UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2007
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4702
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AMREP Corporation
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(Exact name of registrant as specified in its charter)
Oklahoma 59-0936128
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 Alexander Park , Suite 204, Princeton, New Jersey 08540
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (609) 716-8200
Not Applicable
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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Number of Shares of Common Stock, par value $.10 per share, outstanding at July
31, 2007 - 6,653,112.
AMREP CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
July 31, 2007 and April 30, 2007 1
Consolidated Statements of Income and Retained Earnings
(Unaudited) Three Months Ended July 31, 2007 and 2006 2
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended July 31, 2007 and 2006 3
Notes to Consolidated Financial Statements 4 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 6. Exhibits 14
SIGNATURE 15
EXHIBIT INDEX 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Thousands, except par value and number of shares)
July 31, April 30,
2007 2007
------------------ -------------------
ASSETS:
Cash and cash equivalents $ 38,341 $ 42,102
Receivables, net:
Real estate operations 25,865 25,117
Media services operations 52,921 47,825
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78,786 72,942
Real estate inventory 52,496 46,584
Investment assets, net 12,777 12,165
Property, plant and equipment, net 29,901 30,518
Intangible and other assets, net 33,273 34,014
Goodwill 54,334 54,334
------------------ -------------------
TOTAL ASSETS $ 299,908 $ 292,659
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued expenses $ 85,580 $ 83,557
Dividend payable 6,630 -
Deferred revenue 2,784 4,352
Notes payable:
Amounts due within one year 5,651 5,297
Amounts subsequently due 24,637 27,002
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30,288 32,299
Taxes payable 1,513 55
Deferred income taxes and other long-term liabilities 12,191 11,149
Accrued pension cost 1,285 1,243
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TOTAL LIABILITIES 140,271 132,655
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SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
Shares authorized - 20,000,000; 7,419,204 shares issued
at July 31, 2007 and at April 30, 2007 742 742
Capital contributed in excess of par value 46,085 46,085
Retained earnings 120,966 121,333
Accumulated other comprehensive loss, net (2,862) (2,862)
Treasury stock, at cost; 766,092 shares at July 31, 2007
and at April 30, 2007 (5,294) (5,294)
------------------ -------------------
TOTAL SHAREHOLDERS' EQUITY 159,637 160,004
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 299,908 $ 292,659
================== ===================
See notes to consolidated financial statements.
1
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Retained Earnings (Unaudited)
Three Months Ended July 31, 2007 and 2006
(Thousands, except per share amounts)
2007 2006
----------------- -------------------
REVENUES:
Real estate land sales $ 18,150 $ 32,490
Media services operations 32,299 20,827
Interest and other 910 4,952
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51,359 58,269
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COSTS AND EXPENSES:
Real estate land sales 5,762 11,467
Operating expenses:
Media services operations 30,083 18,162
Real estate commissions and selling 253 424
Other 467 327
General and administrative:
Media services operations 3,368 1,730
Real estate operations and corporate 1,107 982
Interest expense, net of capitalized amounts 288 91
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41,328 33,183
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 10,031 25,086
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS 3,711 9,282
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INCOME FROM CONTINUING OPERATIONS 6,320 15,804
LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS
(NET OF INCOME TAXES) (57) -
----------------- -------------------
NET INCOME 6,263 15,804
RETAINED EARNINGS, beginning of period 121,333 81,875
DIVIDEND PAYABLE (6,630) (5,648)
----------------- -------------------
RETAINED EARNINGS, end of period $ 120,966 $ 92,031
================= ===================
EARNINGS PER SHARE - BASIC AND DILUTED
CONTINUING OPERATIONS $ .95 $ 2.38
DISCONTINUED OPERATIONS (.01) -
----------------- -------------------
EARNINGS PER SHARE - BASIC AND DILUTED $ .94 $ 2.38
================= ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,653 6,644
================= ===================
See notes to consolidated financial statements.
