UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-27552
REALCO, INC.
(Exact name of registrant as specified in its charter)
New Mexico 85-0316176
State or other jurisdiction of (I.R.S. Employer
incorporation or other organization Identification No.)
1650 University Boulevard, N.E., Suite 5-100, Albuquerque, New
Mexico, 87102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 505-242-4561
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
--------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No____.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $36,395,184
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: On January 12, 1999, based on the price quoted by NASDAQ, the market value
was $3,420,625.
The number of shares outstanding of each of the Registrant's classes of voting
stock, as of December 23, 1998 , was:
No Par Value Common: 2,767,000 shares.
Series A Preferred: 82,569
Series B Preferred: 212,859
Series D Preferred: 23,919
PART I
ITEM 1: DESCRIPTION OF BUSINESS
General
The Registrant's principal executive offices are located at 1650 University
Blvd. NE, Suite 5-100, Albuquerque, New Mexico 87102 and its telephone number at
that location is (505) 242-4561.
REALCO, INC., a New Mexico corporation ("Realco", hereinafter with its
subsidiaries referred to collectively as the "Registrant"), was organized in
1983 as a private company and its business was that of an investment company
providing funds to others in the form of loans or equity interests through
September 30, 1994. Through its wholly owned subsidiary, Great American Equity
Corporation and referred to hereafter as ("GAEC"), it was engaged in the
business of arranging and participating in secured loans involving various forms
of real estate acquisitions and ventures. Beginning October 1, 1994, the
Registrant changed its business strategy and developed a plan to create a
financial group of interrelated companies to provide a full range of real estate
services.
This Form 10-KSB, including "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21 E of the Securities Exchange Act of 1934, as amended, that are not
historical facts. Such forward-looking information may include, without
limitation, statements that the Company does not expect that lawsuits,
environmental costs, commitments, contingent liabilities, labor negotiations or
other matters will have material adverse effect on its consolidated financial
condition, results of operations or liquidity and other similar expressions
concerning financial results. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
anticipated in the forward-looking statements. Important factors that could
cause such differences include but are not limited to contractual relationships,
industry competition, regulatory developments, natural events such as weather
conditions, changes in the real estate markets and interest rates, fuel prices
and ultimate outcome of environmental investigations or proceedings and other
types of claims and litigation.
On March 14, 1995, the Registrant entered into an agreement and plan of
Reorganization with a New Mexico corporate holding company and certain of that
company's shareholders, which resulted in the Registrant's acquisition of
several wholly-owned subsidiaries including Charter Building and Development
Corp. (Charter), a residential home building contractor and Hooten-Stahl,
Inc.(dba, Prudential Preferred Properties) a real estate brokerage business.
Pursuant to the Reorganization certain of the acquired corporations's
shareholders exchanged all of their Common Stock, representing approximately 98%
of the outstanding stock, for an aggregate of 82,569 shares of the Registrant's
Series A Preferred Stock and 228,859 shares of the Registrant's Series B
Preferred Stock.
Following the acquisition of Charter and Hooten/Stahl, the Registrant, on
February 2, 1996, successfully concluded a public offering of its securities,
consisting of common stock and subordinated debt.
The Registrant through its GAEC subsidiary, is active in lending activities
which include residential construction lending, land acquisition and residential
homesite subdivision development lending and limited computer leasing programs.
GAEC has entered into residential construction participation agreements with two
Albuquerque, New Mexico banks. The agreements between the banks and the
Registrant includes among other terms, that the Registrant is to provide the
first 25% of all funding commitments and the banks to provide the remaining 75%
of the loan commitment. GAEC has also entered into land acquisition and
residential subdivision loan participation agreements with banks in New Mexico
and Arizona. Generally, the Registrant provides from 25% to 40% of the funding
commitments for this activity. The Registrant's portion of this lending activity
is often further leveraged by high net worth private participants. This specific
lending activity has to date proved to be among the most profitable activities
of the Registrant. Agreements between the Registrant and its bank participants
generally include terms which provide that both parties share all revenues and
profits as their interest appear. In the event of default by the Borrower, the
participation agreements require that the funding participation by the
Registrant be fully subordinate to the outstanding balance of any bank
participation included in the joint lending program. The outstanding money
balances of the Registrant associated with these lending activities may vary
from time to time. Such variances may be caused by cyclical swings in the
market, loan demand by its customers or cash availability of the Registrant to
support these activities. As of September 30, 1998, the Registrant and its bank
partners had approximately $3,7000,000 in outstanding loans and/or funding
commitments, of which approximately $997,000 is the Registrant's direct
participation. The Registrant anticipates limited funding of its residential
construction lending capacity during the ensuing fiscal year. This kind of loan
generally matures within six months and the Registrant anticipates that upon
repayment of outstanding loans limited funds will be reinvested in the
continuation of this lending activity.
The Registrant operates PHS, Inc., a joint venture with CTX Mortgage Company, a
full service residential mortgage provider. The joint venture has operations at
three New Mexico and two Arizona residential brokerage branch locations operated
by the Registrant. Arizona operations began in August of 1998, and consequently
did not materially contribute to the September 30, 1998 operating results. PHS,
Inc. recorded approximately $317,000 as its share of earnings for the year ended
September 30, 1998.
Amity, Inc., the Registrant's New Mexico based general contractor specializing
in commercial construction, including commercial tenant improvements and
residential remodeling was acquired in July, 1996. The Registrant had exchanged
24,297 shares of its Series D Convertible Preferred Stock, $10.00 per share
liquidation value, bearing 3% cumulative dividend, for all of the issued and
outstanding Amity shares.
On February 1, 1998 the Registrant's Arizona Mull Realty Company, Inc.,
subsidiary, acquired for cash and future contingent payments, Cliff Winn, Inc.
Realtors, a residential and commercial brokerage company which primarily
conducts its business in Scottsdale, Mesa and to a lesser extent, in central
Phoenix, Arizona. The company operates under the trade name of Prudential
Preferred Properties as does Mull Realty Company, Inc. The Registrant is
currently seeking additional acquisition opportunities in Arizona.
Since the May 1, 1997 acquisition of First Commercial Real Estate Services,
Inc., a New Mexico based commercial brokerage company, First Commercial has
introduced several construction and financing opportunities to other of the
Registrants subsidiaries and affiliates.
On October 7, 1998, the Registrant participated in the purchase of 6,156
additional outstanding common stock of MI Acquisition Corporation (MI), parent
company of Miller & Schroeder, Inc., a financial sevices firm. Including this
acquisition subsequent to fiscal year end, the Registrant through a combination
of Company cash and borrowings owns approximately 12% of MI and the Registrants
President has been appointed to its Board of Directors and is a member of its
Audit Committee. The Registrant and Miller & Schroeder Financial have engaged in
limited cross market activities of some of its services and products.
Operating Strategy
The Registrant's business activities are located in the metropolitan area of
Albuquerque, New Mexico and Phoenix, Arizona. Since the completion of its
Initial Public Offering of February 1996, the Registrant has expanded its
financial, construction and brokerage activities to its core of business in a
continuing effort to become a one stop source for small to medium size
independent home builders and developers who may need to acquire financing,
marketing and sales support.
The Registrant believes that it can capitalize on its operating methods and
strategies, which it is formulating in its existing markets, for expansion to
other geographical areas. For example, the Registrant believes that expansion to
other markets may be achieved by its acquisition of either real estate brokerage
or building companies. Once such a business is acquired, the strategy will be to
export to its new market the entire array of business activities of the
Registrant.
On a continuing basis, the Registrant has been exploring a variety of
acquisition opportunities, consisting of service, product and distribution
businesses. The Registrant's acquisition strategy complements the plan of
internal growth charted for its existing activities.
Inventory Acquisition and Development
During the fiscal year ended September 30, 1998 the Registrant acquired a parcel
of undeveloped land for development of 96 affordable residential home sites
located in Las Lunas, New Mexico. The land purchase and development costs were
financed by a combination of the Registrant's working capital funds and bank
financing.
Financing of existing residential homesite inventories of the Registrant are
generally first position secured loans which are generally provided by local
banks with whom the Registrant has credit facilities, on such terms and
conditions as are customary in the geographical market in which the Registrant
does business. Subordinate second position, secured loans are generally provided
by combination of Registrant funds and outside third party participants. This
tier of subordinated debt is generally granted an "Equity Kicker" in the form of
additional preferential payments per residential lot sold, in addition to the
return of principal and interest. Interest, terms and conditions are customary
in the market in which the Registrant does business. The Registrant is almost
always requested by the first position lender, (bank) to guarantee the entire
debt obligations.
The Registrant has from time to time acquired residential building home sites by
utilizing its available cash, consequently, a portion of the Registrants
residential homesite building inventory is unencumbered.
From time to time, the Registrant enters into joint venture agreements to
acquire undeveloped parcels of land for development into homesites. In such
instances, the Registrant may become a 50% joint venturer and may in addition,
provide and/or arrange financing to the joint venture through its GAEC
subsidiary. At this time, the Registrant is not involved in any existing joint
ventures.
