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 January 31, 2007
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission File Number 1-4702
-------
AMREP Corporation
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 59-0936128
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 Alexander Park , Suite 204, Princeton, New Jersey 08540
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (609) 716-8200
-----------------------------
Not Applicable
--------------------------------------------------------------------------------
(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 Non-accelerated filer X
---- ---- ----
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
------------- -------------
Number of Shares of Common Stock, par value $.10 per share, outstanding at
January 31, 2007 - 6,653,112.
AMREP CORPORATION AND SUBSIDIARIES
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
January 31, 2007 and April 30, 2006 1
Consolidated Statements of Operations and Retained Earnings
(Unaudited) Three Months Ended January 31, 2007 and 2006 2
Consolidated Statements of Operations and Retained Earnings
(Unaudited) Nine Months Ended January 31, 2007 and 2006 3
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended January 31, 2007 and 2006 4
Notes to Consolidated Financial Statements 5 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1A. Risk Factors 16
Item 6. Exhibits 17
SIGNATURE 17
EXHIBIT INDEX 18
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------- --------------------
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Thousands, except par value and number of shares)
January 31, April 30,
2007 2006
------------------ -------------------
ASSETS:
Cash and cash equivalents $ 46,626 $ 46,882
Receivables, net:
Real estate operations 22,480 14,592
Media services operations 53,353 37,140
------------------ -------------------
75,833 51,732
Real estate inventory 40,148 47,533
Investment assets, net 12,018 11,586
Property, plant and equipment, net 31,817 10,879
Other assets, net 35,222 15,238
Goodwill 54,661 5,191
------------------ -------------------
TOTAL ASSETS $ 296,325 $ 189,041
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued expenses $ 73,946 $ 39,382
Deferred revenue 7,891 7,741
Notes payable:
Amounts due within one year 4,438 1,673
Amounts subsequently due 41,879 4,343
------------------ -------------------
46,317 6,016
Taxes payable 2,513 4,548
Deferred income taxes 9,802 9,150
Accrued pension cost 3,385 3,234
------------------ -------------------
TOTAL LIABILITIES 143,854 70,071
------------------ -------------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
Shares authorized - 20,000,000; 7,419,204 shares issued
at January 31, 2007 and 7,417,204 at April 30, 2006 741 741
Capital contributed in excess of par value 46,073 45,772
Retained earnings 115,023 81,875
Accumulated other comprehensive loss, net (4,072) (4,072)
Treasury stock, at cost; 766,092 shares at January 31, 2007
and 773,592 shares at April 30, 2006 (5,294) (5,346)
------------------ -------------------
TOTAL SHAREHOLDERS' EQUITY 152,471 118,970
------------------ -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 296,325 $ 189,041
================== ===================
See notes to consolidated financial statements.
1
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings (Unaudited)
Three Months Ended January 31, 2007 and 2006
(Thousands, except per share amounts)
2007 2006
----------------- -------------------
REVENUES:
Real estate operations - land sales $ 16,563 $ 12,621
Media services operations 24,116 22,449
Interest and other 1,510 519
----------------- -------------------
42,189 35,589
----------------- -------------------
COSTS AND EXPENSES:
Real estate cost of sales - land sales 6,731 6,618
Operating expenses:
Media services operating expenses 20,296 18,989
Real estate commissions and selling 273 480
Other operations 214 311
General and administrative:
Media services operations 2,329 1,782
Real estate operations and corporate 1,195 1,039
Interest expense 152 78
----------------- -------------------
31,190 29,297
----------------- -------------------
Income before income taxes 10,999 6,292
PROVISION FOR INCOME TAXES 4,069 1,051
----------------- -------------------
NET INCOME 6,930 5,241
DIVIDENDS PAID - (23,226)
RETAINED EARNINGS, beginning of period 108,093 89,471
----------------- -------------------
RETAINED EARNINGS, end of period $ 115,023 $ 71,486
================= ===================
EARNINGS PER SHARE - BASIC AND DILUTED $ 1.04 $ 0.79
================= ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,653 6,635
================= ===================
See notes to consolidated financial statements.
