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 October 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
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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
------ ------
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
November 30, 2007 - 6,027,212.
AMREP CORPORATION AND SUBSIDIARIES
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
October 31, 2007 and April 30, 2007 1
Consolidated Statements of Income and Retained Earnings
(Unaudited) Three Months Ended October 31, 2007 and 2006 2
Consolidated Statements of Income and Retained Earnings
(Unaudited) Six Months Ended October 31, 2007 and 2006 3
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended October 31, 2007 and 2006 4
Notes to Consolidated Financial Statements 5 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
SIGNATURE 18
EXHIBIT INDEX 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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AMREP CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Thousands, except par value and number of shares)
October 31, April 30,
2007 2007
------------------ -------------------
ASSETS:
Cash and cash equivalents $ 22,402 $ 42,102
Restricted cash 5,796 -
Receivables, net:
Real estate operations 18,921 25,117
Media services operations 53,153 47,825
------------------ -------------------
72,074 72,942
Real estate inventory 60,475 46,584
Investment assets, net 10,274 12,165
Property, plant and equipment, net 30,147 30,518
Intangible and other assets, net 33,150 34,014
Goodwill 54,139 54,334
------------------ -------------------
TOTAL ASSETS $ 288,457 $ 292,659
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued expenses $ 85,892 $ 83,557
Deferred revenue - 4,352
Notes payable:
Amounts due within one year 10,128 5,297
Amounts subsequently due 33,641 27,002
------------------ -------------------
43,769 32,299
Taxes payable 481 55
Deferred income taxes and other long-term liabilities 14,096 11,149
Accrued pension cost 1,111 1,243
------------------ -------------------
TOTAL LIABILITIES 145,349 132,655
------------------ -------------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
Shares authorized - 20,000,000; 7,419,704 shares issued
at October 31, 2007 and at April 30, 2007 742 742
Capital contributed in excess of par value 46,085 46,085
Retained earnings 124,433 121,333
Accumulated other comprehensive loss, net (2,862) (2,862)
Treasury stock, at cost; 1,382,492 shares at October 31, 2007
and 766,092 shares at April 30, 2007 (25,290) (5,294)
------------------ -------------------
TOTAL SHAREHOLDERS' EQUITY 143,108 160,004
------------------ -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 288,457 $ 292,659
================== ===================
See notes to consolidated financial statements.
1
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Retained Earnings (Unaudited)
Three Months Ended October 31, 2007 and 2006
(Thousands, except per share amounts)
2007 2006
----------------- -------------------
REVENUES:
Real estate land sales $ 3,161 $ 31,707
Media services operations 35,574 22,913
Interest and other 3,355 1,435
----------------- -------------------
42,090 56,055
----------------- -------------------
COSTS AND EXPENSES:
Real estate land sales 1,569 8,017
Operating expenses:
Media services operations 30,234 18,663
Real estate commissions and selling 88 490
Other 458 225
General and administrative:
Media services operations 2,820 1,587
Real estate operations and corporate 1,081 1,495
Interest expense, net of capitalized amounts 337 83
----------------- -------------------
36,587 30,560
----------------- -------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 5,503 25,495
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS 2,036 9,433
----------------- -------------------
NET INCOME 3,467 16,062
RETAINED EARNINGS, beginning of period 120,966 92,031
----------------- -------------------
RETAINED EARNINGS, end of period $ 124,433 $ 108,093
================= ===================
EARNINGS PER SHARE - BASIC AND DILUTED $ 0.55 $ 2.42
================= ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,327 6,649
================= ===================
See notes to consolidated financial statements.