As of September 30, 1998, the Registrant owned or controlled through a
combination of unencumbered ownership, debt financing and purchase agreements,
over 275 developed or currently under development, home sites within the
Albuquerque, New Mexico metropolitan area. Inventory of home sites controlled by
the Registrant, are utilized by Charter and may also be available for sale to
other home builders and individuals.
Prudential Preferred Properties of New Mexico represents a number of independent
custom home builders in an exclusive marketing arrangement. These builders are
part of a "Builders Group" within the Prudential Preferred Properties client
base and may number from 15 to as many as 50 at any given time. Any of the
builders in the "Builders Group" may draw on the available building site
inventory controlled by the Registrant. In addition, any independent builder
within the "Builders Group" may secure residential construction loans from the
Registrant's GAEC lending subsidiary subject to credit approval and budget
availability.
Competition and Market Factors
Each of the Registrant's subsidiaries competes principally on the basis of
reputation in the community in which it serves. However, the Registrant competes
in a highly competitive environment typical of all real estate dependent
companies. All of the Registrant's subsidiaries compete with companies, nearly
all of which have greater financial resources than the Registrant. It is for
that reason that the Registrant continues to undertake to form strategic
alliances with other companies with greater
financial resources and expertise.
The Registrant believes that the host of services it currently offers will
appeal to small and medium size builders and developers. Since its Initial
Public Offering, Prudential Preferred Properties of New Mexico has increased the
number of independent custom builders in its "Builder Group". The ability of the
Registrant to expand its business has been due in part to the addition of new
capital from the public securities offering. The Registrant anticipates that it
will require additional new capital at some future date in order to continue its
ability to expand the segments of its business in which it is currently engaged.
The real estate industry, and the Registrant's business, is cyclical and is
affected by consumer confidence levels, prevailing economic conditions and
interest rates. Other factors effecting business include increases in
construction costs, increases in costs associated with home ownership such as
property taxes, changes in consumer preferences and demographic trends. The
Registrant believes that its strategy of vertical integration 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.
Employees
As of September 30, 1998, the Registrant, including its subsidiaries, had 127
full and part time salaried employees. They were employed as follows: corporate,
5 full-time: residential and commercial construction, 35 full-time and 3
part-time; and real estate brokerage, 57 full-time and 27 part-time. In
addition, real estate brokerage has approximately 600 sales associates who are
independent contractors. The construction segment of the Registrant normally
hires independent subcontractors to provide the skilled labor needed to
construct their projects.
ITEM 2: DESCRIPTION OF PROPERTIES
The Registrant leases, on a month to month basis, approximately 6,600 square
feet of office space at $4,100 per month for its executive and construction
offices. Mr. James A. Arias, the Registrant's President, is a part owner of the
building in which the executive offices are located. The Registrant's lease
arrangement is considered a below market lease as to terms and square foot cost
when compared to all other leases currently in effect within the building.
The Registrant leases space for its real estate brokerage offices, all located
within the Albuquerque, New Mexico and Phoenix, Arizona metropolitan areas.
Leases include space ranging from 1,200 square feet to 6,000 square feet at
monthly rental costs ranging from $1,200 per month to $7,200 per month. One
lease is with the Registrant's Executive Vice President and Chairman of
Prudential Preferred Properties, NM, Mr. Bill E. Hooten. Prior to entering into
the lease with Mr. Hooten, the Registrant acquired an independent determination
of fairness and reasonableness of the lease and its annual rental of $103,200.
The lease with Mr. Hooten expired on January 31, 1997, and has continued to be
in effect month to month. Lease terms and conditions have remained unchanged
throughout the fiscal year and are expected to remain unchanged. During the past
fiscal period, Prudential Preferred Properties of Arizona, has occupied
replacement office space for each of its brokerage offices as well as its
Arizona corporate office. Management believes that the new locations present a
more favorable business image in addition to being strategically located.
Prudential Preferred Properties of New Mexico announced earlier that it would
occupy on or about April 1, 1999, a new brokerage office location consisting of
approximately 37,000 square feet. The new location will replace four offices
consisting of approximately 22,500 combined square feet. Management believes
that the new location will yield additional operating efficiencies and provides
space to increase the independent real estate brokerage contractor base in
Albuquerque, New Mexico by approximately 60 to 70 additional agents. ( See
"Management's Discussion" regarding restructure and impairment charges
associated with this transaction. )
ITEM 3: LEGAL PROCEEDINGS
The Registrant is subject to certain legal claims from time to time and is
involved in litigation that has arisen in the ordinary course of its business.
It is the Registrant's opinion that it either has adequate legal defenses to
such claims or that any liability that might be incurred due to such claims will
not, in the aggregate, exceed the limits of the Registrant's insurance policies
or otherwise result in any material adverse effect on the Registrant's
operations or financial position.
On April 11, 1997, the City of Albuquerque instituted condemnation proceedings
related to a parcel of land upon which the Registrant has a joint venture
financing arrangement for development. This matter is more fully described in
the Registrants 10-QSB filing of June 30, 1997. There has been continuing
correspondence, verbally and written between the legal counsel for both parties
in an effort to settle the matter, and on October 22, 1998, the matter became
the subject of a trial. The Jury found for the joint venture and awarded
approximately $9,538,000 to the defendant, (Registrant's joint venture), which
award would result in additional payments to the joint venture of approximately
$1,633,000. ( At the time of the taking by the City, the City posted with the
Court, and the joint venture received, $7,905,000, the sum that the City deemed
fair compensation.), however, the City of Albuquerque immediately filed an
appeal of the jury verdict. On December 30, 1998, the Registrant entered into an
agreement with its joint venture partner in which the Registrant exchanged its
interest in the joint venture to its partner, in exchange for five and one-half
residential homesites valued at approximately $550,000. Management determined
that the exchange of its joint venture interest for readily saleable homesites,
was in the best interest of the Registrant after considering, risk, legal costs
of contesting an appeal and the present value of money.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Registrant's common stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol "RLCO". The following table sets forth from
October 1,1996 through September 30, 1998, the range of the high and low last
reported sale prices as reported by NASDAQ. The quotations shown represent
inter-dealer prices without adjustment for retail markups, markdowns or
commissions, and may not reflect actual transactions.
Stock Quotations:
High Low High Low
Fiscal 1998 Fiscal 1997
First Quarter 4 2.625 3 5/8 2
Second Quarter 3.25 2.25 3 1/8 2
Third Quarter 2.75 1.875 2 7/8 2 1/4
Fourth Quarter 2.75 1.375 4 2 1/4
On January 12, 1999, the last sale price for the common stock, as reported by
NASDAQ, was $1.625 per share. As of January 12, 1999, there were approximately
680 beneficial holders of the common stock.
The transfer Agent for the Registrant's Common Stock is American Stock Transfer
& Trust Registrant, 40 Wall Street, New York City, New York 10005, telephone:
(718) 921-8275.
The Registrant has not paid any dividends on its Common Stock since its initial
public offering in February, 1996 and expects that for the foreseeable future it
will follow a policy of retaining earnings in order to finance the continued
development of its business. Payment of dividends is within the discretion of
the Registrant's Board of Directors and will depend upon the earnings, capital
requirements and operating and financial condition of the Registrant, among
other factors.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Operation by Segment
Revenues of the Company are generated through the following segments: real
estate brokerage both residential and commercial, construction both residential
and commercial and 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 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 my 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 method of accounting.
The Company currently operates its business within the Albuquerque, New Mexico
and Phoenix, Arizona metropolitan areas. Since inception, management has planned
expanding the Company's businesses and business concepts to other geographical
areas, preferably within the southwest, that have similar demographics. Because
of the various businesses in which the Company is engaged, it has defined the
following business segments for purposes of accounting for revenue, costs and
expenses: Real Estate Brokerage Segment, Construction and Land Development
Segment and Financial Services Segment. These areas of the Company's business
are more fully discussed below.
Real Estate Brokerage Segment:
The real estate brokerage segment consists of Hooten/Stahl, Realtors,dba,
Prudential Preferred Properties, New Mexico, (acquired in 1995), a residential
new and resale Realtor located in Albuquerque, New Mexico; Mull Realty Company,
Inc., (acquired January 1, 1997), dba, Prudential Preferred Properties of
Arizona, Cliff Winn, Inc. Realtors, ( acquired February 1, 1998 by Mull Realty
Company, Inc.), a residential Realtor located in Scottsdale, Arizona which
currently operates as part of Prudential Preferrred Properties of Arizona, and
First Commercial Real Estate Services, Inc. a commercial real estate broker and
property manager located in Albuquerque, New Mexico ( acquired May 1, 1997). The
Company transferred ownership of the preceding companies to an inactive
subsidiary whose name was changed to Real Estate Brokerage Services, Inc. (REBS)
during 1997. This transfer did not affect operations of this segment; however,
operations for 1998 are not comparable to 1997 because 1998 includes eight
months of Cliff Winn, Inc. Realtors operations.
Registrant's total revenues from brokerage commissions and fees from
unaffiliated customers increased $7,496,399 to $21,983,344 in 1998, an increase
of 52% over 1997.