2
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended July 31, 2007 and 2006
(Thousands)
2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,263 $ 15,804
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Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,632 1,447
Non-cash credits and charges:
Pension accrual 42 50
Provision for doubtful accounts (207) 74
Gain on disposal of assets - (4,107)
Changes in assets and liabilities:
Receivables (5,637) (1,691)
Real estate inventory (5,912) 5,435
Intangible and other assets (230) (1,186)
Accounts payable and accrued expenses, and deferred revenue 455 31,721
Taxes payable 1,458 2,969
Deferred income taxes and other long-term liabilities 1,042 1,715
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Total adjustments (6,357) 36,427
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Net cash provided (used) by operating activities (94) 52,231
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant, and equipment (993) (608)
Capital expenditures - purchase of investment assets (663) (70)
Proceeds from disposition of assets - 6,135
Restricted cash - (7,783)
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Net cash used by investing activities (1,656) (2,326)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 23,861 6,232
Principal debt payments (25,872) (7,851)
Exercise of stock options - 13
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Net cash used by financing activities (2,011) (1,606)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,761) 48,299
CASH AND CASH EQUIVALENTS, beginning of period 42,102 46,882
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CASH AND CASH EQUIVALENTS, end of period $ 38,341 $ 95,181
================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 509 $ 91
================== ===================
Income taxes paid - net of refunds $ 1,177 $ 4,598
================== ===================
Non-cash transaction - Dividend payable $ 6,630 $ 5,648
================== ===================
See notes to consolidated financial statements.
3
AMREP CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Three Months Ended July 31, 2007 and 2006
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements included herein
have been prepared by AMREP Corporation (the "Registrant" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
for interim financial information, and do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, the accompanying unaudited consolidated financial statements include
all adjustments, which are of a normal recurring nature, necessary to reflect a
fair presentation of the results for the interim periods presented. The results
of operations for such interim periods are not necessarily indicative of what
may occur in future periods.
The unaudited consolidated financial statements herein should be read in
conjunction with the Company's annual report on Form 10-K for the year ended
April 30, 2007 that was previously filed with the Securities and Exchange
Commission.
(2) Adoption of FIN 48
------------------
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109"
("FIN 48"), on May 1, 2007. Previously, the Company had accounted for tax
contingencies in accordance with FASB Statement No. 5, "Accounting for
Contingencies". As required by FIN 48, the Company recognizes the financial
statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that management
believes has a greater than 50 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority. Unrecognized tax benefits
are tax benefits claimed in the Company's tax returns that do not meet these
recognition and measurement standards.
At the adoption date, the Company applied FIN 48 to all tax positions for which
the statute of limitations remained open. The adoption of FIN 48 had no impact
on the Company's financial statements. The Company's deferred income taxes and
other long-term liabilities include an unrecognized tax benefit of $1,354,000 at
May 1, 2007, which had been previously recorded under FASB Statement No. 5 or
FASB Statement No. 109. The Company's unrecognized tax benefit at July 31, 2007
was $1,648,000. If recognized, the unrecognized tax benefit would have an impact
on the effective tax rate.
The Company is subject to U.S. Federal income taxes, and also to various state
and foreign income taxes. Tax regulations within each jurisdiction are subject
to the interpretation of the related tax laws and regulations and require
significant judgment to apply. The Company is not currently under examination by
any tax authorities with respect to its income tax returns. In nearly all
jurisdictions, the tax years through fiscal April 30, 2003 are no longer subject
to examination.
There were no changes in unrecognized tax positions ("UTP") during the period.
The total amount of UTP could increase or decrease within the next twelve months
for a number of reasons, including the expiration of statutes of limitations,
audit settlements, tax examinations and the recognition and measurement
considerations under FIN 48. The Company does not believe that the total amount
of UTP will significantly increase or decrease over the next twelve months.
4
The Company has elected to retain its existing accounting policy with respect to
the treatment of interest and penalties attributable to income taxes in
accordance with FIN 48, and continues to reflect interest and penalties
attributable to income taxes, to the extent they arise, as a component of its
income tax provision or benefit as well as its outstanding income tax assets and
liabilities. The total amount of interest and penalties recognized in the
accompanying consolidated balance sheets was $395,000 at May 1, 2007 and
$509,000 at July 31, 2007.
(3) Receivables
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Media services operations accounts receivable, net consist of the following (in
thousands):
July 31, April 30,
2007 2007
---------------- ----------------
Fulfillment Services $ 30,066 $ 29,606
Newsstand Distribution Services,
net of estimated returns 23,979 19,550
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54,045 49,156
Less allowance for doubtful accounts (1,124) (1,331)
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$ 52,921 $ 47,825
================ ================
Newsstand Distribution Services accounts receivable are net of estimated
magazine returns of $50,386,000 at July 31, 2007 and $52,275,000 at April 30,
2007. In addition, under a distribution arrangement with one publisher customer
of the Newsstand Distribution Services business, that publisher bears the
ultimate credit risk of non-collection of related amounts due from the customers
to which the Company distributes the publisher's magazines. Accounts receivable
subject to this arrangement were netted against the related accounts payable due
the publisher on the accompanying consolidated balance sheets ($29,790,000 was
netted at July 31, 2007 and $21,106,000 at April 30, 2007).