2
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings (Unaudited)
Nine Months Ended January 31, 2007 and 2006
(Thousands, except per share amounts)
2007 2006
----------------- -------------------
REVENUES:
Real estate operations - land sales $ 80,760 $ 31,680
Media services operations 67,855 67,299
Interest and other 7,898 1,471
----------------- -------------------
156,513 100,450
----------------- -------------------
COSTS AND EXPENSES:
Real estate cost of sales - land sales 26,215 16,746
Operating expenses:
Media services operating expenses 57,121 55,971
Real estate commissions and selling 1,187 1,058
Other operations 766 927
General and administrative:
Media services operations 5,646 5,926
Real estate operations and corporate 3,672 3,168
Interest expense 326 287
----------------- -------------------
94,933 84,083
----------------- -------------------
Income from continuing operations before income taxes 61,580 16,367
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS 22,784 4,262
----------------- -------------------
INCOME FROM CONTINUING OPERATIONS 38,796 12,105
INCOME FROM OPERATIONS OF DISCONTINUED BUSINESS (NET OF INCOME TAXES) - 3,556
----------------- -------------------
NET INCOME 38,796 15,661
RETAINED EARNINGS, beginning of period 81,875 82,695
DIVIDEND PAID (5,648) (26,870)
----------------- -------------------
RETAINED EARNINGS, end of period $ 115,023 $ 71,486
================= ===================
EARNINGS PER SHARE - BASIC AND DILUTED:
CONTINUING OPERATIONS $ 5.84 $ 1.83
DISCONTINUED OPERATIONS - 0.53
----------------- -------------------
EARNINGS PER SHARE - BASIC AND DILUTED $ 5.84 $ 2.36
================= ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,648 6,631
================= ===================
See notes to consolidated financial statements.
3
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended January 31, 2007 and 2006
(Thousands)
2007 2006
----------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,796 $ 15,661
----------------- -------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,604 4,055
Non-cash credits and charges:
Pension expense accrual 151 154
Provision for doubtful accounts 47 (116)
Stock based compensation - Directors' Plan 339 205
Gain on condemnation of utility company - (5,516)
Changes in assets and liabilities:
Receivables (14,066) (302)
Real estate inventory 7,426 1,161
Other assets (2,972) (3,029)
Accounts payable and accrued expenses 26,933 (1,467)
Deferred revenue 150 -
Taxes payable (2,035) (1)
Deferred income taxes 3,077 637
----------------- -------------------
Total adjustments 23,654 (4,219)
----------------- -------------------
Net cash provided by operating activities 62,450 11,442
----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Property, plant, and equipment (1,346) (3,765)
Purchase of investment assets (2,564) -
Purchase of business, net of cash acquired (95,521) -
Proceeds from condemnation of utility company - 4,047
Proceeds from sale of assets 2,058 -
----------------- -------------------
Net cash provided (used) by investing activities (97,373) 282
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 66,293 24,139
Principal debt payments (25,992) (24,529)
Exercise of stock options 14 40
Dividends paid (5,648) (26,870)
----------------- -------------------
Net cash provided (used) by financing activities 34,667 (27,220)
----------------- -------------------
Decrease in cash and cash equivalents (256) (15,496)
CASH AND CASH EQUIVALENTS, beginning of period 46,882 37,743
----------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 46,626 $ 22,247
================= ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 279 $ 294
================= ===================
Income taxes paid - net of refunds $ 21,735 $ 5,713
================= ===================
See notes to consolidated financial statements.
4
AMREP CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended January 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 a good indication 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, 2006 that was previously filed with the Securities and Exchange
Commission.
(2) Acquisition
-----------
On January 16, 2007, the Company, through a newly-created subsidiary ("Newco")
of its Kable Media Services, Inc. ("Kable") subsidiary, completed its
acquisition (the "Acquisition") of Palm Coast Data Holdco, Inc ("Palm Coast"), a
provider of fulfillment services for magazine publishers and others, pursuant to
the terms of that certain Agreement and Plan of Merger (the "Agreement") dated
as of November 7, 2006. The Agreement provided for the Acquisition to occur by
the merger of Newco with and into Palm Coast, with Palm Coast surviving the
merger. As a result of the merger, Palm Coast is now a direct wholly-owned
subsidiary of Kable.
The merger consideration totaled approximately $92,000,000 plus an additional
amount for working capital and certain other adjustments preliminarily estimated
at $3,700,000. The acquisition was financed with existing cash and borrowings.
The results of operations of Palm Coast have been included in the consolidated
financial statements since the date of acquisition. The following unaudited pro
forma consolidated information reflects the results of the Company's operations
as if the acquisition had occurred at the beginning of each nine month period.