The Arizona companies realized an overall increase in commissions and fees to
unaffiliated customers of $7,292,000 to $12,409,000 an increase of 143%, (Cliff
Winn, Inc. provided commissions and fees of $4,362,000 for it's 8 months
operations in 1998). The Arizona companies, contributed $486,000 in operating
profits with commissions paid to agents and operating and administrative
expenses running 75% and 19% of commissions revenue, respectively. Lower
operating expenses in the Phoenix market where sales volumes continue to expand
and competition for agents (including semi-retired agents) and demand for
expensive operating services have not been as strong as in the Albuquerque area
have contributed to the performance variance between the two markets. The
Arizona company anticipates continued good earnings and is continuing to seek
opportunities to expand business operations in the Phoenix market.
The Albuquerque brokerage companies realized an overall increase in commissions
and fees to unaffiliated customers of $205,000 to $9,575,000, an increase of 2%
compared to 1997. This increase slightly trailed the general trend for the
Albuquerque market for the period. In addition, the Albuquerque companies paid
commissions to independent contractor agents, and incurred operating and
administrative expenses of 73% and 41% respectively of the 1998 overall
commission income; with each being an increase over the comparable 71% and 34%
ratios for Albuquerque in 1997. These cost increases were partly due to a
decrease of approximately $502,000 of residential commission income as compared
to 1997, increased competition for top agents and cost of services provided all
agents and customers, all in efforts to retain market share. The Albuquerque
companies realized an operating loss of ($1,329,000) for 1998 compared to an
operating loss of ($541,000 ) in 1998.
Market conditions in residential resale activity continues to be brisk in
Phoenix, and Albuquerque residential resale activity continued to experience
modest increases during the year, a trend which is expected to continue during
the coming year. Competition in Albuquerque continues strong, especially in
services rendered customers. Continuing mergers and consolidation of local
realtors has also apparently caused a drop in the total number of agents
remaining active in the local area, causing troublesome recruiting pressures.
Albuquerque management has attempted to implement changes to increase market
share, lower agent commission splits, while reducing the percentage and amount
of operating costs. Such efforts have to date been unsuccessful. Management
recently announced plans to close four residential branch offices and relocate
them by March 1, 1999, into a single, newly constructed, state of the art
facility, in an effort to entice new recruits and to make available additional
space to enable the Albuquerque residential sales brokerage operation to
increase its sales force by approximately 60 additional agents. Management
anticipates that such changes, if successful could significantly reduce the
operating loss from the Albuquerque residential brokerage activities for the
year ending in 1999 by increasing market share, increasing commission income and
reducing the percentage of cost of operations and customer services. As a result
of the facilities relocation, the Albuquerque residential brokerage operation
has incurred a restructure charge for the year ending September 30, 1998 of
$273,000. This charge is associated with lease abandonment liability and
expenses, which are based upon the discounted future obligations which are not
expected to be recovered through sublease revenues.
The Albuquerque commercial brokerage activity realized an operating loss of
($55,000. The recruitment of additional sales agents during the 1998 fiscal
period is expected to result in increased commission income for the coming year.
It was reported in Item 1 Description of Business that the Registrant expected
the commercial real estate brokerage activity to increase construction and
lending activities of the Registrant by cross marketing its customer base. The
Registrant's commercial construction activity continues to benefit from cross
marketing. Brokerage referrals have included, lease tenant improvements, light
new construction and general infrastructure construction.
Assets dedicated to the real estate brokerage segment increased $484,000 to
$3,920,000 in 1998 over 1997, primarily due to the February 1, 1998 acquisition
of an Arizona residential real estate brokerage company. Depreciation expense
increased from that addition and from capital expenditures in 1998 which were
almost exclusively at the Albuquerque residential real estate segment.
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) a residential home builder, and Amity, Inc. (Amity),
a company active in commercial construction and remodeling of both commercial
and residential properties. This segment also includes The Company's equity in
earnings of joint ventures where the Company or a wholly-owned subsidiary own a
50% non-management interest in land development activities which involve the
acquisition of raw land for development into residential home site lots which
may be sold to Charter or to other builders. The other builders generally have
their homes marketed by Prudential Preferred Properties NM, and may have
construction financing through programs offered by the Registrant's financial
services group.
Combined operating revenues for this segment of the Registrant's business were,
$13,120,000. Operating costs were $13,499,000 which includes a fourth quarter
cost basis impairment reserve of $281,000. This segment sustained a year ended
September 30, 1998, operating loss of ($379,000).
Revenues from residential construction by Charter decreased $1,167,000 to
$10,124,000 in 1998, a decrease of 10% over 1997. Operating profit for Charter
declined $260,000 from a loss of ($98,000) in 1997 to a loss of ($358,000) for
1998, a decline of 265% from 1997. Costs of construction for Charter decreased
$954,000 to $9,643,000 in 1998, and operating costs increased $48,000 to
$839,000 in 1998. Costs of construction and operating costs were 95% and 8% of
construction revenues in 1998 compared to 94% and 7% respectively for 1997. A
decline in first and second quarter in new home sales for Charter, and the
addition of a fourth quarter impairment write off of $270,000, contributed to
significant drop in operating profit for Charter. Completed model and
speculative (Spec) homes required discount prices to sell when compared to
similar sized houses offered by other builders. The costs to maintain and
advertise these models and spec homes added to operating costs in relation to
revenues. Charter follows the completed contract method for residential home
building and sales, with inventories valued at cost, not to exceed market value.
A year end analysis of Charter's inventory of finished homes and building lot
inventory, suggested that the cost basis of some of its inventory was in excess
of estimated market value, and was therefore subject to impairment adjustments
as referred to above. Charter has developed a new line of value engineered homes
in various price ranges, which it is currently marketing. Analysis of recent
sales of this new product line, indicate improved market appeal and improved
margin of profit.
Charter sold 52 new homes at an average sales price of approximately $195,000
and had a backlog of 51 homes under contract at September 30, 1998, with an
indicated revenue of approximately $$9,000,000. At September 30, 1998, Charter
had over 275 lots available for new home construction, either owned directly by
Charter, or by affiliated land development operations or under contract for
purchase. The lots may be used by Charter or sold to other builders as market
conditions warrant.
Revenues from commercial construction and remodeling decreased $26,000 to
$1,724,000 in 1998, a decrease of 1% from 1997. Operating profits decreased from
$165,000 in 1997 to an operating loss of $49,000 in 1998 with a cost of
construction being 88% and operating expenses 15% of revenues. As discussed
earlier, the Registrant's commercial real estate brokerage company gives
referrals to Amity for commercial construction jobs. The expansion of Amity's
offices and the addition of personnel, have contributed to increased operating
costs, however, this is expected to increase Amity's revenue and profitability
in the coming year. Amity has a backlog under contract at September 30, 1998
with estimated revenue of $1,500,000.
Earnings from equity in land development joint ventures decreased $295,000 to
$163,000 in 1998, a decrease of 64% over 1997. This decrease is primarily the
result of the Registrant acquiring its other partner's interests in two joint
ventures which are now accounted for as wholly-owned subsidiaries and the
Registrant is not currently a joint venture partner in any development project
with significant inventory. Most of the building lot inventory held by the
Registrant is wholly owned, therefore, gains on sale of building lots to
affiliates are not recognized until sales are closed. As the backlog of homes
are closed, gains on sale of Registrant owned building lots will be recognized.
At September 30, 1998, the deferred gain on intercompany sales was $102,000.
Earnings from equity in land flowed primarily from the sale of the Registrant's
inventory.
During 1998, the Registrant acquired an undeveloped land parcel and completed
development of 96 home building lots in Las Lunas, New Mexico, a bedroom
community, approximately 15 miles from Albuquerque. This development is not
subject to a joint venture agreement, and all building lots are currently
reserved for Charter. Charter is offering a complete line of entry level housing
ranging in price from $89,900 to $117,900. Management believes that the sale of
this housing project will be substantially completed by September 30, 2000.
Subdivision costs are budgeted at approximately $1,700,000 of which the
Registrant has arranged bank borrowing of approximately $1,150,000.
Assets identified in the residential construction activity increased $2,836,000
to $17,693 in 1998, an increase of 19% over 1997. The primary increase was
approximately $2,946,000 of land held by the land development division of the
Registrant rather than being held by a joint venture with only the Registrant's
50% of net equity being on the balance sheet.
Financial Services Segment:
The financial services segment consists of the Registrant, its subsidiaries,
Great American Equity Corporation (GAEC) and PHS, lnc. Operations include equity
earnings of various finance entities.
Equity earnings from investees consisted principally of (1) 50% interest in PHS
Mortgage partnership, which share was $317,000 in 1998 compared to $249,000 in
1997, and (2) 12.0% interest in MI Acquisition Corporation, which share was
$13,000, in 1998 compared to $30,000 in 1997.
First American Title Company of New Mexico, a publicly held corporation, which
the Registrant previously owned 20% equity was sold for $500,000 cash in
November, 1997 resulting in a gain of $334,000.