2
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Retained Earnings (Unaudited)
Six Months Ended October 31, 2007 and 2006
(Thousands, except per share amounts)
2007 2006
----------------- -------------------
REVENUES:
Real estate land sales $ 21,311 $ 64,197
Media services operations 67,852 43,740
Interest and other 4,286 6,387
----------------- -------------------
93,449 114,324
----------------- -------------------
COSTS AND EXPENSES:
Real estate land sales 7,331 19,484
Operating expenses:
Media services operations 60,317 36,825
Real estate commissions and selling 341 914
Other 925 552
General and administrative:
Media services operations 6,188 3,317
Real estate operations and corporate 2,188 2,477
Interest expense, net of capitalized amounts 625 174
----------------- -------------------
77,915 63,743
----------------- -------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 15,534 50,581
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS 5,747 18,715
----------------- -------------------
INCOME FROM CONTINUING OPERATIONS 9,787 31,866
LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS (NET OF INCOME TAXES) (57) -
----------------- -------------------
NET INCOME 9,730 31,866
RETAINED EARNINGS, beginning of period 121,333 81,875
DIVIDEND PAID (6,630) (5,648)
----------------- -------------------
RETAINED EARNINGS, end of period $ 124,433 $ 108,093
================= ===================
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
CONTINUING OPERATIONS $ 1.51 $ 4.79
DISCONTINUED OPERATIONS (0.01) -
----------------- -------------------
EARNINGS PER SHARE - BASIC AND DILUTED $ 1.50 $ 4.79
================= ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,490 6,646
================= ===================
See notes to consolidated financial statements.
3
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended October 31, 2007 and 2006
(Thousands)
2007 2006
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,730 $ 31,866
----------------- ------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,342 2,937
Non-cash credits and charges:
Pension accrual (benefit) (132) 107
Provision for doubtful accounts (251) 80
Stock based compensation - Directors' Plan - 327
Gain on disposition of assets (1,873) (4,112)
Changes in assets and liabilities:
Receivables 1,119 (7,432)
Real estate inventory (13,891) 6,991
Intangible and other assets (1,073) (2,416)
Accounts payable and accrued expenses, and deferred revenue (2,017) 38,898
Taxes payable 426 560
Deferred income taxes and other long-term liabilities 2,947 4,340
----------------- ------------------
Total adjustments (9,403) 40,280
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Net cash provided by operating activities 327 72,146
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant, and equipment (2,927) (1,098)
Capital expenditures - purchase of investment assets (1,092) (2,492)
Acquisition, net of cash acquired 195 -
Proceeds from disposition of assets 4,749 6,140
Restricted cash (5,796) (4,232)
----------------- ------------------
Net cash used by investing activities (4,871) (1,682)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock (19,996) -
Proceeds from debt financing 52,841 12,181
Principal debt payments (41,371) (13,726)
Exercise of stock options - 14
Dividends paid (6,630) (5,648)
----------------- ------------------
Net cash used by financing activities (15,156) (7,179)
----------------- ------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (19,700) 63,285
CASH AND CASH EQUIVALENTS, beginning of period 42,102 46,882
----------------- ------------------
CASH AND CASH EQUIVALENTS, end of period $ 22,402 $ 110,167
================= ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 828 $ 169
================= ==================
Income taxes paid - net of refunds $ 2,374 $ 13,814
================= ==================
See notes to consolidated financial statements.
4
AMREP CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended October 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, which 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 October 31,
2007 was $1,381,000. 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 significant 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.
5
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 $529,000 at October 31, 2007 and
$395,000 at May 1, 2007 (date of adoption).
(3) Restricted Cash
---------------
Restricted cash consists of amounts held in escrow that were received in
connection with sales of investment assets that are identified as "1031 Exchange
assets" and which are restricted pending the purchase or identification of
replacement assets.
(4) Receivables
-----------
Media services operations accounts receivable, net consist of the following (in
thousands):
October 31, April 30,
2007 2007
----------------- ----------------
Fulfillment Services $ 31,350 $ 29,606
Newsstand Distribution Services,
net of estimated returns 22,883 19,550
----------------- ----------------
54,233 49,156
Less allowance for doubtful accounts (1,080) (1,331)
----------------- ----------------
$ 53,153 $ 47,825
================= ================
Newsstand Distribution Services accounts receivable are net of estimated
magazine returns of $56,172,000 at October 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 ($22,835,000 was
netted at October 31, 2007 and $21,106,000 at April 30, 2007).
