U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] 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 5-100
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 May 12, 1998, was:
2,772,000
Transitional Small Business Format (check one) Yes [ ]No[XX]
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION.
Item 1. FINANCIAL STATEMENTS
REALCO, INC.
CONDENSED BALANCE SHEET
March 31, 1998
ASSETS (Unaudited)
<S> <C>
Cash and cash equivalents $ 3,889,072
Restricted cash 343,377
Securities available for sale 93,437
Accounts and notes receivable 2,844,054
Inventories 14,241,884
Costs and estimated earnings in excess of
billings on uncompleted contracts 25,008
Property & equipment (net) 911,491
Investments - equity method 1,741,609
Deferred income taxes 176,561
Other assets 2,506,775
-----------
$26,773,268
===========
LIABILITIES
Notes payable $ 6,488,564
Lease obligations 69,765
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,429
Construction advances and notes
payable, collateralized by inventories 6,624,629
Accounts payable and accrued
liabilities 2,435,474
Escrow funds held for others 343,377
----------
Total liabilities 15,965,238
----------
STOCKHOLDERS' EQUITY
Preferred stock no par value - authorized
500,000 shares;
Series A - issued and outstanding
82,569 shares 825,690
Series B - issued and outstanding
212,859 shares 2,128,590
Series D - issued and outstanding
23,919 shares 239,190
Common stock no par value;
authorized, 6,000,000 shares, issued
2,845,000 shares 7,712,461
Retained earnings 113,174
----------
11,019,105
Less cost of 73,000 shares held in treasury 211,075
----------
10,808,030
----------
$26,773,268
===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
REALCO, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months Three months
Ended Ended
March 31, March 31,
1998 1997
<S> <C> <C>
REVENUES
Brokerage commissions and fees $ 4,373,536 $ 3,377,320
Construction sales 2,254,498 5,182,448
Sales of developed lots 181,850 268,000
Equity in net earnings of investees 53,097 268,082
Interest and other, net 87,594 185,671
----------- -----------
6,950,575 9,281,521
COSTS AND EXPENSES
Cost of brokerage revenue 3,012,003 2,348,383
Cost of construction sales 2,075,134 4,855,516
Cost of developed lots sold 137,466 288,301
Selling, general and administrative 1,997,950 1,440,726
Depreciation and amortization 123,787 120,294
Interest and other expense 176,694 160,956
----------- -----------
7,523,034 9,214,176
----------- -----------
Income (loss) before provision
for income taxes (572,459) 67,345
INCOME TAX EXPENSE (BENEFIT) (223,000) 31,331
----------- -----------
NET EARNINGS (LOSS) BEFORE PREFERRED
STOCK DIVIDEND REQUIREMENT (349,459) 36,014
PREFERRED STOCK DIVIDEND REQUIREMENT 30,144 30,547
----------- -----------
NET EARNINGS (LOSS) AVAILABLE FOR
COMMON SHARES $ (379,603) $ 5,467
=========== ===========
Earnings (loss) per common share
before preferred stock
dividend requirements $ ( 0.13) $ 0.01
Basic and diluted earnings
(loss) per share $ ( 0.14) $ - -
=========== ===========
Weighted average shares outstanding 2,779,467 2,839,844
----------- -----------
The accompanying notes are an integral part of these statements.