PHS, Inc., (PHS) owns a 49.99% interest in PHS Mortgage Company, (the
"Partnership") a New Mexico general partnership managed by general partner CTX
Mortgage Ventures Corporation (CTX Ventures). The Partnership was organized in
April, 1996, for the purpose of originating and selling mortgage loans and to be
involved in other mortgage banking activities related thereto. Partnership
revenues consist of servicing rights sold, origination and other fees, gain on
sale of mortgages and interest. Operations presently cover only the Albuquerque,
New Mexico and greater Phoenix, Arizona Prudential Preferred Properties
residential brokerage offices, with real estate agents therein providing leads
and/or referrals for Partnership services. Management is continuing to initiate
practices to increase participation by the independent contractor agents in this
activity.
MI Acquisition Corporation was organized to acquire all the outstanding common
stock of Miller & Schroeder, Inc. , a financial services firm which derives a
majority of its revenue from the underwriting, sale and trading of securities by
its principal operating subsidiary, Miller & Schroeder Financial, Inc. At
September 30,1998, the Registrant's percentage interest in shares outstanding
was 11%.
Great American Equity Corporation (GAEC) provides financing for the acquisition
and development of residential home subdivision and interim construction loans
to certain clients of Prudential Preferred Properties NM. GAEC loan fees
decreased $357,000 to $172,000 in 1998, a decrease of almost 67% over 1997.
Increased capital requirements to support the Registrant's residential brokerage
and home building activities, restricted the capital availability required to
maintain the GAEC lending program, therefore revenue and operating profit
experienced a sharp decline.
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 loan for the acquisition and development of residential
subdivisions. Interest and other income decreased $584,000 to $1,176,000 in
1998, a decrease of 33% over 1997.
Realization of Deferred Tax Assets:
At September 30, 1998, the Registrant's net deferred tax assets totaled $301,000
and related primarily to net operating loss carryforwards. Realization of net
operating carryforwards is dependent on generating sufficient future taxable
income. The Registrant believes that its operating strategy to continue to make
acquisitions of related businesses, consolidate and streamline the
administrative functions of its New Mexico residential brokerage, while
increasing its agent sales force will generate future taxable income. Although
realization of net deferred tax assets is not assured, the Registrant believes
these actions will generate sufficient future taxable income during the
available carryforward period, and believes it is more likely than not that the
recorded net deferred tax assets will be realized.
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 PCs 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
additional costs due to overtime, postage, mailing costs, 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.
ITEM 7: FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Shareholders
Realco, Inc.
We have audited the accompanying consolidated balance sheets of Realco, Inc. and
Subsidiaries, as of September 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Realco, Inc. and
Subsidiaries, as of September 30, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for the years then ended in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
December 18, 1998
Realco, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30,
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents ..................... $ 3,788,086 $ 4,242,305
Restricted cash ............................... 170,240 402,979
Securities available for sale ................. 217,968 199,291
Accounts and notes receivable, net (note E) ... 2,277,771 2,353,852
Inventories (note B) .......................... 16,760,111 13,578,721
Costs and estimated earnings in excess of
billings on uncompleted contracts (note C) .. -- 228,272
Property and equipment, net (note F) .......... 928,226 928,416
Investments - equity method (note D) .......... 1,806,502 1,980,163
Deferred income taxes (note H) ................ 301,376 --
Other assets .................................. 2,117,770 2,440,306
------------ ------------
$ 28,368,050 $ 26,354,305
============ ============
LIABILITIES
Notes payable (note G) ........................ $ 6,532,598 $ 6,949,493
Lease obligations (note I) .................... 77,422 104,800
Construction advances and notes payable,
collateralized by inventories (note G) ...... 9,032,641 5,139,284
Billings in excess of costs and estimated
earnings on uncompleted contracts (note C) .. -- 100,638
Accounts payable and accrued liabilities ...... 2,583,933 2,260,896
Deferred income taxes (note H) ................ -- 69,339
Escrow funds held for others .................. 170,240 402,979
------------ ------------
Total liabilities ........................ 18,396,834 15,027,429
STOCKHOLDERS' EQUITY (notes M and N)
Preferred stock - authorized, 500,000 shares
Series A - issued and outstanding,
82,569 shares in 1998 and 1997,
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) ................... (683,930) 495,585
Unrealized gains (losses) on
available-for-sale securities, net of taxes . (26,809) 18,749
------------ ------------
10,195,192 11,420,265
Less 78,000 and 32,000 shares common stock
held in treasury in 1998 and 1997,
respectively - at cost .................... 223,976 93,389
------------ ------------
9,971,216 11,326,876
------------ ------------
$ 28,368,050 $ 26,354,305
============ ============
The accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
1998 1997
------------ ------------
REVENUES
Brokerage commissions and fees .............. $ 21,983,344 $ 14,486,945
Construction sales .......................... 11,848,352 13,041,022
Sales of developed lots ..................... 1,271,973 1,153,500
Equity in net earnings of
investees (note D) ........................ 506,370 789,313
Interest and other, net ..................... 785,145 1,080,008
------------ ------------
36,395,184 30,550,788
COSTS AND EXPENSES
Cost of brokerage revenue ................... 16,254,116 10,275,373
Cost of construction sales .................. 10,953,182 11,607,850
Cost of developed lots sold ................. 1,344,661 1,073,467
Selling, general, administrative,
and other ................................. 8,125,902 5,879,596
Depreciation and amortization ............... 521,909 501,752
Interest .................................... 711,286 683,753
------------ ------------
37,911,056 30,021,791
------------ ------------
Earnings (loss) before
income taxes .................. (1,515,872) 528,997
INCOME TAX EXPENSE (BENEFIT) (note H) ......... (336,357) 199,000
------------ ------------
NET EARNINGS (LOSS) .............. (1,179,515) 329,997
PREFERRED STOCK DIVIDEND REQUIREMENT .......... 120,575 120,575
------------ ------------
NET EARNINGS (LOSS)
APPLICABLE TO COMMON SHARES .... $ (1,300,090) $ 209,422
============ ============
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Net earnings (loss) per common
share before preferred stock
dividend requirement .................... $ (.42) $ .12
============ ============
Net earnings (loss) per common
share after preferred stock
dividend requirement .................... $ (.47) $ .07
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .... 2,777,452 2,829,837
============ ============
The accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Unrealized
gains (losses)
Series A Series B Series D on available
preferred preferred preferred Retained -for-sale Total
stock 6% stock 3% stock 3% Common earnings securities Treasury stockholders'
cumulative cumulative cumulative stock (deficit) net of tax stock equity
-------- ---------- -------- ---------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1,
1996 $825,690 $2,178,590 $242,970 $7,712,461 $ 165,588 $ 7,358 $ -- $11,132,657
Retirement of Series B
preferred stock .... -- (50,000) -- -- -- -- -- (50,000)
Retirement of Series D
preferred stock .... -- -- (3,780) -- -- -- -- (3,780)
Change in unrealized
gains (losses) on
available-for-sale
securities, net of
taxes of $7,757 .... -- -- -- -- -- 11,391 -- 11,391
Purchase of common
stock for treasury . -- -- -- -- -- -- (93,389) (93,389)
Net earnings ......... -- -- -- -- 329,997 -- -- 329,997
-------- ---------- -------- ---------- ----------- -------- --------- -----------
Balance at September
30, 1997 ........... 825,690 2,128,590 239,190 7,712,461 495,585 18,749 (93,389) 11,326,876
Change in unrealized
gains (losses) on
available-for-sale
securities, net of
tax benefit of
$30,370 -- -- -- -- -- (45,558) -- (45,558)
Purchase of common
stock for treasury . -- -- -- -- -- -- (130,587) (130,587)
Net loss ............. -- -- -- -- (1,179,515) -- -- (1,179,515)
-------- ---------- -------- ---------- ----------- -------- --------- -----------
Balance at September
30, 1998 ........... $825,690 $2,128,590 $239,190 $7,712,461 $ (683,930) $(26,809) $(223,976) $ 9,971,216
======== ========== ======== ========== =========== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) ......................................... $(1,179,515) $ 329,997
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization ......................... 521,909 501,752
Accretion of discount on notes payable ................ 55,235 55,235
Net earnings in excess of distributions from investees (7,246) (657,505)
Gain on sale of equity method investment .............. (333,585) --
Gain on sale of securities available for sale ......... (57,367) (47,094)
Loss on sale of property and equipment ................ 40,714 --
Provision for deferred income taxes ................... (328,068) 167,000
Changes in operating assets and liabilities
(net of businesses acquired)
Decrease in restricted cash ......................... 232,739 85,590
Decrease (increase) in accounts receivable .......... 241,570 (384,293)
Decrease (increase) in inventories .................. (3,181,390) 322,705
Decrease in net billings related to costs and
estimated earnings on uncompleted contracts ....... 127,634 179,799
(Increase) decrease in other assets ................. 239,746 (273,632)
Increase in accounts payable and accrued liabilities 292,132 339,556
Decrease in escrow funds held for others ............ (232,739) (85,590)
----------- -----------
Net cash provided by (used in) operating activities (3,568,231) 533,520
Cash flows from investing activities
Purchases of property and equipment ......................... (316,613) (283,542)
Proceeds from sale of property and equipment ................ 1,905 --
Payments for businesses acquired ............................ (426,250) (1,424,144)
Advances on notes receivable ................................ (772,836) (718,906)
Receipts on notes receivable ................................ 655,786 1,465,089
Proceeds from sale of securities available for sale ......... 466,864 195,490
Purchase of securities available for sale ................... (503,561) (90,413)
Purchase of equity method investments ....................... -- (1,045,900)
Proceeds from sale of equity method investment .............. 500,000 --
Cash acquired in business acquisitions ...................... 292,453 251,913
----------- -----------
Net cash used in investing activities ............. (102,252) (1,650,413)
Cash flows from financing activities
Construction advances and notes payable, net ................ 3,954,357 587,424
Proceeds from borrowings under revolving and long-term debt . -- 500,000
Payments on revolving, capital lease, and long-term debt .... (607,506) (115,717)
Purchase of treasury stock .................................. (130,587) (93,389)
----------- -----------
Net cash provided by financing activities ......... 3,216,264 878,318
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......... (454,219) (238,575)
Cash and cash equivalents at beginning of year ................ 4,242,305 4,480,880
----------- -----------
Cash and cash equivalents at end of year ...................... $ 3,788,086 $ 4,242,305
=========== ===========
Cash paid (received) during the year for:
- -----------------------------------------
Income taxes $ (184,000) $ 88,000
Interest 711,000 684,000
Noncash financing and investing activities:
- -------------------------------------------
In 1998, the Company acquired all the common stock of
Cliff Winn, Inc. Realtors for $426,250. In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired, including cash of $292,453 $ 457,155
Cash paid (426,250)
-----------
Liabilities assumed $ 30,905
===========
In 1998, a capital lease obligation of $46,998 was
incurred when the Company entered into a lease for
office equipment.