(5) Investment Assets
-----------------
Investment assets, net consist of the following (in thousands):
October 31, April 30,
2007 2007
----------------- -----------------
Land held for long-term investment $ 9,734 $ 9,039
----------------- -----------------
Commercial rental properties:
Land, buildings and improvements 754 3,535
Furniture and fixtures 40 42
----------------- -----------------
794 3,577
Less accumulated depreciation (254) (451)
----------------- -----------------
540 3,126
----------------- -----------------
$ 10,274 $ 12,165
================= =================
6
(6) Property, Plant and Equipment
-----------------------------
Property, plant and equipment, net consist of the following (in thousands):
October 31, April 30,
2007 2007
----------------- -----------------
Land, buildings and improvements $ 18,160 $ 17,217
Furniture and equipment and other 43,756 41,853
----------------- -----------------
61,916 59,070
Less accumulated depreciation (31,769) (28,552)
----------------- -----------------
$ 30,147 $ 30,518
================= =================
(7) Intangible and Other Assets
---------------------------
Intangible and other assets, net consist of the following (in thousands):
October 31, April 30,
2007 2007
----------------- ----------------
Software development costs $ 9,840 $ 9,461
Deferred order entry costs 5,634 5,837
Prepaid expenses 4,329 3,302
Customer contracts and relationships 15,000 15,000
Other 4,043 5,118
----------------- ----------------
38,846 38,718
Less accumulated amortization (5,696) (4,704)
----------------- ----------------
$ 33,150 $ 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.
(8) Accounts Payable, Net and Accrued Expenses
------------------------------------------
Accounts payable, net and accrued expenses consist of the following (in
thousands):
October 31, April 30,
2007 2007
----------------- ----------------
Publisher payables, net $ 68,101 $ 63,759
Accrued expenses 7,247 6,803
Trade payables 4,183 3,701
Other 6,361 9,294
----------------- ----------------
$ 85,892 $ 83,557
================= ================
Pursuant to an arrangement with a publisher customer of the Newsstand
Distribution Services business, the Company has netted $22,835,000 and
$21,106,000 of accounts receivable against the related accounts payable at
October 31, 2007 and April 30, 2007 (see Note 4).
7
(9) Notes Payable
-------------
Notes payable consist of the following (in thousands):
October 31, April 30,
2007 2007
----------------- ----------------
Line-of-credit borrowings:
Real estate operations and other $ 17,000 $ 6,000
Media services operations 13,390 11,905
Real estate operations term loan 8,163 10,559
Other notes payable 5,216 3,835
----------------- ----------------
$ 43,769 $ 32,299
================= ================
The Company's AMREP Southwest Inc. subsidiary has a revolving credit facility
with a bank that originally was to mature in September 2008. During September
2007, the maturity date was extended to September 2009, with all other terms
remaining unchanged.
(10) Discontinued Operations
-----------------------
Loss from operations of discontinued business (net of income taxes) in the six
month period ended October 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.
(11) Acquisition
-----------
The Company received a refund of $195,000 in the second quarter of 2008 in
excess of a receivable valuation related to the acquisition of Palm Coast in
2007. The Company adjusted the original amount of goodwill recorded in the
purchase accounting for the acquisition, in accordance with Financial Accounting
Standards Board Statement No. 141, "Business Combinations".
(12) Subsequent Event
----------------
On December 5, 2007 a warehouse of approximately 30,000 square feet leased by
the Company in Oregon, Illinois was totally destroyed by fire. The warehouse was
used principally to store back issues of a number of magazines published by
certain customers for which the Company fills back-issue orders as part of its
services to these customers. The Company is in the very earliest stage of
reviewing its insurance coverage and evaluating the impact of this event on its
operations and is unable at this point to reach any conclusions as to these
matters or to determine the effect on its financial position, results of
operations and cash flows.