These pro forma results are not necessarily an indication of what may be
expected to occur in future periods (in thousands, except per share data):
For the Nine Months
Ended January 31
----------------
2007 2006
---- ----
Revenue $ 193,385 $ 138,380
Net income $ 38,578 $ 15,226
Earnings per share - basic and diluted $ 5.80 $ 2.30
5
The preliminary allocation of the purchase price of Palm Coast to net tangible
and identifiable intangible assets is based on their estimated fair values as of
January 16, 2007, determined using valuations and other studies that are not yet
complete. The excess of the purchase price plus estimated fees and expenses
related to the acquisition over the net tangible and identifiable intangible
assets is allocated to goodwill. The purchase price (including closing costs and
excluding cash acquired) has been preliminarily allocated as follows (in
thousands):
Receivables $ 10,082
Property, plant and equipment 22,886
Deferred taxes 2,425
Deferred order entry costs 1,636
Customer contracts 14,500
Goodwill 49,470
Accounts payable and accrued expenses (7,631)
Other assets 2,153
---------------
$ 95,521
===============
(3) Receivables
-----------
Media services operations accounts receivable, net consist of the following (in
thousands):
January 31, April 30,
2007 2006
--------------- ----------------
Fulfillment Services $ 30,499 $ 20,266
Newsstand Distribution Services,
net of estimated returns 24,355 18,409
--------------- ----------------
54,854 38,675
Less allowance for doubtful accounts (1,501) (1,535)
--------------- ----------------
$ 53,353 $ 37,140
=============== ================
Newsstand Distribution Services accounts receivable are net of estimated
magazine returns of $55,584,000 at January 31, 2007 and $54,071,000 at April 30,
2006. In addition, pursuant to an arrangement with one publisher customer of the
Newsstand Distribution Services business that commenced in April 2006, the
publisher bears the ultimate credit risk of non-collection of amounts due from
the customers to which the Company distributed the publisher's magazines under
this arrangement. Accounts receivable subject to this arrangement were netted
($33,103,000 was netted at January 31, 2007 and $20,368,000 at April 30, 2006)
against the related accounts payable due the publisher on the accompanying
consolidated balance sheets.
(4) Property, Plant and Equipment
-----------------------------
Property, plant and equipment, net consist of the following (in thousands):
January 31, April 30,
2007 2006
---------------- ----------------
Land, buildings and improvements $ 17,120 $ 4,397
Furniture and equipment 34,847 30,117
Other 6,665 96
---------------- ----------------
58,632 34,610
Less accumulated depreciation (26,815) (23,731)
---------------- ----------------
$ 31,817 $ 10,879
================ ================
6
(5) Other Assets
------------
Other assets, net consist of the following (in thousands):
January 31, April 30,
2007 2006
---------------- ----------------
Software development costs $ 9,293 $ 7,787
Deferred order entry costs 5,959 3,872
Prepaid expenses 4,386 2,137
Customer contracts and relationships 14,500 -
Other 4,872 3,841
---------------- ----------------
39,010 17,637
Less accumulated amortization (3,788) (2,399)
---------------- ----------------
$ 35,222 $ 15,238
================ ================
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 data base
files and are charged directly to operations over a 12-month period. Customer
contracts and relationships are based on the preliminary allocation of the
purchase price of Palm Coast (see Note 2) and are amortized over 12 years.
(6) Accounts Payable and Accrued Expenses
-------------------------------------
Accounts payable and accrued expenses consist of the following (in thousands):
January 31, April 30,
2007 2006
---------------- ----------------
Publisher payables, net $ 57,213 $ 27,273
Accrued expenses 11,551 4,320
Trade payables 5,061 2,602
Other 121 5,187
---------------- ----------------
$ 73,946 $ 39,382
================ ================
Publisher payables increased from April 30, 2006 to January 31, 2007 as a result
of additional magazine purchases by the Company under an arrangement with a
publisher customer of the Newsstand Distribution Services business that
commenced in April 2006. In addition, pursuant to this arrangement the Company
has netted $33,103,000 and $20,368,000 of accounts receivable against the
related accounts payable at January 31, 2007 and April 30, 2006 (see Note 3).
(7) Notes Payable
-------------
January 31, April 30,
2007 2006
--------------- ----------------
Notes payable:
Line-of-credit borrowings:
Real estate operations and other $ 15,400 $ -
Media services operations 26,900 2,377
Other notes payable 4,017 3,639
--------------- ----------------
$ 46,317 $ 6,016
=============== ================
7
In January 2007, the Company's AMREP Southwest Inc. subsidiary entered into a
new loan agreement that replaced a prior loan agreement entered into in
September 2006. The new loan agreement (the "ASW Credit Facility") added a
$14,180,000 term loan facility to the unsecured $25,000,000 revolving credit
facility provided in the September 2006 agreement.