In 1997, the Company acquired all the common stock of
Mull Realty Company for $1,159,144. In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired, including cash of $205,912 $ 1,282,077
Cash paid (359,144)
Issuance of note payable (800,000)
-----------
Liabilities assumed $ 122,933
===========
In 1997, the Company purchased the net assets and business
of First Commercial Real Estate Services, Inc. for $265,000.
In conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $ 268,500
Cash paid (265,000)
-----------
Liabilities assumed $ 3,500
===========
In 1997, the Company purchased the remaining 50% partnership
interest in Village Joint Venture and Stonehenge at High
Resort Joint Venture for $800,000. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired, including cash of $46,002 $ 3,697,038
Cash paid (800,000)
Previous equity basis investment (618,938)
-----------
Liabilities assumed $ 2,278,100
===========
</TABLE>
In 1997, the Company exchanged a $50,000 note receivable for 5,000 shares of
Series B preferred stock and $3,780 of furniture and fixtures for 378 shares of
Series D preferred stock.
The accompanying notes are an integral part of these statements.
Realco, Inc. and Subsidaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Realco, Inc., a New Mexico corporation, and Subsidiaries (the "Company")
has operations which include real estate brokerage sales through a franchise
from Prudential Real Estate Affiliates, Inc.; single-family home construction;
land development; and, to a lesser extent, commercial construction and financial
services. Its operations and customers are primarily in the vicinity of
Albuquerque, New Mexico except for certain real estate brokerage operations and
customers in Phoenix, Arizona.
The Company's accounting policies reflect industry practices and conform to
generally accepted accounting principles. The more significant policies are
briefly discussed below.
1. Principles of Consolidation
The consolidated financial statements include the accounts of Realco, Inc. and
its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
2. Revenue Recognition and Provision for Warranty Claims
The Company constructs single-family homes of short building duration for which
minimal deposits are generally required from the buyer. Revenue is recognized
upon closing. Estimated warranty costs are provided at the time of sale.
Revenues from significant commercial construction contracts are recognized on
the percentage-of-completion method; accordingly, income is recognized in the
ratio that costs incurred bear to estimated total costs. The aggregate of costs
incurred and income recognized on uncompleted contracts in excess of related
billings is shown as an asset, and the aggregate billings on uncompleted
contracts in excess of related costs incurred and income recognized is shown as
a liability. Certain short-term smaller commercial construction contracts are
accounted for on the completed-contract method, which does not vary
significantly from the percentage-of-completion basis of accounting. Contract
costs include all direct material, subcontractor, supplies, and labor costs and
those indirect costs relating to contract performance. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability,
and final contract settlements may result in revisions to cost and income and
are recognized in the period in which the revisions are determined.
Brokerage commissions and fees earned from real estate brokerage services are
recognized at the time of closing on the underlying real estate sales contracts.
3. Cash, Cash Equivalents, and Restricted Cash
The Company considers money market accounts and all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. The Company maintains its cash and cash equivalents in accounts
which may not be federally insured. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk.
Included in cash and cash equivalents at September 30, 1998 is approximately
$920,000 ($1,513,000 for 1997) in a single money market fund.
In the ordinary course of operations, the Company collects and holds in escrow
funds associated with real estate contract deposits, construction sales contract
deposits, and other escrowed funds. These balances are reflected as restricted
cash with a corresponding liability.
4. Accounts and Notes Receivable
The Company reviews accounts and notes receivable for collectibility and
provides reserves on specific accounts based upon whether the Company believes
that the collection of a specific account is questionable. The Company provides
credit to its customers under ordinary trade terms. Receivables for real estate
contracts are generally collateralized by the real estate.
5. Inventories
Inventories are carried at the lower of cost or estimated net realizable value
and include all acquisition costs, direct labor and benefits, project interest,
materials unique to or installed in the project, subcontractor cost, and a
proportional overhead allocation charge.
6. Property and Equipment
Depreciation is provided in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives of three to ten years
using straight-line and accelerated methods.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by these assets are less than the assets' carrying amount.
Assets acquired under capital leases are recorded at the lower of fair market
value or the present value of future minimum lease payments. These leases are
amortized on the straight-line method over the lesser of the primary lease term
or estimated economic lives.
7. Income Taxes
Deferred income taxes are provided on temporary differences between the tax
basis of an asset or liability and its reported amount in the consolidated
financial statements that will result in taxable or deductible amounts in future
years. Deferred income tax assets or liabilities are determined by applying the
presently enacted tax rates and laws.
The Company and its subsidiaries file consolidated income tax returns.
8. Earnings (Loss) Per Common Share
Earnings (loss) per common share is calculated based on the weighted average
number of shares outstanding during the year pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings per Share, which was adopted
during the year ended September 30, 1998. Because the conversion prices for
convertible debentures, warrants, and options are greater than the average
market price for the periods presented, the assumed conversion of such
securities are antidilutive (see Notes M and N). The adoption of this standard
did not require restatement of 1997 net earnings per common share.
9. Investments
Investments in affiliated companies and joint ventures owned 20% to 50% or which
the Company is able to exercise significant influence over operations are
accounted for on the equity method. Accordingly, the consolidated statements of
operations include the Company's share of the affiliated entities' net earnings.
Available-for-sale securities are carried at fair value with the unrealized
gains and losses excluded from earnings and reported in a separate component of
stockholders' equity, net of tax effects.
10. Intangible Assets
Cost in excess of net assets of businesses acquired with a net value of
approximately $1,276,000 and $1,278,000 at September 30, 1998 and 1997,
respectively, is included in other assets and is being amortized using the
straight-line method over fifteen or twenty years.
The Company assesses the recoverability of cost in excess of net assets of
businesses acquired by determining whether the amortization of the asset balance
over its remaining life can be recovered through the undiscounted future
operating cash flows of the acquired operation. The amount of the impairment, if
any, is measured based on projected discounted future operating cash flows. The
Company believes that no impairment has occurred and that no reduction in the
estimated useful life is warranted.
11. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures; accordingly, actual results
could differ from those estimates.
12. Stock Options
The Company applies APB Opinion 25 and related interpretations in accounting for
its stock options. Accordingly, compensation expense is only recognized for
grants of options which include an exercise price less than the market price of
the stock at the date of the grant.
13. Advertising Costs
The Company expenses the cost of advertising the first time advertising takes
place. Advertising expense for 1998 and 1997 was approximately $990,000 and
$893,000, respectively.
14. Recently Issued Accounting Pronouncement
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information, which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that these enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Company will adopt this
pronouncement in 1999; the effect of adoption is not expected to have a material
impact on the consolidated financial statements of the Company.
NOTE B - INVENTORIES
During the years ended September 30, 1998 and 1997, the Company incurred and
capitalized approximately $285,000 and $303,000, respectively, of interest
costs. Capitalized interest costs charged to cost of construction sales were
approximately $333,000 and $343,000 for the years ended September 30, 1998 and
1997, respectively.
Inventories consist of the following as of September 30:
1998 1997
----------- -----------
Land and improvements under development ........ $10,884,705 $ 9,350,468
Houses in progress ............................. 4,878,185 3,249,361
Model homes .................................... 997,221 978,892
----------- -----------
$16,760,111 $13,578,721
=========== ===========
Houses in progress include homes under contract of approximately $3,056,000 and
$1,585,000 at September 30, 1998 and 1997, respectively.
