U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 5-100
Albuquerque, New Mexico 87102
(Address of principal Executive offices)
(505) 242-4561
(Issuer's telephone number) ---------------------------
(Former name, former address and former three-months, if changed
since last report)
Check whether the issuer has (1) filed all documents and
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or
such shorter period that the registrant was required to
file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX No
------- -------
The number of shares of the registrants no par value
common stock, the issuers only class of common stock,
outstanding as of February 12, 1998, was: 2,780,000
Transitional Small Business Format (check one) Yes [ ] No[XX]
<PAGE>
PART I. FINANCIAL INFORMATION.
Item 1. FINANCIAL STATEMENTS
REALCO, INC.
CONDENSED BALANCE SHEET
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents $ 5,174,257
Restricted cash 319,981
Securities available for sale 93,437
Accounts and notes receivable 2,499,401
Inventories 12,746,219
Property & equipment (net) 913,840
Investments - equity method 1,800,834
Deferred income taxes 80,661
Other assets 2,531,745
----------
$26,160,375
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 6,943,065
Lease obligations 87,447
Billings in excess of costs
and estimated earnings on
uncompleted contracts 7,357
Construction advances and notes
payable, collateralized by inventories 5,095,991
Accounts payable and accrued
liabilities 2,524,860
Escrow funds held for others 319,981
----------
Total liabilities 14,978,701
Stockholders' equity
Preferred stock - authorized, 500,000 shares
Series A - issued and outstanding, 82,569
shares stated at liquidation value 825,690
Series B - issued and outstanding, 212,859
shares stated at liquidation value 2,128,590
Series D - issued and outstanding, 23,919
shares stated at liquidation value 239,190
Common stock - no par value; authorized,
6,000,000 shares, issued, 2,845,000 shares 7,712,461
Retained earnings 467,080
----------
11,373,011
-----------
Less 65,000 shares common stock held in
treasury - at cost 191,337
-----------
11,181,674
----------
$26,160,375
===========
</TABLE>
<PAGE>
REALCO, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months Three months
Ended Ended
December 31, December 31,
1997 1996
REVENUES
<S> <C> <C>
Brokerage commissions and fees $ 4,211,657 $ 2,328,530
Construction sales 3,144,890 4,323,231
Sales of developed lots 468,623 121,000
Equity in net earnings of investees 123,791 174,097
Interest and other, net 526,397 333,671
----------- -----------
8,475,358 7,280,529
COSTS AND EXPENSES
Cost of brokerage revenue 2,973,265 1,776,720
Cost of construction sales 2,817,895 3,971,868
Cost of developed lots sold 413,380 118,475
Selling, general, administrative
and other 1,988,823 1,105,070
Depreciation and amortization 125,420 96,720
Interest 197,981 158,741
----------- -----------
8,516,764 7,227,594
----------- -----------
Income (loss) before provision
for income taxes (41,406) 52,935
INCOME TAX EXPENSE (BENEFIT) (12,900) 21,169
----------- -----------
NET EARNINGS (LOSS) $ (28,506) $ 31,766
=========== ===========
NET EARNINGS (LOSS) BEFORE PREFERRED
STOCK DIVIDEND REQUIREMENT $ (28,506) $ 31,766
PREFERRED STOCK DIVIDEND REQUIREMENT 30,144 30,547
----------- ---------
NET EARNINGS AVAILABLE FOR COMMON
SHARES $ (58,650) $ 1,219
========== =========
Earnings (loss) per common share
before preferred stock dividend
requirements $ (0.01) $ 0.01
Basic and deluted earnings
(loss) per share $ (0.02) $ --
========= =========
Weighted average shares outstanding 2,794,543 2,845,000
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REALCO, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the three months
ended December 31,
1997 1996
<S> <C>
Cash flows from operating activities
Net earnings (loss) $ (28,506) $ 31,766
Adjustments to reconcile net earnings (loss)
to net cash from operating activities
Depreciation and amortization 125,420 96,720
Accretion of discount on notes payable 13,809 13,809
Net earnings of investees in excess of
distributions (123,791) (174,097)
Gain on sale of securities (345,276) (45,365)
Change in operating assets and liabilities
Decrease (increase)
in restricted cash 82,998 (1,931,446)
(Increase)in accounts receivable (111,311) (308,380)
Decrease in inventories 832,502 (115,008)
Decrease in net billings related to costs
and estimated earnings on uncompleted
contracts 134,991 421,800
(Increase) decrease in other assets (146,889) 85,268
Increase (decrease)in accounts payable
and accrued liabilities 263,964 (209,342)
(Decrease)in escrow funds held for others (82,998) 1,931,446
Increase in deferred tax asset (30,577) (57,938)
---------- ---------
Net cash provided by (used in) operating