</TABLE>
REALCO, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months Six months
Ended Ended
March 31, March 31,
1998 1997
<S> <C> <C>
REVENUES
Brokerage commissions and fees $ 8,585,193 $ 5,705,850
Construction sales 5,399,388 9,505,679
Sales of developed lots 650,473 389,000
Equity in net earnings of investees 176,888 442,178
Interest and other, net 609,545 520,376
----------- -----------
15,421,487 16,563,083
COSTS AND EXPENSES
Cost of brokerage revenue 5,985,268 4,125,103
Cost of construction sales 4,893,029 8,827,384
Cost of developed lots sold 550,846 406,776
Selling, general and administrative 3,986,773 2,546,830
Depreciation and amortization 249,207 217,014
Interest and other expense 374,675 319,697
----------- -----------
16,039,798 16,442,804
----------- -----------
Income (loss) before provision
for income taxes (618,311) 120,279
INCOME TAX EXPENSE (BENEFIT) (235,900) 52,500
----------- -----------
NET EARNINGS (LOSS) BEFORE PREFERRED
STOCK DIVIDEND REQUIREMENT $ (382,411) $ 67,779
PREFERRED STOCK DIVIDEND REQUIREMENT 60,288 61,094
----------- -----------
NET EARNINGS (LOSS) AVAILABLE FOR
COMMON SHARES $ (442,699) $ 6,685
=========== ===========
Earnings (loss) per common share
before preferred stock dividend
requirements $ ( 0.14) $ 0.02
Basic and diluted earnings (loss)
per share $ ( 0.16) $ - -
=========== ===========
Weighted average shares outstanding 2,787,088 2,842,451
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
REALCO, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six months ended
March 31,
1998 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ (382,411) $ 67,779
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities
Depreciation and amortization 249,207 217,014
Accretion of discount on notes payable 27,617 27,617
Distributions of investees in excess
of earnings (net earnings in excess
distributions) 136,722 (421,471)
(Gain) on sale of securities (345,276) (45,365)
Change in operating assets and liabilities
(net of business acquired)
(Increase) in accounts receivable (355,327) (139,519)
(Increase) decrease in inventories (663,163) 1,077,336
Decrease in costs and estimated earnings
related to net billings on uncompleted
contracts 106,055 314,589
(Increase) in other assets (210,055) (784,631)
Increase (decrease) in accounts payable and
accrued liabilities 163,826 (624,755)
Increase in deferred tax asset (213,400) (87,454)
---------- ----------
Net cash used by operating activities (1,486,205) (398,860)
---------- ----------
Cash flows from investing activities
Purchases of property and equipment (74,787) (547,315)
Proceeds from sale of securities 586,297 41,411
Advances on notes receivable (448,624) (1,056,468)
Receipts on notes receivable 332,188 0
Purchases of investments - equity method 0 (100)
Payments for business acquired (426,250) 0
Cash acquired in business acquired 292,453 205,912
---------- ----------
Net cash provided (used) in investing
activities 261,277 (1,356,560)
----------- ---------
Cash flows from financing activities
Construction advances and notes
payable, net 1,485,345 812,466
Payments on capital lease obligations (35,035) (46,038)
Payments on notes payable (460,929) 0
Purchase of common stock (117,686) (36,218)
----------- ----------
Net cash provided from financing
activities 871,695 730,210
----------- ----------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (353,233) (1,025,210)
Cash and cash equivalents at beginning
of period 4,242,305 4,480,880
--------- ---------
Cash and cash equivalents at end
of period $ 3,889,072 $ 3,455,670
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
REALCO, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The condensed balance sheet as of March 31, 1998, the
statements of operations for the three month and six month periods
ended March 31, 1998 and 1997 and the statements of cash flows
for the six month periods ended March 31, 1998 and 1997 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 March 31, 1998 and results of operations and cash flows
for the three month and six month periods ended March 31, 1998
and 1997 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, 1997. The results of operations for the
periods ended March 31, 1998 are not necessarily indicative of
the operating results for a full year.
The Company adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 128, Earnings
Per Share, during the quarter ended December 31, 1997. Because the
conversion prices for convertible debentures, warrents, and options
are greater than the average market prices for the periods
presented, the assumed conversion of such securities are
antidilutive.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed using the
weighted number of common shares outstanding of 2,787,088 for
the six month period ended March 31, 1998 and 2,842,451 for the
six month period ended March 31, 1997, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operations 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 presently consists of Prudential
Preferred Properties, NM (PPP-NM)(formerly Prudential Hooten/Stahl,
Realtors) Prudential Preferred Properties, Az (PPP-Az)(formerly Mull
- -Smith, Inc.) and First Commercial Real Estate Services, Inc. The
Mull-Smith company was acquired January 1, 1997, and the First
Commercial Real Estate Services, Inc. (First Commercial) business
was acquired May 1, 1997. Effective February 1, 1998, in the current
quarter, PPP-Az acquired Cliff Winn, Realty, Inc. (Winn) which
also operates in the Phoenix area.
Operations for the quarter ended March 31, 1998:
Brokerage commission income for the 1998 quarter increased
$997,000 or 21% over 1997, primarily due to First Commercial
$215,000 and Winn $567,000 who were not present in 1997 plus an
increase of $243,000 from the existing PPP-Az operation. PPP-NM
had a $70,000 decrease in commission income for 1998. The segment
pre-tax operating loss increased by ($151,000) to ($274,000) or
151% increase in 1998 over 1997. Significant factors included
pre-tax profits for PPP-Az of $109,000 in 1998 compared to
$134,000 in 1997, which were more than offest by pre-tax losses
for PPP-NM of ($369,000) in 1998 compared to ($264,000) in 1997.
The NM loss was a continuation of pre-tax losses which were
($345,000) for the first quarter.