NOTE C - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of significant commercial construction contracts
accounted for on the percentage-of-completion method as of September 30, 1997.
There were no contracts accounted for on the percentage-of-completion method as
of September 30, 1998.
Costs incurred on uncompleted contracts .................... $384,736
Estimated earnings ......................................... 29,868
--------
414,604
Less billings to date .................................... 286,970
--------
$127,634
========
Included in the accompanying consolidated balance sheets under
the following captions
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................. $ 228,272
Billings in excess of costs and estimated earnings on
uncompleted contracts .................................. (100,638)
---------
$ 127,634
=========
NOTE D - INVESTMENTS
The following is a summary of investments carried on the equity method as of
September 30:
1998 1997
---------- ----------
First American Title Company of New Mexico,
20% stockholder interest ..................... $ -- $ 166,415
MI Acquisition Corporation, 11% stockholder
interest ..................................... 1,043,454 1,030,370
PHS Mortgage, 50% stockholder interest ......... 218,518 261,915
Success Venture ................................ 391,794 420,627
Vinyards Joint Venture ......................... 6,290 4,952
Other .......................................... 146,446 95,884
---------- ----------
$1,806,502 $1,980,163
========== ==========
In November 1997, the Company sold its 20% stockholder interest in First
American Title Company of New Mexico for $500,000, resulting in a gain of
$333,585.
The Company participates in land development projects under separate joint
venture agreements. The Company's liability is joint and several for such joint
ventures and its 50% share in the operations is reported on the equity method in
the accompanying consolidated financial statements. Effective July 1, 1997, the
Company purchased the other 50% interest in Village Joint Venture and Stonehenge
at High Resort Joint Venture for a cash payment of $800,000. This action
terminated the joint ventures, and the assets, liabilities, and subsequent
results of operations are included in the accompanying consolidated financial
statements.
Summarized financial information of certain investments carried on the equity
method is as follows:
As of and for the year ended September 30, 1998
-----------------------------------------------
MI
Acquisition PHS Joint
Corporation Mortgage Ventures
----------- ----------- -----------
Cash ................... $ 1,733,533 $ 359,061 $ 308,658
Other assets ........... 34,385,535 543,324 716,102
----------- ----------- -----------
$36,119,068 $ 902,385 $ 1,024,760
=========== =========== ===========
Liabilities ............ $26,843,919 $ 503,113 $ 228,593
Equity ................. 9,275,149 399,272 796,167
----------- ----------- -----------
$36,119,068 $ 902,385 $ 1,024,760
=========== =========== ===========
Revenue earned ......... $31,779,000 $ 1,214,015 $ 892,731
=========== =========== ===========
Net earnings ........... $ 907,547 $ 634,714 $ 290,069
=========== =========== ===========
As of and for the year ended September 30, 1997
-----------------------------------------------
First American MI
Title Company Acquisition PHS Joint
of New Mexico Corporation Mortgage Ventures
----------- ----------- ----------- -----------
Cash ............. $ 765,438 $ 2,145,578 $ 588,166 $ 218,319
Other assets ..... 9,294,676 30,991,355 629,000 1,549,920
----------- ----------- ----------- -----------
$10,060,114 $33,136,933 $ 1,217,166 $ 1,768,239
=========== =========== =========== ===========
Liabilities ...... $ 9,228,041 $25,921,778 $ 688,714 $ 917,081
Equity ........... 832,073 7,215,155 528,452 851,158
----------- ----------- ----------- -----------
$10,060,114 $33,136,933 $ 1,217,166 $ 1,768,239
=========== =========== =========== ===========
Revenue earned ... $ 3,920,670 $ 5,177,778 $ 918,612 $12,433,511
=========== =========== =========== ===========
Net earnings ..... $ 234,507 $ 236,159 $ 498,444 $ 866,073
=========== =========== =========== ===========
NOTE E - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable include the following at September 30:
1998 1997
---------- ----------
Residential construction advances to
various builders subordinate to the
interest of banks under participation
agreements; collateralized by certain real
estate and homes under construction,
interest due monthly at the banks' prime
rate plus 1%, principal due as homes are
sold, up to a nine-month term with
three-month renewals considered .................. $ 936,265 $ 778,743
Notes receivable from various real estate
agents; collateralized by computer equipment,
payable in monthly installments including
interest at 10%, with maturity dates through
November 2000 .................................... 25,738 126,338
Note receivable; collateralized by real
estate, interest due monthly at 9%, principal
payable as lots are sold or upon demand .......... 118,000 118,000
Brokerage commissions and fees receivable ........ 715,234 554,611
Construction sales receivable .................... 151,585 416,872
Other advances and receivables ................... 355,993 435,034
---------- ----------
2,302,815 2,429,598
Less allowance for doubtful accounts ........... 25,044 75,746
---------- ----------
$2,277,771 $2,353,852
========== ==========
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
1998 1997
---------- ----------
Office equipment, furniture, and fixtures .......... $1,719,010 $1,423,922
Leasehold improvements ............................. 150,348 159,317
Automobiles and equipment .......................... 123,025 113,208
---------- ----------
1,992,383 1,696,447
Less accumulated depreciation and amortization ... 1,064,157 768,031
---------- ----------
$ 928,226 $ 928,416
========== ==========
NOTE G - DEBT
Debt consisted of the following at September 30:
1998 1997
----------- -----------
Subordinated sinking fund notes, $5,750,000
face amount, 9.5% interest payable annually,
principal payable at various dates
through December 2003 (less $170,107 and
$225,342 unamortized discount at September
30, 1998 and 1997, respectively, based on
imputed interest rate of 10.5%) (A) ........... $ 5,579,893 $ 5,524,658
Construction and development advances;
collateralized by inventories (B) ............... 4,938,718 1,798,584
Notes payable; collateralized by inventories (C) 4,154,923 3,340,700
Note payable to Norwest Bank; collateralized by
equity investee common stock owned by the
Company, due in semiannual installments of
$35,700 plus interest at 1% over the bank's
prime rate, through July 2004 ................... 428,600 500,000
Noninterest-bearing note payable to selling
shareholder of Mull Realty Company, Inc.,
collateralized by the common stock of a Company
subsidiary, due in annual installments based
upon a factor of earnings with all outstanding
principal due in April 2001 ..................... 361,527 800,000
Revolving line of credit with Norwest Bank,
interest payable monthly at 1.5% over the bank's
prime rate, principal payable June 1999 ......... 100,000 100,000
Other notes payable ............................. 1,578 24,835
----------- -----------
$15,565,239 $12,088,777
=========== ===========
(A) Subordinated sinking fund notes are subject to various covenants, the
most restrictive of which include minimum net worth requirements,
limitations on dividends, and limitations on debt.
(B) Construction and development advances collateralized by inventories
include $1,250,113 ($523,350 at September 30, 1997) advanced under
various interim construction lines of credit which total $1,600,000.
Each project under these lines of credit requires a separate
construction loan bearing interest at the bank's prime rate plus 1%
(9.5% at September 30, 1998 and 1997). Construction and development
advances also include $3,327,033 ($1,158,424 at September 30, 1997)
advanced under other lending guidelines. Each home to be built under
these lending guidelines requires a separate construction loan at the
bank's prime rate plus .5% to 1.5% (prime rate was 8.5% at September 30,
1998 and 1997). Additional construction advances collateralized by
inventories of $361,572 ($116,810 at September 30, 1997) consist
primarily of buyer-financed construction loans which are payable upon
closing.
(C) Notes payable collateralized by inventories include amounts outstanding
on loan agreements expiring at various dates through April 2000, with
variable interest rates at the banks' prime rates plus .5% to 1.5%
(prime rate was 8.5% at September 30, 1998 and 1997) and fixed interest
rates of 9% or 10%, with principal payments due as properties are sold.
Aggregate future maturities of debt are as follows at September 30, 1998:
Year ending September 30
1999 $ 9,067,019
2000 1,871,000
2001 1,232,927
2002 871,400
2003 871,400
Thereafter 1,821,600
-----------
15,735,346
Less amount representing discount on debt 170,107
-----------
$15,565,239
===========
NOTE H - INCOME TAXES
The provision for income taxes consists of the following for the years ended
September 30:
1998 1997
--------- ---------
Current ....................... $ (8,289) $ 32,000
Deferred ...................... (328,068) 167,000
--------- ---------
$(336,357) $ 199,000
========= =========
The Company's effective income tax rate on continuing operations differed from
the federal statutory rate of 34% as follows:
1998 1997
--------- ---------
Income taxes at federal statutory rate ....... $(515,396) $ 179,859
Change in valuation allowance ................ 270,859 (15,966)
Nondeductible expenses ....................... 37,628 30,884
State income taxes at statutory rate ......... (90,952) --
Dividend exclusion ........................... -- 1,665
Adjustment of estimated income tax
liability of prior year .................... (48,831) --
Other ........................................ 10,335 2,558
--------- ---------
Total tax expense ................ $(336,357) $ 199,000
========= =========
Components of deferred taxes are as follows
at September 30:
Assets
Inventories ................................ $ 128,160 $ --
Accrued liabilities ........................ 146,956 59,434
Property and equipment ..................... 59,446 49,943
Investments ................................ 123,410 89,892
Tax loss carryforward ...................... 248,720 13,888
Valuation allowance ........................ (295,319) (24,460)
--------- ---------
$ 411,373 $ 188,697
========= =========
Liabilities
Investments ................................ $ 109,997 $ 256,943
Other ...................................... -- 1,093
--------- ---------
$ 109,997 $ 258,036
========= =========
The valuation allowance increased $270,859 for the year ended September 30, 1998
and decreased $15,966 for the year ended September 30, 1997.