The revolving credit facility matures September 17, 2008 and is used to support
real estate development in New Mexico. Borrowings bear annual interest at the
borrower's option at (i) the prime rate (8.25% at January 31, 2007) less 1.00%,
or (ii) LIBOR (5.32% at January 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 January 31,
2007, the outstanding balance of the revolving credit facility was $4,500,000
with an interest rate of 6.97%. The term loan bears annual interest at the
30-day LIBOR rate plus 1.75% (7.07% at January 31, 2007), matures December 15,
2008 and is secured by certain of the borrower's notes receivable from real
estate sales. The term loan requires prepayment in the amount of collections on
the notes receivable and the amount of any that have experienced payment
defaults. At January 31, 2007, the outstanding balance of the term loan was
$10,900,500. The ASW Credit Facility contains a number of restrictive covenants,
including one that requires the borrower to maintain a minimum tangible net
worth.
In connection with the completion of the acquisition of Palm Coast, the
Company's Kable subsidiary and certain of its direct and indirect subsidiaries
entered into a Second Amended and Restated Loan and Security Agreement with a
bank (the "Present Kable Loan Agreement"). Certain of Kable's direct and
indirect subsidiaries were previously parties to an Amended and Restated Loan
and Security Agreement dated as of April 28, 2005, as amended (the "Prior Kable
Loan Agreement"). The Prior Kable Loan Agreement consisted of several revolving
credit facilities and capital expenditure lines of credit.
The Present Kable Loan Agreement amended the Prior Kable Loan Agreement and
canceled certain of the existing credit facilities, consolidated in part certain
of the revolving credit facilities and existing term debt and added Kable, Palm
Coast and Palm Coast's subsidiary as additional borrowers. The credit facilities
under the Present Kable Loan Agreement consist of: (i) a revolving credit loan
and letter of credit facility in an aggregate principal amount of up to
$35,000,000 ("Facility A"), a portion of which was used to fund part of the
merger consideration for the acquisition of Palm Coast, and the remainder of
which may be used for working capital purposes; (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 under the Present Kable Loan Agreement are
secured by substantially all of their assets other than (i) real property and
(ii) any borrower's interest in the capital securities of any other borrower or
any subsidiary of any borrower.
The Facility A, C and D loans mature in May 2010 and bear annual interest at
fluctuating rates that, at the borrowers' option, may be either (i) reserve
adjusted LIBOR rates (5.3% at January 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 in the Present Kable Loan Agreement, or (ii) the Lender's
prime rate (8.25% at January 31, 2007). The Facility B loan matures December 31,
2009 and bears annual interest at a rate of 6.4%. At January 31, 2007, the
outstanding balance under Facility A was $26,900,000 with an interest rate of
7.30%.
The Present Kable Loan Agreement 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
8
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.
Other notes payable consist of equipment financing loans and a note payable
related to the acquisition of distribution contracts with a weighted average
interest rate of 5.7% at January 31, 2007.
(8) Discontinued Operations
-----------------------
Income from operations of discontinued business in the nine month period ended
January 31, 2006 reflects the gain from the disposition of the primary assets of
the Company's El Dorado, New Mexico water utility subsidiary, which were taken
through condemnation proceedings.
(9) 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 nine
month periods ended January 31, 2007 and 2006.