(13) Information About the Company's Operations in Different Industry
----------------------------------------------------------------
Segments
--------
The following tables set forth summarized data relative to the industry segments
for continuing operations in which the Company operated for the three and six
month periods ended October 31, 2007 and 2006 (tables in thousands):
Newsstand
Real Estate Fulfillment Distribution
Operations Services Services Corporate Consolidated
-------------------------------------------------------------------------------------------------------------------------------
Three months ended October 31, 2007 (a):
Revenues $ 6,428 $ 32,035 $ 3,556 $ 71 $ 42,090
8
Income from continuing operations 2,347 134 560 426 3,467
Provision for income taxes from
continuing operations 1,378 86 321 251 2,036
-----------------------------------------------------------------------------------
Income from continuing operations before
income taxes 3,725 220 881 677 5,503
Interest expense (income), net (b) - 1,394 (383) (674) 337
Depreciation and amortization 61 2,405 243 1 2,710
-----------------------------------------------------------------------------------
EBITDA (c) $ 3,786 $ 4,019 $ 741 $ 4 $ 8,550
-----------------------------------------------------------------------------------
Capital expenditures $ 277 $ 1,851 $ 21 $ 3 $ 2,152
-------------------------------------------------------------------------------------------------------------------------------
Three months ended October 31, 2006:
Revenues $ 32,430 $ 18,969 $ 4,187 $ 469 $ 56,055
Income from continuing operations 14,365 771 851 75 16,062
Provision for income taxes from
continuing operations 8,437 453 499 44 9,433
-----------------------------------------------------------------------------------
Income from continuing operations before
income taxes 22,802 1,224 1,350 119 25,495
Interest expense (income), net (b) - 167 (84) - 83
Depreciation and amortization 40 1,216 233 1 1,490
-----------------------------------------------------------------------------------
EBITDA (c) $ 22,842 $ 2,607 $ 1,499 $ 120 $ 27,068
-----------------------------------------------------------------------------------
Capital expenditures $ 2,422 $ 470 $ - $ 20 $ 2,912
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-------------------------------------------------------------------------------------------------------------------------------
Six months ended October 31, 2007 (a):
Revenues $ 25,291 $ 61,023 $ 6,867 $ 268 $ 93,449
Income from continuing operations 9,727 (1,725) 808 977 9,787
Provision (benefit) for income taxes from
continuing operations 5,712 (1,004) 464 575 5,747
-----------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 15,439 (2,729) 1,272 1,552 15,534
Interest expense (income), net (b) - 2,861 (869) (1,367) 625
Depreciation and amortization 116 4,736 487 3 5,342
-----------------------------------------------------------------------------------
EBITDA (c) $ 15,555 $ 4,868 $ 890 $ 188 $ 21,501
-----------------------------------------------------------------------------------
Goodwill $ - $ 50,246 $ 3,893 $ - $ 54,139
Total assets $ 97,011 $ 141,483 $ 48,040 $ 1,923 $ 288,457
Capital expenditures $ 1,179 $ 2,800 $ 37 $ 3 $ 4,019
-------------------------------------------------------------------------------------------------------------------------------
Six months ended October 31, 2006:
Revenues $ 69,522 $ 36,541 $ 7,442 $ 819 $ 114,324
Income from continuing operations 29,638 928 1,070 230 31,866
Provision for income taxes from
continuing operations 17,407 544 628 136 18,715
-----------------------------------------------------------------------------------
Income from continuing operations before
income taxes 47,045 1,472 1,698 366 50,581
Interest expense (income), net (b) - 292 (118) - 174
Depreciation and amortization 101 2,373 461 2 2,937
-----------------------------------------------------------------------------------
EBITDA (c) $ 47,146 $ 4,137 $ 2,041 $ 368 $ 53,692
-----------------------------------------------------------------------------------
Goodwill $ - $ 1,298 $ 3,893 $ - $ 5,191
Total assets $ 79,954 $ 47,365 $ 69,106 $ 61,535 $ 257,960
Capital expenditures $ 2,492 $ 1,070 $ 8 $ 20 $ 3,590
-------------------------------------------------------------------------------------------------------------------------------
9
(a) Segment information does not include net loss from discontinued
operations of $57,000 in the six months ended October 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 from continuing
operations 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
2007 consolidated financial statements and accompanying notes. All references in
this Item 2 to the second quarter or first six months of 2008 and 2007 mean the
fiscal three or six-month periods ended October 31, 2007 and 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 six months of 2008.
RESULTS OF OPERATIONS
---------------------
For the second quarter of 2008, net income was $3,467,000, or $0.55 per share,
compared to net income of $16,062,000, or $2.42 per share, in the second quarter
of the prior year. Results for the second quarter of both 2008 and 2007 were
10
entirely from continuing operations. For the first six months of 2008, net
income was $9,730,000, or $1.50 per share, compared to net income of
$31,866,000, or $4.79 per share, for the same period of 2007. Results for the
first six months of 2008 included a loss on discontinued operations of $57,000,
or $.01 per share, that 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 estimated and accrued
for this matter in the fourth quarter of 2007, while the results for the same
period in 2007 were entirely from continuing operations. Revenues were
$42,090,000 and $93,449,000 in the second quarter and first six months of 2008
compared to $56,055,000 and $114,324,000 in the same periods last year.