A valuation allowance for deferred tax assets is required when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of this deferred tax asset depends on the
Company's ability to generate sufficient taxable income in the future.
Management believes it is more likely than not that a portion of the deferred
tax asset will be realized by future operating results. If the Company is unable
to generate sufficient taxable income in the future through operating results or
tax-planning opportunities, an additional valuation allowance will be required
through a charge to expense.
At September 30, 1998, the Company has net operating loss carryforwards for tax
purposes of approximately $610,000 which will expire in 2013.
NOTE I - LEASES
The Company leases furniture and equipment under long-term leases with ownership
of the furniture and equipment transferred to the Company at the termination of
the leases. Property and equipment include leased furniture and equipment with a
cost of approximately $360,000 and $313,000 and accumulated depreciation of
approximately $237,000 and $222,000 at September 30, 1998 and 1997,
respectively.
Capital lease terms range from three to five years and provide for payments as
follows:
Year ending September 30
1999 $ 46,778
2000 11,578
2001 11,578
2002 11,578
2003 6,560
---------
Total minimum lease payments 88,072
Amount representing interest 10,650
---------
Present value of net minimum lease payments $ 77,422
=========
The Company leases certain office facilities and equipment used in its
operations under operating leases expiring at various dates through 2004 and
provide for payments as follows:
Year ending September 30
1999 $ 899,000
2000 855,000
2001 687,000
2002 644,000
2003 437,000
Thereafter 130,000
----------
$3,652,000
==========
Two facilities are subleased under leases which expire in 2000. Total future
minimum sublease rentals amount to $89,000 at September 30, 1998.
Rental expense for all operating leases for the years ended September 30 is as
follows:
1998 1997
--------- ---------
Minimum rentals ..................... $ 989,000 $ 601,000
Sublease rentals .................... (61,000) --
--------- ---------
$ 928,000 $ 601,000
========= =========
Certain of these leases relating to rental expense of approximately $117,000 and
$127,000 for the years ended September 30, 1998 and 1997, respectively, are with
related parties.
NOTE J - BUSINESS COMBINATIONS
The Company acquired Cliff Winn, Inc. Realtors ("Winn Realtors"), a real estate
broker, effective February 1, 1998. The acquisition included a cash payment of
approximately $426,000 and future contingent payments of up to $962,500. The
contingent payments made, if any, are based on future earnings levels and will
result in additional costs in excess of net assets acquired to be amortized over
the remaining life of the asset.
The Company acquired Mull Realty Company, Inc. ("Mull Realty"), a real estate
broker, effective January 1, 1997. The acquisition included a cash payment of
approximately $359,000, the issuance of a noninterest-bearing note payable for
$800,000, and future contingent payments of up to $1,175,000. As installments on
this noninterest-bearing note payable are based upon a factor of earnings, the
terms are not fixed and no discount on debt is readily determinable. The
contingent payments made, if any, are based on future earnings levels and will
result in additional costs in excess of the net assets acquired to be amortized
over the remaining life of the asset.
Additionally, the Company acquired First Commercial Real Estate Services, Inc.
("First Commercial"), a commercial real estate broker, effective May 1, 1997,
for a cash payment of $265,000.
These business combinations have been accounted for using the purchase method of
accounting and the accompanying consolidated financial statements include the
operations of these real estate brokers subsequent to the date of acquisition.
Costs in excess of the net assets acquired were approximately $1,049,000.
The following summarized pro forma unaudited information assumes the
acquisitions of Winn Realtors, Mull Realty, and First Commercial had occurred on
October 1, 1996:
Year ended September 30
-----------------------
1998 1997
------------ -----------
Revenues $ 38,471,000 $37,232,000
============ ===========
Net loss $ (1,104,000) $ (2,505)
============ ===========
Loss per common share $ (.44) $ (.04)
============ ===========
NOTE K - SEGMENT INFORMATION
The Company operates in the following segments: residential construction, real
estate broker, commercial construction, and financial services. Information
concerning the Company's business segments as of and for the years ended
September 30 is as follows:
1998 1997
------------ ------------
Revenues
Residential construction ............... $ 10,124,161 $ 11,290,953
Real estate broker
Sales to unaffiliated customers ...... 21,983,344 14,486,945
Intersegment sales ................... 367,617 405,009
Financial services ..................... 838,229 876,743
Commercial construction ................ 1,724,191 1,750,069
Other sales ............................ 1,271,973 1,153,500
Interest and other
Sales to unaffiliated customers ...... 453,286 992,578
Intersegment sales ................... 722,604 766,980
Eliminations ........................... (1,090,221) (1,171,989)
------------ ------------
Total ......................... $ 36,395,184 $ 30,550,788
============ ============
Operating profit (loss)
Residential construction ............. $ (357,829) $ (97,610)
Real estate broker ................... (329,289) (61,058)
Financial services ................... 325,183 843,042
Commercial construction .............. (49,405) 164,830
Other sales .......................... 10,692 120,067
------------ ------------
Total ....................... $ (400,648) $ 969,271
============ ============
Assets
Residential construction ............ $ 17,692,589 $ 14,856,678
Real estate broker .................. 3,919,507 3,436,032
Financial services .................. 1,811,497 1,707,052
Commercial construction ............. 575,380 767,169
------------ ------------
Identifiable assets ........ 23,998,973 20,766,931
Equity investments .................. 1,806,502 2,025,238
Corporate assets .................... 827,748 969,319
Other assets ........................ 1,734,827 2,592,817
------------ ------------
Total ...................... $ 28,368,050 $ 26,354,305
============ ============
Depreciation and amortization
Residential construction ............ $ 123,258 $ 103,612
Real estate broker .................. 255,986 249,199
Commercial construction ............. 17,410 22,868
Other ............................... 125,255 126,073
------------ ------------
Total ...................... $ 521,909 $ 501,752
============ ============
Capital expenditures
Residential construction ............ $ 146,570 $ 188,331
Real estate broker .................. 147,405 79,418
Commercial construction ............. 16,818 8,679
Other ............................... 5,820 7,114
------------ ------------
Total ...................... $ 316,613 $ 283,542
============ ============
Operating profit consists of total revenues, less costs and expenses including
interest expense allocated to the financial services segment, but does not
include unallocated interest expense, other income, net equity in earnings of
investees, loss on sale of equipment, or income taxes. Identifiable assets are
those assets used in the Company's operations in each area. Other assets include
cash and cash equivalents, investments accounted for under the equity method,
and capitalized debt issuance costs.
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company is contingently liable on land development loans made by various
lending institutions to joint ventures to which the Company is a 50% general
partner. The Company was contingently liable for approximately $97,000 and
$917,000 at September 30, 1998 and 1997, respectively.
The Company is engaged in various legal proceedings incidental to its normal
business activities. Management of the Company does not believe that the outcome
of each such proceeding or all of them combined will have a material adverse
effect on the Company or its consolidated financial position or operations.
NOTE M - PREFERRED STOCK AND WARRANTS
Series A voting preferred stock is entitled to dividends when declared and paid
at a 6% cumulative rate payable annually starting January 31, 1996 and payable
each January 31 thereafter. Series B voting preferred stock is entitled to
dividends when declared and paid at a 3% cumulative rate payable annually
starting January 31, 1996 and payable each January 31 thereafter. Series D
voting preferred stock is entitled to dividends when declared and paid at a 3%
cumulative rate annually starting July 1, 1996 and payable each July 1
thereafter. At September 30, 1998, preferred stock dividends in arrears for
Series A were $127,086 or $1.54 per share ($77,545 or $.94 per share for 1997),
Series B were $227,670 or $1.07 per share ($163,812 or $.77 per share for 1997),
and Series C were $18,799 or $.79 per share ($11,623 or $.49 per share for
1997). All three series of preferred stock have a liquidation preference of $10
per share, plus all accumulated but unpaid dividends. Each Series A and Series D
preferred share is convertible into common shares at $7.50 per common share on
the basis of $10 per preferred share. The Series B preferred stock is
convertible under the same terms; however, the preferred stock value is $11.11
per share.
During 1997, the Company amended its articles of incorporation to convert the
previously authorized 80,000 shares of Series C preferred stock to a series of
preferred shares which are unclassified as to rights or preferences.
Additionally, this amendment provides for all shares of Series A, Series B, and
Series D preferred shares which are reacquired by the Company to be converted to
a series of preferred stock which is unclassified as to rights or preferences.
