U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(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, 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.
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(Exact name of registrant as specified in its charter)
New Mexico 85-0316176
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(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
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(Address of principal executive offices) (Zip code)
(505) 242-4561
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by the Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 XX No
------- ------
As of February 17, 1999 the Registrant had outstanding 2,767,000 shares of its
no par value common stock, the Registrant's only class of common stock.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1998 September 30,
(unaudited) 1998
----------- -----------
ASSETS
Cash and cash equivalents $ 3,147,771 $ 3,788,086
Restricted cash 218,180 170,240
Securities available for sale 174,478 217,968
Accounts and notes receivable, net 1,826,940 2,277,771
Costs and estimated earnings in excess of
billings on uncompleted contracts 171,436 -
Inventories 16,378,183 16,760,111
Property & equipment, net 916,077 928,226
Investments - equity method 1,508,428 1,806,502
Deferred income taxes 189,585 301,376
Other assets 2,474,246 2,117,770
----------- -----------
$27,005,324 $28,368,050
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 5,934,949 $ 6,532,598
Lease obligations 59,729 77,422
Construction advances and notes payable,
collateralized by inventories 7,943,783 9,032,641
Accounts payable and accrued liabilities 2,684,578 2,583,933
Escrow funds held for others 218,180 170,240
----------- -----------
Total liabilities 16,841,219 18,396,834
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 500,000
shares Series A - issued and
outstanding, 82,569 shares, stated at
liquidation value 825,690 825,690
Series B - issued and outstanding, 212,859
shares, stated at liquidation value 2,128,590 2,128,590
Series D - issued and outstanding, 23,919
shares, stated at liquidation value 239,190 239,190
Common stock - no par value; authorized,
6,000,000 shares; issued, 2,845,000 shares 7,712,461 7,712,461
Retained earnings (deficit) (494,464) (683,930)
Accumulated other comprehensive income (23,386) (26,809)
----------- -----------
10,388,081 10,195,192
Less 78,000 shares common stock
held in treasury - at cost 223,976 223,976
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10,164,105 9,971,216
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$27,005,324 $28,368,050
=========== ===========
See accompanying notes.
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended December 31,
(unaudited)
1998 1997
----------- -----------
REVENUES
Brokerage commissions and fees $ 6,165,917 $ 4,211,657
Construction sales 4,553,734 3,144,890
Sales of developed lots 641,500 468,623
Equity in net earnings of investees 96,165 123,791
Interest and other, net 697,669 526,397
----------- -----------
12,154,985 8,475,358
COSTS AND EXPENSES
Cost of brokerage revenue 4,594.991 2,973,265
Cost of construction sales 4,182,672 2,817,895
Cost of developed lots sold 484,430 413,380
Selling, general, administrative and other 2,221,680 1,988,823
Depreciation and amortization 119,503 125,420
Interest 235,932 197,981
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11,839,208 8,516,764
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Earnings (loss) before income taxes 315,777 (41,406)
INCOME TAX EXPENSE (BENEFIT) 126,311 (12,900)
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NET EARNINGS (LOSS) 189,466 (28,506)
PREFERRED STOCK DIVIDEND REQUIREMENT 30,144 30,144
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NET EARNINGS (LOSS) APPLICABLE
TO COMMON SHARES $ 159,322 $ (58,650)
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per common share before
preferred stock dividend requirement $ 0.07 $ (0.01)
=========== ===========
Net earnings (loss) per common share after
preferred stock dividend requirement $ 0.06 $ (0.02)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,767,000 2,794,543
=========== ===========
See accompanying notes.
REALCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended December 31,
(unaudited)
1998 1997
----------- -----------
Cash flows from operating activities
Net earnings (loss) $ 189,466 $ (28,506)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Depreciation and amortization 119,503 125,420
Accretion of discount on notes payable 13,809 13,809
Net distributions in excess of earnings
of investees (earnings in excess of
distributions 359,654 (123,791)
Gain on sale of securities - (345,276)
Change in operating assets and liabilities
(Increase) decrease in restricted cash (47,940) 82,998
(Increase) decrease in accounts receivable 136,000 (111,311)
(Increase) decrease in inventories 381,928 832,502
(Increase) decrease in net billings
related to costs and estimated earnings
on uncompleted contracts (171,436) 134,991
Increase in other assets (88,404) (146,889)
Increase in accounts payable and
accrued liabilities 100,645 263,964
Decrease in escrow funds held for others 47,940 (82,998)
Decrease in deferred tax asset 111,791 (30,577)
----------- -----------
Net cash provided by operating activities 1,152,956 584,336
Cash flows from investing activities
Purchases of property and equipment (77,393) (25,612)
Proceeds from sale of securities available
for sale - 86,297
Proceeds from sale of equity security - 500,000
Advances on notes receivable (58,000) (247,613)
Receipts on notes receivable 372,831 213,375
Purchase of investments - equity method (61,580) -
----------- -----------
Net cash provided by investing activities 175,858 526,447
Cash flows from financing activities
Construction advances and notes
payable, net (1,151,436) (63,530)
Payments on capital lease obligations
And long term debt (817,693) (17,353)
Purchase of treasury stock - (97,948)
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Net cash used in financing activities (1,969,129) (178,831)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (640,315) 931,952
Cash and cash equivalents at beginning
of period 3,788,086 4,242,305
----------- -----------
Cash and cash equivalents at end
of period $ 3,147,771 $ 5,174,257
=========== ===========
See accompanying notes.
REALCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Realco, Inc. and
its wholly owned subsidiaries have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions of Form 10-Q and Article 10 of the Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended December 31, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1999. For further information refer to the financial statements
and footnotes included in the company's annual report on Form 10-KSB for the
year ended September 30, 1998.
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.
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS
Earnings (Loss) Per Share
In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share" was issued. SFAS 128 establishes standards for
computing and presenting earnings per share (EPS) and simplifies the existing
standards. This statement replaces the presentation of primary EPS with a
presentation of basic and diluted EPS. SFAS No. 128 was adopted in the financial
statements for the year ended September 30, 1998. The adoption of this standard
had no impact on the Company's earnings per share amounts.
Comprehensive Income
In June 1997, Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Comprehensive Income" was issued. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 130 was adopted in the financial statements
for the quarter ended December 31, 1998. The adoption of this standard had no
significant impact on the financial statements of the Company.
Total comprehensive income (loss) for the three months ended December 31, 1998
and 1997 was approximately $193,000 and ($47,000), respectively.
Disclosures About Segments of and Enterprise and Related Information
In June 1997, Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures About Segments of and Enterprise and Related Information" was
issued. SFAS 131 establishes for the way that a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. SFAS 131 is effective for
fiscal years beginning after December 31, 1997, but need not be applied to
interim financial statements in the initial year of its application. Management
believes adoption of this statement will not have a material impact on the
financial statements of the Company.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
- ----------------------
Revenues of the Company are generated through the following segments: (1)
residential and commercial real estate brokerage; (2) residential and commercial
construction, and 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 earnings generated by other financial
service entities in which the Company owns an equity interest. Operations of
such equity method investees include commercial and residential mortgage
lending, and to a lesser extent, property and casualty insurance.
The Company currently operates its business within the Albuquerque, New Mexico
and Phoenix, Arizona metropolitan areas. Since inception, management has planned
on expanding the Company's operations and business concepts to other
geographical areas, preferably to areas within the Southwest having similar
demographics.
Based upon the various lines of businesses in which the Company is engaged, it
has defined the following operating segments for purpose of financial accounting
and reporting: Real Estate Brokerage Segment, Construction and Land Development
Segment, and Financial Services Segment.
Real Estate Brokerage Segment:
The real estate brokerage segment consists of Hooten/Stahl, Realtors, dba
Prudential Preferred Properties, New Mexico; Mull Realty Company, Inc. and Cliff
Winn, Inc. Realtors (Winn), collectively dba Prudential Preferred Properties,
Arizona; and First Commercial Real Estate Services, Inc.
Total brokerage commissions and fees from unaffiliated customers for this
segment increased 46% to $6,165,917 for the quarter ended December 31, 1998 as
compared to 1997. This increase is primarily attributable to revenues of
$1,669,246 generated by Winn, which was acquired by the Company in February
1998. This segment experienced a pre-tax loss of $161,688 for the quarter ended
December 31, 1998 as compared to a pre-tax loss of $294,600 for 1997. The
decrease in the loss is the result of several factors discussed below.