activities 584,336 (260,767)
---------- ---------
Cash flows from investing activities
Purchases of property and equipment (25,612) (44,437)
Proceeds from sale of securities available
for sale 86,297 41,411
Proceeds from sale of equity security 500,000 --
Advances on notes receivable (247,613) (484,752)
Receipts on notes receivable 213,375 --
Purchase of investments - equity method -- (100)
---------- ---------
Net cash provided by (used in) investing
activities 526,447 (487,878)
---------- ---------
Cash flows from financing activities
Construction advances and notes
payable, net (63,530) 719,806
Payments on capital lease obligations (17,353) (22,838)
Purchase of common stock (97,948) --
--------- ---------
Net cash (used in) provided by financing
activities (178,831) 696,968
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 931,952 (51,677)
Cash and cash equivalents at beginning
of period 4,242,305 4,480,880
--------- ---------
Cash and cash equivalents at end
of period $ 5,174,257 $4,429,203
============ ===========
</TABLE>
<PAGE>
The condensed balance sheet as of December 31, 1997, the
statements of operations for the three month periods ended
December 31, 1997 and 1996 and the statements of cash flows for
the three month periods ended December 31, 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 December 31,1997 and results of operations and cash flows
for the three month periods ended December 31, 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, 1997. The results of
operations for the period ended December 31, 1997 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, warrants, and
options are greater than the average market prices for the
periods presented, the assumed conversion of such securities are
antidilutive.
ITEM 2: 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 presently consists of
Prudential Hooten/Stahl, Realtors, Prudential Preferred
Properties (formerly Mull-Smith, Inc.) and First Commercial
Real Estate Services, Inc., with the latter two company
operations being acquired after the quarter ended December 31,
1996.
Total revenues from brokerage commissions and fees from
unaffiliated customers in 1997 of $4,211,657 include $2,280,947
of revenue from the new operations. The remaining revenues for
1997 of $1,930,710 were a decrease of $397,820 or 17% for
Prudential Hooten/Stahl compared to 1996. Prudential
Hooten/Stahl operates in the Albuquerque, NM. New and used home
sales in the Albuquerque area for the December quarters reflect a
slight increase from 1996 to 1997. Prudential Hooten/Stahl lost
market share and suffered an increase in quarterly pre-tax loss
from ($245,000) in 1996 to ($345,000) in 1997. Albuquerque
management is currently implementing changes to address
this situation, however there is no expectation of realizing
significant reductions in operating losses before the fiscal
year end .
Prudential Preferred Properties, a Phoenix, AZ, based realtor
acquired January 1, 1997, has realized operating profits
throughout the calendar year including $84,000 of pre-tax
profits for the December 1997 quarter. Management expects
continued operating profits from this company and on February 1,
1998, acquired a second realtor in the Phoenix area .
First Commercial Real Estate Services, Inc. an Albuquerque
commercial brokerage activity, did not contribute significantly
in the 1997 quarter, producing a pre-tax loss of ($5,000) on
$359,000 of commission revenue. Management has expanded this
company with additional services and has provided the
integration of brokerage activity with financing sources and
commercial construction company capabilities all of which are
directed at increasing volume and providing future profits.
The total Real Estate Brokerage segment realized a pre-tax loss
of ($294,600) for the quarter ended December 31, 1997 compared to
a pre-tax loss of ($240,500) in 1996.
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. and Amity, Inc.
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 homesite lots which may be sold to
Charter or to other builders. In addition, the Company has
established a Land Development Division where direct ownership
and development of subdivisions occurs. The other home builders
who may purchase developed lots generally have their homes
marketed by Prudential Hooten/Stahl, Inc. and may have
construction financing through programs offered by the
Company's financial services group.
Revenues during the December quarter from residential
construction by Charter decreased $942,000 to $2,499,000 in
1997, a decrease of 27% when compared to 1996. A quarterly pre-
tax loss for Charter increased from ($53,000) in 1996 to
($261,000) in 1997. Costs of construction for Charter were
$2,431,000 or 97% of sales in 1997 compared to 95% in 1996.