As a result of these amendments, the Company has 180,923 preferred shares
authorized which are unclassified as to rights and preferences. Such shares will
be fixed with respect to rights and preferences by the Board of the Company upon
issuance.
As a result of its past public offering of certain debt and equity securities,
690,000 warrants to purchase Company common stock at $8.40 per share were
issued. These warrants became immediately exercisable upon closing of the
offering and all warrants remain outstanding at September 30, 1998.
NOTE N - STOCK OPTIONS
The Company adopted an employee incentive stock plan for certain key employees
during the year ended September 30, 1997. Options currently outstanding under
the plan become exercisable one year from the date of the grant and expire five
years after the date of the grant. These options are exercisable at not less
than the market value of the Company's stock on the date of the grant.
Accordingly, no compensation cost has been recognized for these options. Had
compensation cost for these options been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net earnings (loss) and
earnings (loss) per common share would have been the pro forma amounts indicated
below for the years ended September 30, 1998 and 1997:
1998 1997
------------- -----------
Net earnings (loss) applicable to common shares
As reported ................................. $ (1,300,090) $ 209,422
Pro forma ................................... $ (1,386,036) $ 193,322
Earnings (loss) per share
As reported ................................. $ (.47) $ .07
Pro forma ................................... $ (.50) $ .07
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: dividend yield was
estimated to remain at zero for both years; expected volatility of 54% for both
years; risk-free interest rates of 6% and 5.9%; and an expected life of one year
for both years.
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
A summary of the status of the Company's fixed stock options as of September 30
and changes during the years then ended is presented below:
1998 1997
------------------ -------------------
Weighted Weighted
average average
Number exercise Number exersize
of shares price of shares price
------- ------ ------ ------
Outstanding at beginning of year ... 35,000 $ 3.30 -- $ --
Granted ............................ 90,000 3.42 35,000 3.30
Forfeited .......................... (25,000) 3.42 -- --
------- ------ ------ ------
Outstanding at end of year ......... 100,000 $ 3.38 35,000 $ 3.30
======= ====== ====== ======
Options exercisable at year end .... 30,000 $ 3.30
Weighted-average fair value of
options granted during the year .. $ 1.09 $ .46
The following information applies to options outstanding at September 30, 1998:
Number outstanding 100,000
Range of exercise prices $3.25 to $3.45
Weighted average exercise price $3.38
Weighted average remaining contractual life 4 years
NOTE O - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value information as
required by SFAS No. 107, Disclosures About Fair Value of Financial Instruments.
Such information, which pertains to the Company's financial instruments, is
based on the requirements set forth in SFAS No. 107 and does not purport to
represent the aggregate net fair value of the Company. The carrying amounts in
the table below are the amounts at which the financial instruments are reported
in the consolidated financial statements.
All of the Company's financial instruments are held for purposes other than
trading.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
1. Cash, Cash Equivalents, and Restricted Cash
The carrying amount approximates fair value because of the short maturity and
highly liquid nature of those instruments.
2. Securities Available for Sale
The estimated fair values are based upon quoted market prices.
3. Fixed Rate Notes Receivable
The discounted amount of future cash flows using the current rates at which
similar loans would be made to borrowers is used to estimate fair value.
4. Floating Rate Notes Receivable
The carrying amount approximates fair value because interest rates adjust to
market rates.
5. Fixed Rate Debt
The discounted amount of future cash flows using the Company's current
incremental rate of borrowing for similar liabilities is used to estimate fair
value.
6. Floating Rate Debt
The carrying amount approximates fair value because interest rates adjust to
market rates.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash, cash equivalents, and
restricted cash ............ $ 3,958,326 $ 3,958,326 $ 4,645,284 $ 4,645,284
Securities available for sale 217,968 217,968 199,291 199,291
Fixed rate notes receivable .. 143,738 143,738 244,338 232,090
Floating rate notes receivable 936,265 936,265 778,743 778,743
Financial liabilities
Fixed rate debt .............. (6,775,271) (6,727,059) (7,027,768) (6,983,417)
Floating rate debt ........... (8,428,441) (8,428,441) (4,261,009) (4,261,009)
Financial liabilities for which
it is not practicable to
estimate fair value
Notes payable .............. (361,527) -- (800,000) --
</TABLE>
It was not practicable to estimate the fair value of a noninterest-bearing note
payable which does not have fixed repayment terms.
NOTE P - ITEMS AFFECTING FOURTH QUARTER RESULTS OF OPERATIONS
During the fourth quarter of fiscal 1998, the Company committed to close four
real estate brokerage branch offices and re-establish those offices in a single,
strategically located facility. As a result of this commitment, the Company
incurred charges of $273,157 related to lease abandonments. Additionally, during
the fourth quarter, the Company determined valuation allowances of $505,436 were
required on certain inventories, receivables, and other assets. The aggregate
effect of these items was to increase the loss for the fourth quarter by
$605,823 or $.22 per share.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with Accountants of the kind
described by Item 304 of Regulation S-B at any time during the Registrant's two
(2) most recent fiscal years.
PART III
Pursuant to instruction E(3) to From 10-KSB, the information required by Part
III (Items 9, 10, 11 and 12) is hereby incorporated by reference to the
materials contained in "Election of Directors," "Executive Compensation,"
"Certain Transactions" and "Security Ownership of Certain Beneficial Owners and
Management," contained in the Registrant's definitive proxy materials to be
filed with the Commission within 120 days of September 30, 1998.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
EXHIBIT
NUMBER DESCRIPTION
2.1* Articles of Merger dated July 12, 1995
3.1* Articles of Incorporation dated August 8, 1983
3.2* Articles of Amendment to Articles of Incorporation dated March 20, 1995
3.3* Articles of Amendment dated July 28, 1995
3.4* Bylaw as amended
10.1* Agreement and Plan or Reorganization dated March 14, 1995
10.2* Employment Agreement dated March 14, 1995, between the Registrant and Mr.
Bill E. Hooten, included as an exhibit to Agreement and Plan of
Reorganization
10.3* Employment Agreement dated March 14, 1995, between the Registrant and Mr.
Melvin A. Hardison, included as an exhibit to Agreement and Plan of
Reorganization
10.4* The Prudential Real Estate Affiliates, Inc. Franchise Agreement with
the Registrant, as amended
10.5* First Security Bank line of construction credit commitment dated December
2, 1994
10.6* Loan Agreement dated July 5, 1994, between Sunwest Bank of Albuquerque and
Charter Building and Development Corp.
10.7* Real Estate lease dated January 1, 1994, between R.R. Rutledge and
Hooten/Stahl, Inc.
10.8* Real Estate lease dated January 1, 1991, between Bill E. Hooten and
Hooten/Stahl, Inc.
10.9* Shopping Center Lease dated December 7, 1993, between Rio Rancho Shopping
Center and Hooten/Stahl, Inc.
10.10 1997 Employee Incentive Stock Option Plan, incorporated herein by
reference to the Registrant's Form 10-QSB filed on May 15, 1997.
21 Subsidiaries of the small business issuer
21.1 Real Estate Brokerage Services, Inc.
21.2 Charter Building and Development Corporation, Inc.
21.3 Great American Equity Corporation, Inc.
21.4 Amity, Inc.
21.5 PHS, Inc.
25.* Form T-1 Statement of Eligibility and Qualification under Trust Indenture
Act of 1939 of a Corporation Designated to act as Trustee * Filed as an exhibit
to the Registrant's Registration Statement under the Securities Act of 1933, as
amended, on Form S-B2 (Registration Statement No. 33-98740-D), and incorporated
herein by reference. All other exhibits required by Item 601 of Regulation S-B
are inapplicable to this Registrant in this filing.
(b) Reports on Form 8-K:
No reports were filed on Form 8K during the quarter ended September 30, 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: January 13, 1999 REALCO, INC.
By: James A. Arias
- ------------------------------------------
James A. Arias, President, Chief
Executive Officer, Chairman of the Board of
Directors
In accordance with the Exchange Act, this report has been signed below by the
following persons in behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Dated:
Melvin A. Hardison
- ------------------------
Melvin A. Hardison Chief Financial January 13, 1999
Officer/Secretary/Treasurer
Bill E. Hooten
- ------------------------
Bill E. Hooten Executive Vice President
and Director January 13, 1999
Arthur A. Schwartz
- ------------------------
Arthur A. Schwartz Director January 13, 1999
Marshall Blumenfeld
- ------------------------
Marshall Blumenfeld Director January 13, 1999
Jeffrey S. Silverman
- ------------------------
Jeffrey S. Silverman Director January 13, 1999
Noel Zeller
- ------------------------
Noel Zeller Director January 13, 1999
Martin S. Orland
- ------------------------
Martin S. Orland Director January 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 3788000
<SECURITIES> 218000
<RECEIVABLES> 2579000
<ALLOWANCES> 25000
<INVENTORY> 16760000
<CURRENT-ASSETS> 0
<PP&E> 1992000
<DEPRECIATION> 1064000
<TOTAL-ASSETS> 28368000
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0
3193000
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</TABLE>