Prudential Preferred Properties, New Mexico experienced an increase in brokerage
commissions and fees from unaffiliated customers of $428,247 or 21% over 1997.
This increase in revenue and management's continuing efforts to reduce selling,
general, and administrative expenses resulted in a reduction of the pre-tax loss
of $69,276 to $275,719 in 1998. Management's continuing efforts to improve the
operations of this Albuquerque based residential brokerage company through
increasing market share and reducing operating expenses, includes the
consolidation of four branch offices into a single, newly constructed facility
which is expected to be ready for occupancy during the quarter ended June 30,
1999.
Prudential Preferred Properties, Arizona recognized continued growth in revenues
and earnings primarily through its acquisition of Winn. Management anticipates
continued earnings from these operations and are continuing to seek other
opportunities to expand its activities in the Phoenix market.
First Commercial Real Estate Services, Inc. an Albuquerque commercial brokerage
company, recognized a pre-tax loss of $65,469 as compared to a pre-tax loss of
$5,000 in 1997. Additional costs incurred to recruit additional sales agents and
expand its property management staff have not yet resulted in increased
revenues.
Construction and Land Development Segment:
The construction and land development segment operates in the Albuquerque, Rio
Rancho and Los Lunas, New Mexico metropolitan areas. Construction is comprised
of the residential and commercial operations of Charter Building & Development
Corp. (Charter) and Amity, Inc., respectively. This segment also includes and
development activities consisting of the acquisition of raw land for development
into residential homesite lots which may be sold to Charter or to other
builders. Land development projects have typically been performed under joint
venture agreements, but the Company has performed some development projects
independently.
Operating revenues for this segment increased $2,521,438 or 78% over 1997.
Additionally, this segment recognized a pre-tax profit of $516,961 in 1998
compared to a pre-tax loss of $149,883 in 1997.
Residential construction revenues of Charter increased $1,451,959 or 58% over
1997. This increase in revenues is attributable to the Company's newly
introduced line of value engineered houses being received well by the
marketplace. In addition to the increase in revenues, an increase of nearly 2.5%
in gross profit on home sales was recognized. These factors as well as reduction
in selling, general and administrative expenses resulted in a pre-tax loss of
$128,615 as compared to $261,261 in 1997. Management expects this newly
introduced line of homes to continue to improve the overall operations of
Charter. At December 31, 1998 Charter had a backlog of homes under contract with
indicated revenue of approximately $8,065,000.
Revenues from Amity's commercial construction and remodeling totaled $602,429 in
1998, a decrease of about 7% from 1997. A pre-tax loss of $34,615 was recognized
in 1998 as compared to a pre-tax profit of $48,185 in 1997. This loss is
primarily attributable to increased general and administrative costs incurred in
an effort to expand operations. Amity has a backlog under contract at December
31, 1998 with estimated revenues of $1,100,000.
The Company's land development activities experienced an increase in revenues
and pre-tax earnings of $645,168 and $617,042, respectively over 1997. This
increase is primarily the result of an agreement reached on December 30, 1998
whereby the Company received certain residential homesites valued at
approximately $550,000 in consideration for its interest in a joint venture
which received an award of $1,633,000 in a lawsuit. As this award is expected to
go through a future appeal process, management determined this exchange was in
the best interest of the Company after considering risk and future legal costs.
Financial Services Segment:
The financial services segment consists of operations of the Registrant, Great
American Equity Corporation (GAEC) and PHS, Inc.
In addition to financial services performed directly by the Company, operations
also include the Company's share of earnings from various equity method
investees who perform various financial services. Such investees include a 50%
equity interest in PHS Mortgage and a 11% interest in MI Acquisition
Corporation. The Company also 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.
The Financial Services segment realized a pre-tax loss of $30,380 as compared to
a pre-tax profit of $409,800 for 1997. The decrease is primarily attributable to
the $333,585 gain recognized on the sale of First American Title and a $70,000
loan origination fee in the quarter ended December 31, 1997, for which there was
no comparable activity in 1998.