(4) Investment Assets
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Investment assets, net consist of the following (in thousands):
July 31, April 30,
2007 2007
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Land held for long-term investment $ 9,694 $ 9,039
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Commercial rental properties:
Land, buildings and improvements 3,542 3,535
Furniture and fixtures 42 42
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3,584 3,577
Less accumulated depreciation (501) (451)
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3,083 3,126
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$ 12,777 $ 12,165
================ ================
5
(5) Property, Plant and Equipment
-----------------------------
Property, plant and equipment, net consist of the following (in thousands):
July 31, April 30,
2007 2007
---------------- ----------------
Land, buildings and improvements $ 17,571 $ 17,217
Furniture and equipment and other 42,486 41,853
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60,057 59,070
Less accumulated depreciation (30,156) (28,552)
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$ 29,901 $ 30,518
================ ================
(6) Intangible and Other Assets
---------------------------
Intangible and other assets, net consist of the following (in thousands):
July 31, April 30,
2007 2007
---------------- ----------------
Software development costs $ 9,699 $ 9,461
Deferred order entry costs 5,545 5,837
Prepaid expenses 3,532 3,302
Customer contracts and relationships 15,000 15,000
Other 4,190 5,118
---------------- ----------------
37,966 38,718
Less accumulated amortization (4,693) (4,704)
---------------- ----------------
$ 33,273 $ 34,014
================ ================
Software development costs include internal and external costs of the
development of new or enhanced software programs and are generally amortized
over five years. Deferred order entry costs represent costs incurred in
connection with the data entry of customer subscription information to database
files and are charged directly to operations over a 12-month period. Customer
contracts and relationships are amortized over 12 years.
(7) Accounts Payable, net and Accrued Expenses
------------------------------------------
Accounts payable, net and accrued expenses consist of the following (in
thousands):
July 31, April 30,
2007 2007
---------------- ----------------
Publisher payables, net $ 66,871 $ 63,759
Accrued expenses 6,076 6,803
Trade payables 6,114 3,701
Other 6,519 9,294
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$ 85,580 $ 83,557
================ ================
Pursuant to an arrangement with a publisher customer of the Newsstand
Distribution Services business, the Company has netted $29,790,000 and
$21,106,000 of accounts receivable against the related accounts payable at July
31, 2007 and April 30, 2007 (see Note 3).
6
(8) Notes Payable
July 31, April 30,
2007 2007
---------------- ----------------
Notes payable:
Line-of-credit borrowings:
Real estate operations and other $ 11,000 $ 6,000
Media services operations 7,116 11,905
Real estate operations term loan 8,672 10,559
Other notes payable 3,500 3,835
---------------- ----------------
$ 30,288 $ 32,299
================ ================
The Company's AMREP Southwest Inc. subsidiary has a term loan facility and a
revolving credit facility (the "Real Estate Credit Facility") with a bank that
matures in September 2008. The term loan is secured by certain notes receivable
from real estate sales and requires prepayment in an amount equal to collections
on the notes receivable held as collateral and the amount of any that have
experienced payment defaults. The term loan bears interest fluctuating from
month-to-month at the 30-day LIBOR rate (5.32% at July 31, 2007) adjusted for
regulatory reserve requirements plus 1.75%. The term loan's outstanding balance
at July 31, 2007 was $8,672,000 with an interest rate of 7.07%. The revolving
credit facility has a maximum borrowing capacity of $25,000,000 and is used to
support real estate development in New Mexico. Borrowings bear interest at the
borrower's option at (i) the prime rate (8.25% at July 31, 2007) less 1.00%, or
(ii) the 30-day LIBOR rate (5.32% at July 31, 2007) plus 1.65% if borrowings are
less than $10,000,000 or plus 1.50% if borrowings are $10,000,000 or above. At
July 31, 2007, the outstanding balance of the revolving credit agreement was
$11,000,000 with an interest rate of 6.82%. The Real Estate Credit Facility
contains a number of restrictive covenants, including one that requires the
borrower to maintain a minimum tangible net worth.
