
involving the Company or it's assets.
On April 11, 1997, the City instituted the condemnation procedure
related to aparcel of land upon which the Company had a joint venture
financing arrangement for development. Because of its interest in the
property, the Company was named as one ofthe defendant's in the action.
The condemnation action is filed in the District Court for Bernalillo
County, New Mexico captioned City of Alb. vs. Vineyards Joint Venture
and numbered CV 97-02912. Subsequent to the filing of the action,
the City deposited $7,905,000 as payment for the land and that money
was distributed to the parties having a monetary interest in the
property. This payment was based upon a purported appraisal of the
property obtained by the City. The Company received the payment of all
of the money that it had advanced to the Joint Venture. The Court
will eventually determine the actual value of the property for purposes
of the condemnation should the parties not reach a compromise. As a 50%
joint venture partner, the Company will receive its share of any future
payments that might result from the Court determining that the value
of the property is greater than the City's offer or if the parties
compromise for a higher dollar amount. In addition, the Registrant, has
made an independent claim in the action for loss of profits which it
has sustained due to the condemnation action by the City. There is a
disagreement between the City and the defendants over the true value of
the condemned property.
Management believes the joint venture was left with sufficient
balances after satisfying all its obligations with which to meet the
expected legal expense to challenge the adequacy of the fair market
claim of value by the City of Albuquerque verses the fair market
value claim by the joint venture.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS IN SENIOR SECURITIES.
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES
None
ITEM 5. OTHER INFORMATION.
On February 27, 1997, the Board of Directors authorized the repurchase
of up to 150,000 shares of the Company's common stock. During the
quarter ended June 30, 1997, the Company purchased 23,500 shares at a
cost of $46,419 bringing the total shares acquired under this
program to approximately 38,000 shares. The company may continue its
buy-back program during the ensuing quarters, subject to market
conditions.
ITEM. 6. EXHIBITS AND REPORTS ON FORM 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REALCO, INC.
Date: August 14, 1997
S/ James A. Arias
----------------
James A. Arias, President
Date: August 14, 1997
S/ Melvin A. Hardison
---------------------
Melvin A. Hardison
Secretary\Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
form (type) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1997
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<SECURITIES> 223784
<RECEIVABLES> 4086930
<ALLOWANCES> 0
<INVENTORY> 10475098
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<TOTAL-ASSETS> 25388084
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<BONDS> 0
0
3247250
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<CGS> 19708918
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<OTHER-EXPENSES> 4578931
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</TABLE>