Operations for the six months ended March 31, 1998:
Brokerage commission income for the six months increased
$2,879,000 to $8,585,000 or 50% over the 1997 period. Newly acquired
businesses accounted for the increases while PPP-NM had a reduction
in commission income of ($493,000) to $3,704,000 in 1998 or a 12%
drop in relation to 1997. The segment pre-tax loss increased by
($215,000) to ($569,000) in 1998, an increase of 61% in relation
to 1997. PPP-Az had a pre-tax profit $192,000 and Winn had a pre-
tax profit of $20,000 while PPP-NM had a pre-tax loss of ($714,000)
for the six-month period ended March 31, 1998.
The Albuquerque residential real estate market has been relatively
flat if not slightly increasing during the covered period. PPP-NM
has not maintained it's share of the market even while expenses to
support associate agents have continued at about the same dollar
level and thereby a higher ratio to commission income. Ms. Claudia
Noakes was employed as president of PPP-NM as of January 1, 1998;
she has initiated agressive new programs to bring in top agents to
increase commission income; has reduced office space for better
desk occupancy rates and has changed advertising and promotional
media to reduce operating expenses. The last month of this
reporting period reflected improvements in both income and expenses;
however, it is too early to assure significant changes in PPP-NM
operating results in future periods.
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 Building & Development Corp. (Charter) and
Amity, Inc. (Amity). This segment also includes the Company's
Land Development Division (LDD) which acquires raw land and
develops it into residential homesite lots for Charter and
other homebuilders. The LDD also holds equity interest in joint
ventures with other developers of home subdivisions.
Charter builds homes in price ranges of $145,000 to $250,000 in up
to eleven subdivisions in the area. Homesite lots have been
acquired from LDD and related joint ventures and from other
developers. Charter occasionally sells lots from their inventory
as markets dictate. Amity is principally a builder of small
commercial buildings. They also do remodeling and occasionally
build upper range homes. The LDD recognizes their share of
earnings from joint ventures on an equity basis. Profits on lot sold
to Charter, either directly by LDD or by joint venture, are deferred
so long as the lot remaines in Charter's inventory. Charter obtains
construction and lot acquisition financing from various local banks
and from the Company. Interest from Charter to the Company is
deferred and/or eliminated in consolidation as appropriate.
Operations for the quarter ended March 31, 1998
Cosntruction revenues decreased ($2,928,000) to $2,524,000 for
1998 when compared to the quarter ended March 31, 1997. This
drop was primarily due to the timing of a few Amity contracts,
however, Charter had a reduction in homes sales revenues of
($642,000) to $1,955,000 in 1988, or a drop of 25% when compared
to 1997. Segment lot sales declined ($86,000) to $182,000 and
equity in earnings of joint venture investees declined ($212,000)
to $23,000 in 1997. The changes in lot sales and joint venture
earnings relate more to the ownership structure than to operating
activities as the Company acquired the outside interests in two
ventures effective June 1, 1997. These operations were being
reported only as LDD's share of their net earnings but are now
reported gross in the Company's financial statements.
Segment pre-tax profits declined from a profit of $217,000 in 1997
to a pre-tax loss of ($210,000) for the quarter ended March 31,1998.
The principal reason for the loss was a pre-tax loss for Charter of
($251,000) compared to a loss of ($91,000) in 1997. The Charter
pre-tax loss was ($261,000) in the first quarter. Amity realized a
pre-tax loss of ($20,000) for 1998 while the LDD had a pre-tax
profit of $82,000.
Operations for the six months ended March 31, 1998
Construction revenues for the segment declined ($4,107,000) to
$5,399,000 in 1998 compared to the six months ended March 31, 1997.
Again the timing of Amity contracts contributed to the drop, however,
Charter homes sales were down ($1,585,000) to $4,454,000 or 26%
when compared to 1997. Lot sales were up $261,000 to $650,000, and
joint venture equity earnings were down ($265,000) to $75,000 for
1998, again primarily due to the restructuring of ownership in
land development activities.
The segment's pre-tax earnings of $283,000 in 1997 dropped
($643,000) to a pre-tax loss of ($360,000) for the six months ended
March 31, 1998. Pre-tax earnings of $28,000 for Amity and $187,000
for LDD was offset by a pre-tax loss of ($512,000) for Charter for
the 1998 six months period. In addition, deferred gains on lots
sold to and still in inventory at Charter contribute to the segment
total loss. At March 31, 1998, over $122,000 of such gain was
deferred.