The Company's Kable Media Services, Inc. subsidiary, and certain of its direct
and indirect subsidiaries ("Kable"), have a credit arrangement with a bank that
provides (i) a revolving credit loan and letter of credit facility in an
aggregate principal amount of up to $35,000,000 ("Facility A"); (ii) a secured
term loan of approximately $3,000,000 ("Facility B"); (iii) a capital
expenditure line of credit in an amount of up to $1,500,000 to finance new
equipment ("Facility C"); and (iv) a second revolving credit loan facility of
$10,000,000 ("Facility D") that may be used exclusively for the payment of
accounts payable under a distribution agreement with a customer of Kable's
Distribution Services business. The borrowers' obligations are secured by
substantially all of their assets other than real property and any borrower's
interest in the capital securities of any other borrower or any subsidiary of
any borrower. Subject to the bank's right to accelerate the obligations upon the
occurrence of an Event of Default, as defined, and subject to applicable cure
periods, the maturity dates of Facility A, Facility C and Facility D are each
May 1, 2010, and the maturity date of Facility B is December 31, 2009. The
credit arrangement includes customary Events of Default, including cross-default
in respect of certain contracts and subordinated indebtedness of the borrowers,
certain of the borrowers ceasing to be direct or indirect wholly owned
subsidiaries of Kable, and a Material Adverse Effect, as defined.
The Facility A, C and D loans bear interest at fluctuating rates that, at the
borrowers' option, may be either (i) reserve adjusted LIBOR of several possible
durations (5.36% at July 31, 2007) plus a margin established quarterly of from
1.5% to 2.5% dependent on the borrowers' funded debt to EBITDA ratio, as
defined, or (ii) the Lender's prime rate (8.25% at July 31, 2007). At July 31,
2007 the outstanding balance under Facility A was $7,116,000 with an interest
rate of 7.11% per annum. Facility B had an outstanding balance of $2,446,000 at
7
July 31, 2007 (included in Other notes payable) with an interest rate of 6.4%
per annum. There were no outstanding balances on Facilities C and D as of July
31, 2007.
The Kable credit arrangement requires the borrowers to maintain certain
financial ratios and contains customary covenants and restrictions, the most
significant of which limit the ability of the borrowers to declare or pay
dividends or make other distributions to the Company unless certain conditions
are satisfied, and that limit the annual amount of indebtedness the borrowers
may incur for capital expenditures and other purposes.
(9) Discontinued Operations
-----------------------
Loss from operations of discontinued business (net of income taxes) in the three
month period ended July 31, 2007 reflects costs associated with the settlement
of all litigation related to the Company's El Dorado, New Mexico water utility
subsidiary that were in addition to costs that were estimated and accrued for
this matter in the fourth quarter of 2007.
(10) Information About the Company's Operations in Different Industry Segments
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The following tables set forth summarized data relative to the industry segments
for continuing operations in which the Company operated for the three month
periods ended July 31, 2007 and 2006.
Newsstand
Real Estate Fulfillment Distribution
Operations Services Services Corporate Consolidated
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Three months ended July 31, 2007 (a):
Revenues $ 18,863 $ 28,988 $ 3,311 $ 197 $ 51,359
Income from continuing operations 7,380 (1,859) 248 551 6,320
Provision (benefit) for income taxes from
continuing operations 4,334 (1,090) 143 324 3,711
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Income from continuing operations
before income taxes 11,714 (2,949) 391 875 10,031
Interest expense (income), net (b) - 1,467 (486) (693) 288
Depreciation and amortization 55 2,331 244 2 2,632
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EBITDA (c) $ 11,769 $ 849 $ 149 $ 184 $ 12,951
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Goodwill $ - $ 50,441 $ 3,893 $ - $ 54,334
Total assets $ 101,473 $ 139,603 $ 38,482 $ 20,350 $ 299,908
Capital expenditures $ 691 $ 949 $ 16 $ - $ 1,656
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Three months ended July 31, 2006 (a):
Revenues $ 37,092 $ 17,572 $ 3,255 $ 350 $ 58,269
Income from continuing operations 15,273 157 219 155 15,804
Provision (benefit) for income taxes from
continuing operations 8,970 91 129 92 9,282
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Income from continuing operations
before income taxes 24,243 248 348 247 25,086
Interest expense (income), net (b) - 125 (34) - 91
Depreciation and amortization 61 1,157 228 1 1,447
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EBITDA (c) $ 24,304 $ 1,530 $ 542 $ 248 $ 26,624
----------------------------------------------------------------------------------
Goodwill $ - $ 1,298 $ 3,893 $ - $ 5,191
Total assets $ 81,765 $ 44,827 $ 61,514 $ 51,588 $ 239,694
Capital expenditures $ 70 $ 600 $ 8 $ - $ 678
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8
(a) Segment information does not include net loss from discontinued operations
of $57,000 in the three months ended July 31, 2007.