Equity earnings recognized by PHS, Inc. from its interest in PHS Mortgage, a
partnership which originates and sells mortgages, totaled $73,337 in the quarter
ended December 31, 1998 compared to $87,357 in 1997.
The Company recognized a loss of $604 as compared to a loss of $15,308 in 1997
relating to its equity interest in MI Acquisition Corporation, which derives the
majority of its revenue from the underwriting, sale and trading of securities by
its principal operating subsidiary, Miller & Schroeder Financial, Inc.
GAEC experienced a $72,257 decrease in revenues, or 81% from 1997 and a $75,367
decrease in pre-tax profits, or 84% from 1997. These decreases are primarily the
result of a $70,000 loan origination fee received in 1997, for which there was
no comparable activity in 1998.
Liquidity and Capital Resources:
- --------------------------------
The Company's liquidity consists primarily of cash, trade accounts receivable,
inventories and construction advances collateralized by inventory. Future cash
needs will be financed primarily by cash flows from operations, future advances
under construction loans and if needed, other financing arrangements which may
be available to the Company. The Company's current projection of future cash
requirements, however may be affected in the future by numerous factors,
including changes in customer receipts, consumer industry trends, sales volume,
operating cost fluctuations, acquisitions of existing businesses and unplanned
capital spending.
Competition and Market Factors:
- -------------------------------
Each of the Registrant's subsidiaries competes principally on the basis of
reputation in the community in which it operates. However, the Registrant
competes in a highly competitive environment typical of all real estate
dependent companies. The real estate industry, and therefore the Registrant's
business, is cyclical and can be affected by consumer confidence levels,
prevailing economic conditions and interest rates. Other factors effecting the
Registrant's business include increases in construction material and labor
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 will eventually build a dominance in
the markets in which it does business, however there can be no assurance that
this strategy will be successful.
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995:
- -----------------------------------------
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the company, (ii) the company's plans and
results of operations will be affected by the company's ability to manage its
growth, and (iii) other risks and uncertainties as indicated from time to time
in the company's filings with the Securities and Exchange Commission.
Year 2000 Issues:
- -----------------
The Registrant has been notified by its principal vendors of its operating
computer programs, that they are deemed Year 2000 compliant. The Registrant has
embarked on a systematic program of testing each of its PC's and related
software programs to detect any Year 2000 defect. The examination is being
conducted by Registrant personnel and is scheduled to be completed by June 1999.
The Registrant's key business relationships include suppliers and subcontractors
for building and land development, realtor clearing associations, and financial
institutions and mortgage companies which not only process the Registrant's cash
receipts and disbursements but also provide deposit and lending services for the
Registrant and its customers. The Registrant has begun to review these
third-party relationships to seek assurances from key parties that they are Year
2000 compliant and believes that this evaluation will be completed by late 1999.
While some of the Registrant's business relations have assured the Registrant
they are addressing the Year 2000 issues, the Registrant cannot guarantee its
key business relationships will resolve these issues in a timely manner.
The Registrant does not believe there will be any significant costs incurred in
regards to its own computer software and hardware since its vendors have deemed
them Year 2000 compliant. Testing of the subsystems and contacting third parties
will be done by the Registrant's existing personnel with less than $5,000 of
additional costs incurred due to payroll and various supplies. The Registrant
does not yet have a comprehensive contingency plan but intends to establish such
a plan as part of its Year 2000 assessment during 1999.
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.
As previously reported in the Registrant's 10-QSB filing of June 30, 1997, and
the 10-KSB filing of September 30, 1998, an agreement was reached on December
30, 1998 whereby the Registrant received certain residential homesites valued at
approximately $550,000 in consideration for its interest in a joint venture
which received an award of $1,633,000 in a lawsuit. As this award is expected to
go through a future appeal process, management determined this exchange was in
the best interest of the Registrant after considering risk and future legal
costs.
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 Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REALCO, INC.
Date: February 18, 1999
James A. Arias
-------------------------
James A. Arias, President
Date: February 18, 1999
Melvin A. Hardison
---------------------------------------
Melvin A. Hardison, Secretary\Treasurer
and Chief Financial Officer
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