New home sales in the Albuquerque market have been fairly stable
for the past year or so with some increase in new home permits
during the recent months. However, Charter homes have been subject
to strong competition with a related reduction in new industry
relocations to the Albuquerque area and the accompanying new home
buyers of Charter price level homes. The failure of Charter homes
to meet pricing competition has reduced sales as well as profits on
individual homes as costs accumulate with the time they are held
in inventory. Management continues to make changes and refinements
in Charter's product and operations, however significantly improved
results are not yet evident. Charter has over 200 lots in nine
subdivisions available for new homes and has a backlog of 34 homes
under contract with an indicated revenue of approximately
$5,578,000.
The Land Development Division holds equity interests in two joint
ventures. One development in the Northeast Heights of Albuquerque
has been most successful with development activity totally complete
and with sales generating about $50,000 in each of the two quarters
ending March 31, 1998. The other venture's devlopment activity was
terminated by the City of Albuquerque's condemnation proceedings as
previously reported. The LDD has recently completed a 100 lot golf
course residential subdivision and is initiating acquisition and
development of another subdivision which will feature homes in the
$75,000 to $100,000 range. LDD also has over 40 lots remaining
from former joint ventures which are clear of any debt and are
available for Charter or for sale to other builders.
Financial Services Segment:
The financial services segment consists of the Company (Realco) and
Great American Equity Corporation (GAEC) and PHS, Inc. Operations
also include equity earnings of various finance entities including a
50% interest in PHS Mortgage partnership and a 13% interest in
MI Acquisition Corporation.
The Company owned a 20% interest in First American Title Company of
New Mexico until November, 1997 when is was sold for $500,000 cash
resulting in a gain of $333,585.
Operations for the quarter ended March 31, 1998
Interest and other income declined ($98,000) to $87,000 for the
quarter ended March 31, 1998, when compared to 1997. The decline was
partially due to fewer loan fees generated and increased
inter-company loan interest which is eliminated in consolidation.
The PHS, Inc. share of equity earnings of PHS Mortgage was about
level with 1997 at $49,000 for the quarter. The equity share of
investment in MI Acquisition was a loss of ($31,000).
Operations for the six months ended March 31, 1998
Interest and other income for the segment increased $89,000 to
$609,000 for 1998. The 1998 amount includes the $333,585 gain
on the sale of the investment in First American Title of New Mexico,
and an equity loss of ($46,000) on the Company's investment in
MI Acquisition which was not acquired until August, 1997, and
therefore not a factor in the 1997 period.
Overall Company Operations:
The Company's pre-tax loss of ($572,000) for the quarter ended March
31, 1998, resulted primarily from the Albuquerque area home sales
activities with a PPP-NM loss of ($369,000) and a Charter loss of
($251,000). Management has been and continues to address this
serious situation and numerious changes have been accomplished;
however, there is no assurance that these changes and/or the
Albuquerque real estate market will provide a signicant immediate
change in operating results.
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 approximately
$3,889,000 of the Registrant's current cash and cash
equivalents. During the current quarter, the Company had
utilized approximately $4,213,000 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 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 insurance policies or otherwise result in any
material adverse effect on the Company's operations or financial
position. The only litigation in which the Company is involved that
might be considered other than routine and ordinary is the following:
On April 11, 1997, the City of Albuquerque instituted condemnation
procedings related to a parcel of land upon which the Company had a
joint venture financing arrangement for development. This matter is
more fully described in the Company's 10-QSB filing of June 30,
1997. There has been continueing 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 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS IN SENIOR SECURITIES.
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On March 5, 1998, the Company held its annual meeting
of shareholders. Proxies were solicited for the meeting
pursuant to Regulation 14A under the Exchange Act. The
shareholders voted on the following matters in the way
indicated:
a. Election of Directors. There was no solicitation in
opposition to management's nominees listed in the proxy
statement and all of those nominees were elected.
No other matters came before the shareholders at the
meeting.
Item 5. OTHER INFORMATION.,
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) There are no exhibits are filed with this report.
(b) There were no Forms filed during this reporting period.
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: May 12, 1998 S/ James A.Arias
_________________________
James A. Arias, President
Date: May 12, 1998 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 3889000
<SECURITIES> 93000
<RECEIVABLES> 2926000
<ALLOWANCES> 82000
<INVENTORY> 14267000
<CURRENT-ASSETS> 0
<PP&E> 1972000
<DEPRECIATION> 1060000
<TOTAL-ASSETS> 26773000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
3193000
<COMMON> 7712000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26773000
<SALES> 14635000
<TOTAL-REVENUES> 15421000
<CGS> 11429000
<TOTAL-COSTS> 11429000
<OTHER-EXPENSES> 4236000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375000
<INCOME-PRETAX> (618000)
<INCOME-TAX> (236000)
<INCOME-CONTINUING> (382000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (382000)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.16)
</TABLE>