(b) Interest expense, net includes inter-segment interest income and expense
that is eliminated in consolidation.
(c) The Company uses EBITDA (which the Company defines as income from
continuing operations before interest expense, net, income taxes and
depreciation and amortization) in addition to income as a key measure of
profit or loss for segment performance and evaluation purposes.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------- ------------------------------------------------------------------------
of Operations
-------------
INTRODUCTION
------------
The Company, through its subsidiaries, is primarily engaged in three business
segments: the Real Estate business operated by AMREP Southwest Inc. and its
subsidiaries (collectively, "AMREP Southwest") and the Fulfillment Services and
Newsstand Distribution Services businesses operated by Kable Media Services,
Inc. and its subsidiaries (collectively, "Kable" or "Media Services"). The
Company's foreign sales and activities are not significant.
The following provides information that management believes is relevant to an
assessment and understanding of the Company's consolidated results of operations
and financial condition. The discussion should be read in conjunction with the
consolidated financial statements and accompanying notes. All references in this
Item 2 to the first quarter or first three months of 2008 and 2007 mean the
three-month periods ended July 31, 2007 and July 31, 2006, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
Management's discussion and analysis of financial condition and results of
operations is based on the accounting policies used and disclosed in the 2007
consolidated financial statements and accompanying notes that were prepared in
accordance with accounting principles generally accepted in the United States of
America and included as part of the Company's annual report on Form 10-K for the
year ended April 30, 2007 (the "2007 Form 10-K"). The preparation of those
consolidated financial statements required management to make estimates and
assumptions that affected the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual amounts or results could differ from those
estimates.
The significant accounting policies of the Company are described in Note 1 to
the 2007 consolidated financial statements, and the critical accounting policies
and estimates are described in Management's Discussion and Analysis included in
Item 7 of the 2007 Form 10-K. There have been no changes in the critical
accounting policies. Information concerning the implementation and the impact of
new accounting standards issued by the Financial Accounting Standards Board
("FASB") is included in the notes to the 2007 consolidated financial statements.
The Company adopted FASB Interpretation No. 48 ("FIN 48") effective May 1, 2007.
The adoption of FIN 48 had no impact on the Company's financial condition,
liquidity or results of operations. The Company did not adopt any other
accounting policies in the first three months of 2008.
RESULTS OF OPERATIONS
---------------------
For the first quarter of 2008, net income was $6,263,000, or $0.94 per share,
compared to net income of $15,804,000, or $2.38 per share, in the first quarter
of the prior year. Results for the first quarter of 2008 included net income
from continuing operations of $6,320,000, or $0.95 per share, and a loss from
9
discontinued operations, net of tax, of $57,000, or $0.01 per share, while the
results for the first quarter of 2007 were entirely from continuing operations.
Revenues were $51,359,000 in the first quarter of 2008 compared to $58,269,000
in the same period last year, a decrease of $6,910,000 (12%).
The net loss from discontinued operations in the first quarter of 2008 reflected
costs incurred in connection with the settlement of all litigation related to
the Company's El Dorado, New Mexico water utility subsidiary that were in
addition to costs that were estimated and accrued for this matter in the fourth
quarter of 2007.
First quarter revenues from land sales at AMREP Southwest decreased $14,340,000
(44%) compared to last year's first quarter, from $32,490,000 in 2007 to
$18,150,000 in 2008. This decrease was primarily due to fewer land sales in the
Company's principal market of Rio Rancho, New Mexico and a reduction in the
average selling price of undeveloped lots. In the first quarter of 2008, the
Company sold (i) 122 developed residential lots (totaling approximately 19
acres) and closed one commercial land sale (totaling approximately 14 acres) at
an average selling price of $291,000 per acre, and (ii) 330 undeveloped lots
(totaling approximately 291 acres) at an average selling price of $29,000 per
acre. In the first quarter of 2007, land sales consisted of (i) 318 developed
residential lots (totaling approximately 52 acres) and ten commercial land sales
(totaling approximately 13 acres) at an average selling price of $277,000 per
acre, and (ii) 392 undeveloped lots (totaling approximately 250 acres) at an
average selling price of $59,000 per acre. The increase in the average selling
price per acre of developed land was due to a change in the mix of projects from
which the land was sold, while the decrease in the average selling price of
undeveloped land was attributable to a substantially higher proportion of
undeveloped investment land sold in the current year from locations in Rio
Rancho that are further removed from developed areas. The average gross profit
percentage on land sales increased from 65% for the first three months of 2007
to 68% for the same period of 2008. Revenues and related gross profits from land
sales can vary significantly from period to period as a result of many factors,
including the nature and timing of specific transactions, and prior results are
not necessarily a good indication of what may occur in future periods.