Operating costs, depreciation and interest expense totaled
$359,000 or 14% of sales in 1997 compared to 7% in 1996.
New home sales in the Albuquerque area were down about 7% for
both the year and the quarter ended December 31, 1997 compared to
1996. This followed recent years of significant growth in new
home sales which in turn attracted additional home building
operations in Albuquerque and greater competition in a slightly
smaller current market. Charter did not maintain it's market
share and has suffered the above reported losses while clearing
stale housing products. 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. At
December 31, 1997, Charter had over 200 lots in nine
subdivisions available for new homes and has a backlog of 21
homes under contract an with an indicated revenue of
approximately $3,800,000.
Revenues from Amity's commercial construction and remodeling
totaled $645,544 in 1997, a decrease of about $230,000 from 1996;
however pre-tax profits increased $32,000 to $48,185 in the
quarter ended December 31, 1997 compared to 1996.
The Company's land development activities in 1996 was from
participation in joint ventures while in 1997 it included both
joint ventures and direct ownership and development of homesite
lots. Pre-tax earnings from land development activities was
$104,000 in 1996 compared to $105,000 in 1997 before a $42,000
deferral of gain on lots sold to Charter and still in their
inventory. The cumulative total of such deferred gain was over
$122,000 at December 31, 1997. The recently established Land
Development Division of the Company includes a 100 lot golf
course residential subdivision scheduled for completion early in
1998. The Company has utilized acquisition and development
financing, as arranged by the joint venture who originated this
subdivision, which financing is from a bank with which the
Company has various other banking relations.
The significant remaining development joint venture was
organized late in 1996 to develop a subdivision in the far
Northeast Heights of Albuquerque, New Mexico, containing 82 lots
of which 63 lots have been sold through December 31, 1997.
Total venture earnings through that date are in excess of
$940,000 of which 50% accrues to the Company. The Company's
land development division realized $52,000 of earnings from this
joint venture in the quarter ended December 31, 1997.
The total Construction and Land Development segment realized a
pre-tax loss of ($149,800) in quarter ended December 31, 1997
compared to a pre-tax profit of $68,300 in 1996.
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 it was sold for
$500,000 cash resulting in a gain of $333,585. Equity
earnings to PHS, Inc. from it's PHS Mortgage partnership totaled
$87,357 in the quarter ended December 31, 1997 compared to
$62,583 in 1996 MI Acquisition Corporation was organized in
August, 1997, and the Company's share of their operations was a
loss of ($15,308) for the December 1997 quarter.
GAEC realized loan fees of $89,400 in the quarter ended
December 31, 1997, a decrease of $24,400 or 21% compared to
1996. The 1997 loan fees earned by GAEC include $70,000
realized through it's connection with MI Acquisition Corporation
and it's subsidiary Miller & Schroeder, Inc. a financial;
services firm which provided underwriting for the related loan.
Such fees have nominal related costs and therefore
substantially all such income flows to pre-tax 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
was $181,100 in 1997, a decrease of $93,500 from 1996.
The total Financial Services segment realized a pre-tax profit
of $409,800 for the quarter ended December 3, 1997 compared to
$224,700 for 1996.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Company is subject to certain legal claims from time to time
and is involved in litigation that has arisen in the ordinary
course of its 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 proceedings 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
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 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS IN SENIOR SECURITIES.
None
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
Item 5. OTHER INFORMATION.
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) There are no exhibits filed with this Report.
(b) 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: February 14, 1998
/S/James A. Arias
------------------------
James A. Aria, President
Date: February 14, 1998
/S/ Melvin A. Hardison
---------------------------
Melvin A. Hardison, Secretary\Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5174000
<SECURITIES> 93000
<RECEIVABLES> 2580000
<ALLOWANCES> 81000
<INVENTORY> 12746000
<CURRENT-ASSETS> 0
<PP&E> 1722000
<DEPRECIATION> 808000
<TOTAL-ASSETS> 26160000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
3193000
<COMMON> 7712000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26160000
<SALES> 7825000
<TOTAL-REVENUES> 8475000
<CGS> 6205000
<TOTAL-COSTS> 8319000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198000
<INCOME-PRETAX> (41000)
<INCOME-TAX> (13000)
<INCOME-CONTINUING> (28000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