Revenues from land sales at AMREP Southwest were $3,161,000 and $21,311,000 for
the three and six month periods ended October 31, 2007 compared to $31,707,000
and $64,197,000 for the same periods of the prior year. These decreases were the
result of a substantial decline in land sales in the Company's principal market
of Rio Rancho, New Mexico, due to the softening of the real estate market in the
greater Albuquerque-metro and Rio Rancho areas. The number of permits for new
home construction in both markets was down significantly for the first ten
months of calendar 2007 compared to the same period in 2006, with Rio Rancho
showing a decrease of almost 50%. The Company believes that this decline
reflected the well-publicized problems of the national homebuilding industry,
including fewer sales of both new and existing homes, increasing numbers of
mortgage delinquencies and foreclosures and a tightening of mortgage
availability. As a result of these factors, builders have slowed the pace of
building on land previously purchased from the Company in Rio Rancho and, in
some cases, have delayed or cancelled the purchase of additional land. These
factors are also believed to have contributed to a decline in sales of
undeveloped land to both builders and investors.
In Rio Rancho, the Company sells both developed and undeveloped lots to
national, regional and local homebuilders, commercial and industrial property
developers and others. For the second quarter and first six months of 2008 and
2007, the Company's land sales in Rio Rancho have been as follows:
2007 2006
---------------------------------------- ------------------------------------------
Revenues Revenues
Acres Revenues Per Acre Acres Revenues Per Acre
Sold (in 000's) (in 000's) Sold (in 000's) (in 000's)
--------- ----------- ------------ --------- ------------ ------------
Three months ended
October 31:
Developed
Residential 10 $ 2,740 $ 274 30 $ 7,954 $ 265
Commercial - - - 31 8,504 274
--------- ----------- ------------ --------- ------------ ------------
Total Developed 10 2,740 274 61 16,458 270
Undeveloped 11 421 38 324 15,249 47
--------- ----------- ------------ --------- ------------ ------------
Total 21 $ 3,161 $ 151 385 $ 31,707 $ 82
--------- ----------- ------------ --------- ------------ ------------
Six months ended
October 31:
Developed
Residential 30 $ 9,468 $ 316 83 $ 22,456 $ 271
Commercial 14 2,921 209 44 11,798 268
--------- ----------- ------------ --------- ------------ ------------
Total Developed 44 12,389 282 127 34,254 270
Undeveloped 302 8,922 30 573 29,943 52
--------- ----------- ------------ --------- ------------ ------------
Total 346 $ 21,311 $ 62 700 $ 64,197 $ 92
--------- ----------- ------------ --------- ------------ ------------
Variances in the average selling price per acre of developed land in the three
and six month periods of 2008 compared to 2007 were generally due to a change in
11
the mix and the stage of development of specific projects from which the land
was sold. The Company offers developed and undeveloped land in Rio Rancho from a
number of different projects and selling prices may vary from project to project
and within projects depending on location, the stage of development and other
factors. The decrease in the average selling price of undeveloped land in the
second quarter and first six months of 2008 was primarily attributable to a
higher proportion of undeveloped investment land sold in the current year from
locations in Rio Rancho that are further removed from developed areas and thus
generally have lower average selling prices. The average gross profit percentage
on land sales decreased from 75% and 70% for the second quarter and first six
months of 2007 to 50% and 66% for the same periods of 2008. The reduced gross
profit percentages in fiscal 2008 were principally attributable to a change in
the mix of sales between developed and undeveloped lots sold in each of the
periods, with sales in both the three and six month periods of fiscal 2008
including a higher percentage of revenues from sales of developed lots which
generally have lower gross profit percentages than undeveloped lots. 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.
Revenues from Media Services, including both Fulfillment Services and Newsstand
Distribution Services, increased from $22,913,000 and $43,740,000 for the second
quarter and first six months of 2007 to $35,574,000 and $67,852,000 for the same
periods in 2008. These increases were attributable to the January 2007
acquisition of Palm Coast Data Holdco, Inc. ("Palm Coast") by Kable. Revenues
from Fulfillment Services operations, including the revenues of Palm Coast, were
$32,028,000 and $61,011,000 for the second quarter and first six months of 2008
compared to $18,965,000 and $36,537,000 in the same periods of the prior year.