First quarter revenues from Kable increased $11,472,000 (55%) compared to last
year's first quarter, from $20,827,000 in 2007 to $32,299,000 in 2008. This
increase was attributable to the January 2007 acquisition of Palm Coast Data
Holdco, Inc. ("Palm Coast") by Kable. First quarter revenues from Fulfillment
Services operations, including the revenues of Palm Coast, increased by
$11,416,000 (65%), from $17,572,000 in 2007 to $28,988,000 in 2008. The increase
in Fulfillment Services revenues resulting from the Palm Coast acquisition
($13,119,000) was partly offset by decreases in revenues from other parts of
Kable's Fulfillment Services business. Revenues from Kable's Newsstand
Distribution Services operations were comparable to the same period last year,
and increased by $56,000 (2%) for the three months ended July 31, 2007 compared
to the same period in the prior year. Kable's operating expenses increased by
$11,921,000 (66%) in the first quarter of 2008 compared to the same period in
the prior year, with such increase being primarily attributable to the
additional operating expenses of Palm Coast, which were offset in part by
decreased payroll and benefit expenses resulting from lower sales volumes in
other parts of the Fulfillment Services business.
The Company recently initiated a project to consolidate the Kable and Palm Coast
fulfillment operations in order to improve operating efficiencies and customer
service and also to reduce costs. In connection with this consolidation effort,
the first quarter results for 2008 included a charge of approximately $300,000
for severance costs relating to a workforce reduction of approximately 75
people. The Company expects to realize annual operating cost savings of
approximately $2,700,000 from this workforce reduction.
10
Interest and other revenues decreased by $4,042,000 for the three months ended
July 31, 2007 compared to the same period of the prior year, primarily due to
the sale in last year's first quarter of certain AMREP Southwest non-inventory
real estate assets, including the Company's office building in Rio Rancho, which
in the aggregate contributed a pre-tax gain of $4,107,000.
Real Estate commissions and selling expenses decreased by $171,000 in the first
quarter of 2008 compared to the same period in 2007, primarily due to decreases
in variable commissions and selling expenses. Such costs generally vary
depending upon the terms of specific land sale transactions. Real estate and
corporate general and administrative expenses in the first quarter of 2008
increased by $125,000 compared to the same period in 2007 due to increased
professional and consulting fees. General and administrative costs of magazine
operations increased $1,638,000 in the first quarter of 2008 compared to the
same period in 2007, primarily due to the addition of Palm Coast partially
offset by reduced spending in other Media Services operations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the past several years, the Company has financed its operations from
internally generated funds from real estate sales and Media Services operations,
and from borrowings under its various lines-of-credit and development loan
agreements.
Cash Flows From Financing Activities
------------------------------------
AMREP Southwest has a term loan facility and a revolving credit facility (the
"Real Estate Credit Facility") with a bank that matures in September 2008. The
term loan is secured by certain notes receivable from real estate sales and
requires prepayment in an amount equal to collections on the notes receivable
held as collateral and the amount of any that have experienced payment defaults.
The term loan bears interest fluctuating from month-to-month at the 30-day LIBOR
rate (5.32% at July 31, 2007) adjusted for regulatory reserve requirements plus
1.75%. The term loan's outstanding balance at July 31, 2007 was $8,672,000 with
an interest rate of 7.07%. The revolving credit facility has a maximum borrowing
capacity of $25,000,000 and is used to support real estate development in New
Mexico. Borrowings bear interest at the borrower's option at (i) the prime rate
(8.25% at July 31, 2007) less 1.00%, or (ii) the 30-day LIBOR rate (5.32% at
July 31, 2007) plus 1.65% if borrowings are less than $10,000,000 or plus 1.50%
if borrowings are $10,000,000 or above. At July 31, 2007, the outstanding
balance of the revolving credit agreement was $11,000,000 with an interest rate
of 6.82%. The Real Estate Credit Facility contains a number of restrictive
covenants, including one that requires the borrower to maintain a minimum
tangible net worth.