THREE MONTHS: Newsstand
Real Estate Fulfillment Distribution
Operations Services Services Corporate Consolidated
-------------- ------------- ------------- ------------- ------------
January 2007 (Thousands):
Revenues $ 17,355 $ 20,612 $ 3,737 $ 485 $ 42,189
Operating and G&A expenses 7,682 19,569 3,056 731 31,038
Management fee (income) 249 206 43 (498) -
Interest expense - 456 (191) (113) 152
-------------- ------------- ------------- ------------- ------------
Pretax income contribution from
continuing operations $ 9,424 $ 381 $ 829 $ 365 $ 10,999
============== ============= ============= ============= ============
--------------------------------------------------------------------------------------------------------------
January 2006 (Thousands):
Revenues $ 12,943 $ 19,185 $ 3,264 $ 197 $ 35,589
Operating and G&A expenses 7,787 17,972 2,800 660 29,219
Management fee (income) 250 212 36 (498) -
Interest expense - 114 (36) - 78
-------------- ------------- ------------- ------------- ------------
Pretax income contribution from
continuing operations $ 4,906 $ 887 $ 464 $ 35 $ 6,292
============== ============= ============= ============= ============
--------------------------------------------------------------------------------------------------------------
NINE MONTHS: Newsstand
Real Estate Fulfillment Distribution
Operations Services Services Corporate Consolidated
-------------- ------------- ------------- ------------- ------------
January 2007 (Thousands):
Revenues $ 86,877 $ 57,153 $ 11,179 $ 1,304 $ 156,513
Operating and G&A expenses 29,661 53,933 8,833 2,180 94,607
Management fee (income) 747 619 128 (1,494) -
Interest expense - 748 (309) (113) 326
-------------- ------------- ------------- ------------- ------------
Pretax income contribution from
continuing operations $ 56,469 $ 1,853 $ 2,527 $ 731 $ 61,580
============== ============= ============= ============= ============
Identifiable assets $ 82,259 $ 97,125 $ 40,725 $ 21,555 $ 241,664
Goodwill $ - $ 50,768 $ 3,893 $ - $ 54,661
9
--------------------------------------------------------------------------------------------------------------
January 2006 (Thousands):
Revenues $ 32,607 $ 57,243 $ 10,056 $ 544 $ 100,450
Operating and G&A expenses 19,899 53,440 8,457 2,000 83,796
Management fee (income) 748 638 108 (1,494) -
Interest expense - 341 (54) - 287
-------------- ------------- ------------- ------------- ------------
Pretax income contribution from
continuing operations $ 11,960 $ 2,824 $ 1,545 $ 38 $ 16,367
============== ============= ============= ============= ============
Identifiable assets $ 78,566 $ 45,197 $ 33,757 $ 12,567 $ 170,087
Goodwill $ - $ 1,298 $ 3,893 $ - $ 5,191
Interest expense includes intersegment interest income which is eliminated in
consolidation.
--------------------------------------------------------------------------------------------------------------
(10) New and Emerging Accounting Standards
-------------------------------------
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
the Company's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes", and provides guidance for recognizing and
measuring tax positions taken or that are expected to be taken in a tax return
that directly or indirectly affect amounts reported in the financial statements.
FIN 48 also provides accounting guidance for related income tax effects of tax
positions that do not meet the recognition threshold specified in this
interpretation. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently evaluating the impact that the adoption of
this Statement will have on its financial position, results of operation and
cash flows.
In September 2006, the FASB issued Statement No. 158 ("SFAS No. 158"),
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans - an amendment of FASB Statement Nos. 87, 88, 106, and 132(R)". SFAS No.
158 requires a company that sponsors a postretirement benefit plan to fully
recognize, as an asset or liability, the overfunded or underfunded status of its
benefit plan in its balance sheet. The funded status is measured as the
difference between the fair value of the plan's assets and its benefit
obligation. This provision is effective for public companies for fiscal years
ending after December 15, 2006. In addition, SFAS No. 158 also requires a
company to measure its plan assets and benefit obligations as of its fiscal
year-end balance sheet date. Currently, a company is permitted to choose a
measurement date up to three months prior to its fiscal year-end to measure plan
assets and obligations. This provision is effective for all companies for fiscal
years ending after December 15, 2008. The Company does not expect the adoption
of this Statement will have a material impact on its financial position, results
of operations or cash flows.
In February 2007, the FASB issued Statement No. 159 ("SFAS No. 159"), "The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115", which provides all entities with an option
to report selected financial assets and liabilities at fair value. The
objective of the SFAS No. 159 is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in earnings caused by
measuring related assets and liabilities differently without having to apply the
complex provisions of hedge accounting. Certain specified items are eligible
for the irrevocable fair value measurement option as established by SFAS No.
159. SFAS No. 159 is effective as of the beginning of an entity's first fiscal
year beginning after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007 provided
10
the entity also elects to apply the provisions of FASB Statement No. 157, "Fair
Value Measurements". The Company is currently evaluating the impact that the
adoption of this Statement will have on its financial position, results of
operation and cash flows.
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 third quarter or first nine months of 2007 and 2006 mean the
fiscal three or nine month periods ended January 31, 2007 and January 31, 2006.
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 2006
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, 2006 (the "2006 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 2006 consolidated financial statements, and the critical accounting policies
and estimates are described in Management's Discussion and Analysis included in
Item 7 in the 2006 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 is
included in the notes to the 2006 consolidated financial statements. The Company
did not adopt an accounting policy in the first nine months of fiscal 2007 that
had a material impact on its financial condition, liquidity or results of
operations.