The increase in Fulfillment Services revenues resulting from the Palm Coast
acquisition ($14,207,000 and $27,326,000 in the second quarter and first six
months) was partly offset by decreases in revenues from other parts of Kable's
Fulfillment Services business that resulted from competitive market pressures
and customer losses that occurred in earlier periods. Revenues from Kable's
Newsstand Distribution Services operations decreased from $3,948,000 and
$7,203,000 for the second quarter and first six months of 2007 to $3,546,000 and
$6,841,000 the same periods in 2008. The decrease in Newsstand Distribution
Services revenues was due primarily to reduced billings and lower commission
rates. Kable's operating expenses increased by $11,571,000 (62%) and $23,492,000
(64%) for the second quarter and first six months of 2008 compared to the same
periods in 2007, 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 has announced 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
that was announced in August 2007 and which is expected to reduce annual
operating costs by approximately $2,700,000. In October 2007, the Company
announced the planned redistribution of the fulfillment services work performed
at the Marion, Ohio facility of its Fulfillment Services business and the
scheduled closing of the Ohio facility. Approximately $700,000 in
severance-related costs are projected to be paid in connection with the Ohio
facility closure, which will be recorded as positions are eliminated during the
eleven month transitional period ending September 2008. Following the completion
of this program, the Company anticipates realizing cost savings of approximately
$2,000,000 annually, which will bring the total estimated cost savings of the
two actions to approximately $4,700,000 annually.
Interest and other revenues were $3,355,000 and $4,286,000 for the three and
six-month periods ended October 31, 2007 compared to $1,435,000 and $6,387,000
for the same periods in the prior year. During the second quarter of 2008, the
Company sold a commercial rental property at AMREP Southwest that resulted in a
pre-tax gain of $1,873,000. In addition, the Company recognized pre-tax income
of $618,000 from the forfeiture of a deposit for the purchase of land by a
12
homebuilder who did not exercise a purchase option. During the first quarter of
2007, the Company sold certain of AMREP Southwest's investment 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 $402,000 and $573,000
in the second quarter and first six months of 2008 compared to the same periods
in 2007, principally 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 second quarter and first six months of 2008 decreased by $414,000 and
$289,000 compared to the same periods in 2007 primarily due to reduced
professional and consulting fees. General and administrative costs of magazine
operations increased $1,233,000 and $2,871,000 in the second quarter and first
six months of 2008 compared to the same periods 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 revolving credit facility with a bank that originally was
to mature in September 2008. During September 2007, the maturity date was
extended to September 2009, with all other terms remaining unchanged.
On August 24, 2007, the Company paid a special cash dividend of $1.00 per share
to shareholders of record at the close of business on August 10, 2007.
Cash Flows From Operating Activities
------------------------------------
Real Estate inventory was $60,475,000 at October 31, 2007 compared to
$46,584,000 at April 30, 2007. Inventory in the Company's core real estate
market of Rio Rancho was $53,554,000 at October 31, 2007 and $39,770,000 at
April 30, 2007. The increase in Real Estate inventory in Rio Rancho was
attributable to capitalized costs incurred for the improvement of certain
projects that are in the initial stages of site development. The balance of
inventory consisted of properties in Colorado. Real estate investment assets,
which includes land held for long-term investment located in areas not planned
to be developed in the near term and thus not offered for sale, decreased from
$12,165,000 at April 30, 2007 to $10,274,000 at October 31, 2007 primarily as a
result of the commercial rental property sold at AMREP Southwest.
Real Estate receivables decreased from $25,117,000 at April 30, 2007 to
$18,921,000 at October 31, 2007, resulting primarily from the net effect of
payments received on previously issued mortgage notes offset in part by mortgage
notes received in connection with real estate sales that closed during the
second quarter of 2008. Receivables from Media Services operations increased
from $47,825,000 at April 30, 2007 to $53,153,000 at October 31, 2007, primarily
due to higher quarter-end billings at October 31, 2007 compared to April 30,
2007.
Accounts payable and accrued expenses increased from $83,557,000 at April 30,
2007 to $85,892,000 at October 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
13
due from the customers to which the Company distributes the publisher's
magazines. Accounts receivable subject to this arrangement were netted
($22,835,000 was netted at October 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. Deferred revenue decreased from
$4,352,000 at April 30, 2007 to none at October 31, 2007 as related sales
recorded under the percentage of completion were completed.