Kable and certain direct and indirect subsidiaries have a credit arrangement
with a bank that provides (i) a revolving credit loan and letter of credit
facility in an aggregate principal amount of up to $35,000,000 ("Facility A");
(ii) a secured term loan of approximately $3,000,000 ("Facility B"); (iii) a
capital expenditure line of credit in an amount of up to $1,500,000 to finance
new equipment ("Facility C"); and (iv) a second revolving credit loan facility
of $10,000,000 ("Facility D") that may be used exclusively for the payment of
accounts payable under a distribution agreement with a customer of Kable's
Distribution Services business. The borrowers' obligations are secured by
substantially all of their assets other than real property and any borrower's
interest in the capital securities of any other borrower or any subsidiary of
any borrower. Subject to the bank's right to accelerate the obligations upon the
occurrence of an Event of Default, as defined, and subject to applicable cure
periods, the maturity dates of Facility A, Facility C and Facility D are each
May 1, 2010, and the maturity date of Facility B is December 31, 2009. The
credit arrangement includes customary Events of Default, including cross-default
in respect of certain contracts and subordinated indebtedness of the borrowers,
certain of the borrowers ceasing to be direct or indirect wholly owned
subsidiaries of Kable, and a Material Adverse Effect, as defined.
11
The Facility A, C and D loans bear interest at fluctuating rates that, at the
borrowers' option, may be either (i) reserve adjusted LIBOR rates of several
possible durations (5.36% at July 31, 2007) plus a margin established quarterly
of from 1.5% to 2.5% dependent on the borrowers' funded debt to EBITDA ratio, as
defined, or (ii) the Lender's prime rate (8.25% at July 31, 2007). At July 31,
2007 the outstanding balance under Facility A was $7,116,000 with an interest
rate of 7.11% per annum. Facility B had an outstanding balance of $2,446,000 at
July 31, 2007 with an interest rate of 6.4% per annum. There were no outstanding
balances on Facilities C and D as of July 31, 2007.
The Kable credit arrangement requires the borrowers to maintain certain
financial ratios and contains customary covenants and restrictions, the most
significant of which limit the ability of the borrowers to declare or pay
dividends or make other distributions to the Company unless certain conditions
are satisfied, and that limit the annual amount of indebtedness the borrowers
may incur for capital expenditures and other purposes.
On July 16, 2007, the Board of Directors of the Company declared a special cash
dividend of $1.00 per share payable on August 24, 2007 to shareholders of record
at the close of business on August 10, 2007.
Cash Flows From Operating Activities
------------------------------------
Real Estate inventory was $52,496,000 at July 31, 2007 compared to $46,584,000
at April 30, 2007. Inventory in the Company's core real estate market of Rio
Rancho was $45,632,000 at July 31, 2007 and $39,770,000 at April 30, 2007. The
balance of inventory consisted of properties in Colorado. Real estate investment
assets, which includes land held for long-term investment located in areas that
are not planned to be developed in the near term and thus not offered for sale,
totaled $12,777,000 at July 31, 2007 and $12,165,000 at April 30, 2007.
Real Estate receivables increased from $25,117,000 at April 30, 2007 to
$25,865,000 at July 31, 2007, resulting primarily from the net effect of
mortgage notes received in connection with real estate sales that closed during
the first three months of 2008 offset in part by payments received on previously
issued mortgage notes. Receivables from Media Services operations increased from
$47,825,000 at April 30, 2007 to $52,921,000 at July 31, 2007, primarily due to
higher quarter-end billings at July 31, 2007 compared to April 30, 2007.
Accounts payable and accrued expenses increased from $83,557,000 at April 30,
2007 to $85,580,000 at July 31, 2007, primarily as a result of an increase in
the amounts due publishers. In addition, under a distribution arrangement with
one publisher customer of the Newsstand Distribution Services business, that
publisher bears the ultimate credit risk of non-collection of related amounts
due from the customers to which the Company distributes the publisher's
magazines. Accounts receivable subject to this arrangement were netted
($29,790,000 was netted at July 31, 2007 and $21,106,000 was netted at April 30,
2007) against the related accounts payable due the publisher on the accompanying
consolidated balance sheets.
Deferred revenue relates to consideration received on certain real estate land
sales which are accounted for under the percentage of completion method and
which will be recognized as revenue as the Company completes land development
work which it is obligated to perform.