RESULTS OF OPERATIONS
---------------------
For the third quarter of 2007, net income was $6,930,000, or $1.04 per share,
compared to net income of $5,241,000, or $0.79 per share, in the third quarter
of 2006. For the first nine months of 2007, net income was $38,796,000, or $5.84
per share, compared to net income of $15,661,000, or $2.36 per share, in the
same period of 2006. Results for the third quarter and first nine months of 2007
were entirely from continuing operations, as were the results for the third
quarter of 2006. The results for the first nine months of 2006 included a net
gain from discontinued operations of $3,556,000, or $0.53 per share. Revenues
were $42,189,000 and $156,513,000 in the current year's third quarter and first
nine months compared to $35,589,000 and $100,450,000 in the same periods last
year.
11
Revenues from land sales at the Company's AMREP Southwest subsidiary increased
from $12,621,000 in the third quarter of fiscal 2006 to $16,563,000 in fiscal
2007's third quarter. For the nine months ended January 31, land sale revenues
increased from $31,680,000 last year to $80,760,000 this year. The revenue
growth in both the three and nine month periods of 2007 was due to higher
average selling prices of residential lots, resulting in part from the mix of
lots sold, more commercial land sales and, for the nine month period, a greater
number of residential lots sold in fiscal 2007 than in 2006. The average gross
profit percentage on land sales rose from 48% and 47% in the third quarter and
first nine months of 2006 to 59% and 68% for the same periods of 2007,
reflecting the higher average selling prices in the first nine months of fiscal
2007 and the mix of residential lots sold in each of the periods. As a result of
these factors, the pretax income contribution from AMREP Southwest increased
from $4,906,000 and $11,960,000 in the three and nine month periods ended
January 31, 2006 to $9,424,000 and $56,469,000 in the same periods this year.
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 the Company's Kable Media Services operations (excluding interest)
increased from $22,449,000 in the third quarter of 2006 to $24,116,000 in the
same quarter of the current year. For the nine months ended January 31, revenues
increased from $67,299,000 last year to $67,855,000 this year. The increase in
revenues for both the quarter and the nine-month period was primarily
attributable to the January 16, 2007 acquisition of Palm Coast Data Holdco, Inc.
("Palm Coast"). Newsstand Distribution Services revenues increased by $248,000
(8%) and $658,000 (7%) for the three and nine-month periods ended January 31,
2007 compared to the same periods last year, principally from increased
distribution volumes of magazines and new business. Fulfillment Services
revenues increased by $1,419,000 (7%) for the third quarter ending January 31,
2007 compared to the same quarter in the prior year as a result of the Palm
Coast acquisition discussed above, with Palm Coast's revenues being included in
the consolidated financial statements for a 15 day period. For the nine-month
period ending January 31, Fulfillment Services revenues decreased $102,000 for
2007 compared to 2006 as the additional revenues for 15 days associated with the
Palm Coast acquisition were offset by the effect this year of previously
reported customer losses that occurred in earlier periods. Media Services
operating expenses increased by $1,307,000 (7%) for the third quarter of 2007
and by $1,150,000 (2%) for the first nine months of 2007 compared to the same
periods of the prior year. These increases were primarily attributable to (i)
the addition of operating expenses of Palm Coast offset in part by decreased
payroll and benefit expenses in other Fulfillment Services business and (ii) an
increase in Newsstand Distribution Services operating expenses because of
additional costs, principally payroll, associated with the growth of that
business.
Interest and other revenues increased by $991,000 and $6,427,000 in the three
and nine months ended January 31, 2007 compared to the same periods of the prior
year, primarily as a result of increased interest income on invested cash
balances in the current year as well as from the sale in the first quarter of
fiscal 2007 of certain AMREP Southwest non-inventory real estate assets,
including the Company's office building in Rio Rancho, New Mexico which in the
aggregate contributed a pre-tax gain of $4,107,000.
Real estate commissions and selling expenses decreased by $207,000 in the third
quarter of 2007 compared to 2006, primarily due to decreases in variable
commissions and selling expenses. For the first nine months of 2007, real estate
commissions and selling expenses increased by $129,000 compared to the same
period of the prior year, primarily due to costs incurred in relation to
increased land sales in the first two quarters. Such costs generally vary
depending upon the terms of specific land sale transactions. Real estate and
corporate general and administrative expenses increased by $156,000 and $504,000
in the third quarter and first nine months of 2007 compared to the same prior
year periods due to increased real estate professional and consulting fees and,
with respect to the nine month period, an increase in the Company's stock price
12
which was used to value a portion of directors' compensation paid in stock.
General and administrative costs of Media Services increased $547,000 for the
third quarter compared to 2006 due primarily to the addition of Palm Coast.
These costs decreased $280,000 for the first nine months of 2007, however,
compared with the same prior year period as the increase attributable to Palm
Coast was offset by continuing favorable variances in payroll and related
benefit costs.