Cash Flows From Investing Activities
------------------------------------
Capital expenditures amounted to $4,019,000 and $3,590,000 in the first six
months of 2008 and 2007, primarily for computer hardware and software
development expenditures related to Kable's Fulfillment Services business and
the acquisition of real estate investment property. The Company believes that it
has adequate 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,
including its debt agreements and lease agreements, and is subject to certain
other commitments and contingencies. The table below summarizes significant
contractual obligations as of October 31, 2007 for the items indicated (in
thousands):
Contractual Less than 1 - 3 3 - 5 More than
Obligations Total 1 year years years 5 years
----- --------- ----- ----- ---------
Notes payable $43,769 $10,129 $33,215 $ 425 $ -
Operating leases
and other 24,337 4,968 8,602 5,077 5,690
----------- -------------- ------------- ------------- --------------
Total $68,106 $15,097 $41,817 $ 5,502 $ 5,690
=========== ============== ============= ============= ==============
The increase in notes payable was primarily due to additional borrowings under
the AMREP Southwest revolving line of credit. Operating leases and other
includes $1,910,000 of unrecognized tax benefits and related interest accrued
in accordance with FIN 48. 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
with non-affiliates of the Company. On October 8, 2007, the Company announced
that it had completed its 500,000-share repurchase program. The shares were
purchased in open market transactions for a total purchase price, including
commissions, of $15,933,000, or an average of $31.87 per share.
The Company also announced on October 8, 2007 that its Board of Directors had
authorized a further repurchase of up to an additional 500,000 shares of the
Company's common stock. The purchases may be made from time-to-time either in
the open market or through negotiated private transactions with non-affiliates
of the Company. As of October 31, 2007, the Company had purchased 116,400 shares
of the additional 500,000 shares in open market transactions for a total
purchase price, including commissions, of $4,063,000, or an average of $34.91
per share.
14
During the period from November 1, 2007 through December 7, 2007, the Company
repurchased 10,000 shares, all in the open market, for an aggregate purchase
price, including commissions, of $318,900, or an average of $31.89 per
share.
All repurchases were funded from cash on hand and borrowings, 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
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 October 31, 2007, borrowings of
$40,053,000 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.
15
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
------- -----------------------------------------------------------
The Company purchased shares of its common stock in open market transactions
during the three-month period ended October 31, 2007 as summarized in the
following table:
Total Number of
Shares Purchased as Maximum Number of
Total Number Part of Publicly Shares that May Yet Be
of Shares Average Price Announced Plans Purchased Under the
Period Purchased (1) Paid Per Share or Programs Plans or Programs
----------------------------------- ---------------- --------------- ------------------ ----------------------
August 1, 2007 - August 31, 2007 250,000 $33.62 250,000 250,000
September 1, 2007 - September 30,
2007 186,000 $30.83 186,000 64,000
October 1, 2007 - October 31, 2007 180,400 $32.36 180,400 383,600
---------------- --------------- ------------------ ----------------------
Total 616,400 $32.41 616,400 383,600
================ =============== ================== ======================
Note (1) - 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. The 500,000 shares repurchase was completed on October 8, 2007. On
October 8, 2007, the Company announced that its Board of Directors had
authorized a further 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. There is no designated expiration date for the program. All of the
purchases were made in the open market and were part of the publicly announced
programs.
16
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
The 2007 Annual Meeting of Shareholders of the Company was held on October 2,
2007. At the meeting, Samuel N. Seidman and Lonnie A. Coombs were reelected
directors of the Company by the following votes:
For Withheld
--- --------
Samuel N. Seidman 6,103,096 144,678
Lonnie A. Coombs 6,125,372 122,402
Item 5. Other Information
------- -----------------
On December 5, 2007 a warehouse of approximately 30,000 square feet leased by
the Company in Oregon, Illinois was totally destroyed by fire. The warehouse was
used principally to store back issues of a number of magazines published by
certain customers for which the Company fills back-issue orders as part of its
services to these customers. The Company is in the very earliest stage of
reviewing its insurance coverage and evaluating the impact of this event on its
operations and is unable at this point to reach any conclusions as to these
matters or to determine the effect on its financial position, results of
operations and cash flows.
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.
17
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: December 10, 2007 AMREP CORPORATION
(Registrant)
By: /s/ Peter M. Pizza
---------------------------------------------
Peter M. Pizza
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
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 - Filed
herewith.
19