Cash Flows From Investing Activities
------------------------------------
Capital expenditures amounted to $1,656,000 and $678,000 in the first three
months of 2008 and 2007, primarily for the acquisition of real estate investment
property and computer hardware and software development expenditures related to
Kable's Fulfillment Services business. The Company believes that it has adequate
12
cash and financing capability to provide for its anticipated future capital
expenditures.
Future Payments Under Contractual Obligations
---------------------------------------------
The Company is obligated to make future payments under various contracts such as
debt agreements and lease agreements, and is subject to certain other
commitments and contingencies. There have been no material changes to Future
Payments Under Contractual Obligations as reflected in the Liquidity and Capital
Resources section of Management's Discussion and Analysis in the 2007 Form 10-K.
Refer to Notes 9, 14 and 15 to the consolidated financial statements included in
the 2007 Form 10-K for additional information on long-term debt and commitments
and contingencies.
Discretionary Stock Repurchase Program
--------------------------------------
On July 16, 2007, the Company announced that its Board of Directors had
authorized the repurchase of up to 500,000 shares of the Company's common stock
from time to time in the open market or through negotiated private transactions.
No shares were repurchased at July 31, 2007. During the period from August 1,
2007 through September 7, 2007, the Company repurchased 333,600 shares, all in
the open market, for an aggregate purchase price, including brokerage
commissions, of $11,146,000. These repurchases were funded from cash on hand,
and the Company expects to fund any future purchases from internally generated
cash or borrowings.
Risk Factors
------------
In addition to the other information set forth in this report, the factors
discussed in Part I, "Item 1A. Risk Factors." in the Company's 2007 Form 10-K,
which could materially affect the Company's business, financial condition or
future results, should be carefully considered. The risks described in the
Company's 2007 Form 10-K are not the only risks facing the Company. Additional
risks and uncertainties not currently known to the Company or that currently are
deemed to be immaterial also may materially adversely affect the Company's
business, financial condition or operating results.
Statement of Forward-Looking Information
----------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking", including statements contained in this
report and other filings with the Securities and Exchange Commission, reports to
the Company's shareholders and news releases. All statements that express
expectations, estimates, forecasts or projections are forward-looking statements
within the meaning of the Act. In addition, other written or oral statements,
which constitute forward-looking statements, may be made by or on behalf of the
Company. Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", "projects", "forecasts", "may", "should", variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and contingencies that are difficult to
predict. These risks and uncertainties include, but are not limited to, the
risks described above under the heading "Risk Factors". Many of the factors that
will determine the Company's future results are beyond the ability of management
to control or predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in or suggested by such
forward-looking statements. The forward-looking statements contained in this
report include, but are not limited to, statements regarding the project to
consolidate the operations of the Fulfillment Services business and the
estimated cost savings of the workforce reduction. The Company undertakes no
obligation to revise or update any forward-looking statements, or to make any
13
other forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------- ---------------------------------------------------------------
The Company has several credit facilities that require the Company to pay
interest at a rate that may change periodically. These variable rate obligations
expose the Company to the risk of increased interest expense in the event of
increases in short-term interest rates. At July 31, 2007, borrowings of
$26,788,000 were subject to variable interest rates. Refer to Item 7(A) of the
2007 Form 10-K for additional information regarding quantitative and qualitative
disclosures about market risk.
Item 4. Controls and Procedures
------- -----------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
The Company's management, with the participation of the Company's chief
financial officer and the other executive officers whose certifications
accompany this quarterly report, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report. As a result of such evaluation, the chief financial officer and such
other executive officers have concluded that such disclosure controls and
procedures are effective to provide reasonable assurance that the information
required to be disclosed in the reports the Company files or submits under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and (ii) accumulated and communicated to the
Company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate, to allow
timely decisions regarding disclosure. The Company believes that a control
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
----------------------------------------------------
No change in the Company's system of internal control over financial reporting
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
------- --------
Exhibit No. Description
----------- -----------
31.1 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
31.2 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
31.3 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
32 Certification required pursuant to 18 U.S.C. Section 1350.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 10, 2007 AMREP CORPORATION
(Registrant)
By: /s/ Peter M. Pizza
---------------------------------------------
Peter M. Pizza
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934 - Filed herewith.
31.2 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934 - Filed herewith.
31.3 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934 - Filed herewith.
32 Certification required pursuant to 18 U.S.C. Section 1350.
16