The Company's effective tax rate from continuing operations is estimated to be
37% for the third quarter and first nine months of 2007 compared to 17% and 26%
for the same periods in fiscal 2006. The lower effective tax rate in 2006
compared to the current year was primarily due to tax benefits associated with
charitable contributions of land by the real estate business in fiscal 2006.
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
------------------------------------
In January 2007, the Company's AMREP Southwest Inc. subsidiary entered into a
new loan agreement that replaced a prior loan agreement entered into in
September 2006. The new loan agreement (the "ASW Credit Facility") added a
$14,180,000 term loan facility to the unsecured $25,000,000 revolving credit
facility provided in the September 2006 agreement.
The revolving credit facility matures September 17, 2008 and is used to support
real estate development in New Mexico. Borrowings bear annual interest at the
borrower's option at (i) the prime rate (8.25% at January 31, 2007) less 1.00%,
or (ii) LIBOR (5.32% at January 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 January 31,
2007, the outstanding balance of the revolving credit facility was $4,500,000
with an interest rate of 6.97%. The term loan bears annual interest at the
30-day LIBOR rate plus 1.75% (7.07% at January 31, 2007), matures December 15,
2008 and is secured by certain of the borrower's notes receivable from real
estate sales. The term loan requires prepayment in the amount of collections on
the notes receivable and the amount of any that have experienced payment
defaults. At January 31, 2007, the outstanding balance of the term loan was
$10,900,500. The ASW Credit Facility contains a number of restrictive covenants,
including one that requires the borrower to maintain a minimum tangible net
worth.
In connection with the completion of the acquisition of Palm Coast, the
Company's Kable subsidiary and certain of its direct and indirect subsidiaries
entered into a Second Amended and Restated Loan and Security Agreement with a
bank (the "Present Kable Loan Agreement"). Certain of Kable's direct and
indirect subsidiaries were previously parties to an Amended and Restated Loan
and Security Agreement dated as of April 28, 2005, as amended (the "Prior Kable
Loan Agreement"). The Prior Kable Loan Agreement consisted of several revolving
credit facilities and capital expenditure lines of credit.
The Present Kable Loan Agreement amended the Prior Kable Loan Agreement and
canceled certain of the existing credit facilities, consolidated in part certain
of the revolving credit facilities and existing term debt and added Kable, Palm
Coast and Palm Coast's subsidiary as additional borrowers. The credit facilities
under the Present Kable Loan Agreement consist of: (i) a revolving credit loan
and letter of credit facility in an aggregate principal amount of up to
$35,000,000 ("Facility A"), a portion of which was used to fund part of the
merger consideration for the acquisition of Palm Coast, and the remainder of
which may be used for working capital purposes; (ii) a secured term loan of
approximately $3,000,000 ("Facility B"); (iii) a capital expenditure line of
13
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 under the Present Kable Loan Agreement are
secured by substantially all of their assets other than (i) real property and
(ii) any borrower's interest in the capital securities of any other borrower or
any subsidiary of any borrower.
The Facility A, C and D loans mature in May 2010 and bear annual interest at
fluctuating rates that, at the borrowers' option, may be either (i) reserve
adjusted LIBOR rates (5.3% at January 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 in the Present Kable Loan Agreement, or (ii) the Lender's
prime rate (8.25% at January 31, 2007). The Facility B loan matures December 31,
2009 and bears annual interest at a rate of 6.4%. At January 31, 2007, the
outstanding balance under Facility A was $26,900,000 with an interest rate of
7.30%.
The Present Kable Loan Agreement 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 14, 2006, the Board of Directors declared a special cash dividend of
$0.85 per common share payable on August 16, 2006 to shareholders of record at
the close of business on July 31, 2006. Previously, the Board had declared
special dividends of $0.55, $0.40 and $0.25 per share following the close of
AMREP's fiscal years ending April 30, 2005, 2004 and 2003, and had declared an
additional special dividend of $3.50 per share in December 2005. The Board has
stated it may consider special dividends from time-to-time in the future in
light of conditions then existing, including earnings, financial condition, cash
position, and capital requirements and other needs. Notwithstanding such
statement and the status of such future conditions, no assurance is given that
there will be any such future dividends declared or that future dividend
declarations, if any, will be similar in amount or frequency with past
dividends.
Cash Flows From Operating Activities
------------------------------------
Real estate inventory was $40,148,000 at January 31, 2007 compared to
$47,533,000 at April 30, 2006. Inventory in the Company's core real estate
market of Rio Rancho was $33,408,000 at January 31, 2007 and $40,981,000 at
April 30, 2006. The balance of inventory consisted of properties in Colorado.
Real estate receivables increased from $14,592,000 at April 30, 2006 to
$22,480,000 at January 31, 2007 resulting from the net effect of mortgage notes
received by AMREP Southwest in connection with real estate sales that closed
during the first nine months of 2007 offset in part by payments received on
mortgage notes held by AMREP Southwest. Receivables from Media Services
operations increased from $37,140,000 at April 30, 2006 to $53,353,000 at
January 31, 2007, primarily due to (i) the timing of quarter-end billings and
cash collections and (ii) the addition of Palm Coast.
Accounts payable and accrued expenses increased from $39,382,000 at April 30,
2006 to $73,946,000 at January 31, 2007, primarily as a result of an increase in
the amounts due publishers under the distribution arrangement referred to above
with a new publisher customer of the Newsstand Distribution Services business
that commenced in April 2006 and, to a lesser extent, the addition of Palm
Coast. Under this new distribution arrangement, the 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
14
to this arrangement were netted ($33,103,000 was netted at January 31, 2007 and
$20,368,000 at April 30, 2006) 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 for which it remains obligated.
Cash Flows From Investing Activities
------------------------------------
On January 16, 2007, the Company, through a newly-created subsidiary of Kable,
acquired Palm Coast. The merger consideration totaled approximately $92,000,000
plus an additional amount for working capital and certain other adjustments
estimated at $3,700,000. The acquisition was financed with existing cash and
borrowings.
Capital expenditures amounted to $3,910,000 and $3,765,000 in the first nine
months of 2007 and 2006 and were 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 cash and financing capability to provide for its anticipated future
capital expenditures.
The Company is obligated to make future payments under various contracts,
including its debt agreements and lease agreements, and it is subject to certain
other commitments and contingencies. The table below summarizes significant
contractual cash obligations as of January 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 $ 46,317 $ 4,438 $ 14,979 $ 26,900 $ -
Operating leases 26,422 5,743 7,762 5,327 7,590
------------ ------------- ------------ ------------ --------------
Total $ 72,739 $ 10,181 $ 22,741 $ 32,227 $ 7,590
============ ============= ============ ============ ==============
Refer to Notes 9, 14 and 15 to the consolidated financial statements included in
the 2006 Form 10-K for additional information on long-term debt and commitments
and contingencies.
Statement of Forward-Looking Information
----------------------------------------
Certain information included herein and in other Company statements, reports and
filings with the Securities and Exchange Commission is forward-looking within
the meaning of the Private Securities Litigation Reform Act of 1995. Refer to
Item 7 of the 2006 Form 10-K for a discussion of the assumptions and factors on
which these statements are based. Any changes in the actual outcome of these
assumptions and factors could produce significantly different results;
accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty. AMREP Corporation disclaims any
intention or obligation to update or revise any 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 January 31, 2007, $42,301,000 of
consolidated borrowings was subject to variable interest rates.
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 1A. Risk Factors
-------- ------------
As described below, a recent acquisition by the Company may involve a
further risk to its business.
IF THE RECENTLY ACQUIRED PALM COAST DATA BUSINESS IS NOT EFFICIENTLY INTEGRATED
WITH KABLE'S EXISTING FULFILLMENT BUSINESS, THE COMPANY MAY NOT REALIZE THE
EXPECTED BENEFITS OF THE ACQUISITION; AND THE RESOURCES AND ATTENTION REQUIRED
FOR SUCCESSFUL INTEGRATION MAY INTERRUPT THE BUSINESS ACTIVITIES OF PALM COAST
DATA AND THE COMPANY'S EXISTING BUSINESS.
On January 16, 2007, the Company, through Kable, acquired Palm Coast Data
Holdco, Inc., which, through its subsidiary is a leading United States provider
of fulfillment services to the magazine publishing industry. There is a
significant degree of difficulty and management involved in the process of
integrating Palm Coast Data's business with the Company's existing media
services business, while maintaining the ongoing operations of each business,
coordinating geographically separate organizations and developing new customers
and products. Successful integration will also depend, in part, on retaining key
officers and other personnel in each of the business units. The integration
process will require significant expansion of the Company's operational and
financial systems, which will increase the operating complexity of the Company's
information technology systems. Implementation of controls, systems and
procedures may be costly and time-consuming and may not be effective.
16
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.
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: March 19, 2007 AMREP CORPORATION
(Registrant)
By: /s/ Peter M. Pizza
-------------------
Peter M. Pizza
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
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.
18