Annual Statements Open main menu

AMREP CORP. - Quarter Report: 2017 October (Form 10-Q)

 

 

 

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, 2017     

 

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.)

 

620 West Germantown Pike, Suite 175

Plymouth Meeting, PA

 

19462

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (610) 487-0901

 

Not Applicable
(Former name or former address, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

Yes x No ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨
         
Non-accelerated filer ¨   Smaller reporting company x
(Do not check if a smaller reporting company)    
      Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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 December 8, 2017 – 8,098,704.

 

 

 

 

 

 

AMREP CORPORATION AND SUBSIDIARIES

 

INDEX

 

PAGE

NO.

   
PART I.  FINANCIAL INFORMATION  
   
Item 1.  Financial Statements  
   
Consolidated Balance Sheets
October 31, 2017 (Unaudited) and April 30, 2017
1
   
Consolidated Statements of Operations and Retained Earnings (Unaudited)
Three Months Ended October 31, 2017 and 2016
2
   
Consolidated Statements of Operations and Retained Earnings (Unaudited)
Six Months Ended October 31, 2017 and 2016
3
   
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended October 31, 2017 and 2016
4
   
Notes to Consolidated Financial Statements (Unaudited) 5
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 11
   
Item 4.  Controls and Procedures 15
   
PART II.  OTHER INFORMATION  
   
Item 6.  Exhibits 15
   
SIGNATURE 16
   
EXHIBIT INDEX 17

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AMREP CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands, except par value and share amounts)

 

   October 31, 
2017
   April 30, 
2017
 
   (Unaudited)     
ASSETS          
Cash and cash equivalents  $13,829   $11,811 
Receivables, net   6,378    6,379 
Real estate inventory   55,930    56,090 
Investment assets   9,714    9,715 
Property, plant and equipment, net   10,246    10,852 
Other assets   2,262    2,310 
Deferred income taxes, net   8,663    9,519 
TOTAL ASSETS  $107,022   $106,676 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
LIABILITIES:          
Accounts payable and accrued expenses  $7,271   $7,035 
Taxes payable, net   459    465 
Other liabilities and deferred revenue   1,756    3,376 
Accrued pension cost   10,827    10,967 
TOTAL LIABILITIES   20,313    21,843 
           
SHAREHOLDERS’ EQUITY:          
Common stock, $.10 par value; shares authorized – 20,000,000; shares issued – 8,323,954 at October 31, 2017 and 8,303,204 at April 30, 2017   832    830 
Capital contributed in excess of par value   50,842    50,694 
Retained earnings   48,490    46,764 
Accumulated other comprehensive loss, net   (9,240)   (9,240)
Treasury stock, at cost; 225,250 shares at October 31, 2017    and April 30, 2017   (4,215)   (4,215)
TOTAL SHAREHOLDERS’ EQUITY   86,709    84,833 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $107,022   $106,676 

 

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

 

 1 

 

 

AMREP CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Retained Earnings (Unaudited)

Three Months Ended October 31, 2017 and 2016

(Amounts in thousands, except per share amounts)

 

   2017   2016 
REVENUES:          
Fulfillment services  $7,673   $7,858 
Real estate land sales   1,416    3,529 
Other   86    78 
    9,175    11,465 
COSTS AND EXPENSES:          
Real estate land sales   1,139    2,944 
Operating and selling expenses:          
Fulfillment services   5,983    6,707 
Real estate   582    407 
General and administrative expenses:          
Fulfillment services   308    327 
Real estate   86    134 
Corporate   696    744 
Interest expense   18    82 
    8,812    11,345 
Income before income taxes   363    120 
           
Provision for income taxes   85    8 
Net income   278    112 
           
Retained earnings, beginning of period   48,212    47,409 
Retained earnings, end of period  $48,490   $47,521 
Earnings per share, net - basic and diluted  $0.03   $0.01 
Weighted average number of common shares outstanding – basic   8,070    8,050 
Weighted average number of common shares outstanding – diluted   8,102    8,077 

 

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

 

 2 

 

 

AMREP CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations and Retained Earnings (Unaudited)

Six Months Ended October 31, 2017 and 2016

(Amounts in thousands, except per share amounts)

 

   2017   2016 
REVENUES:          
Fulfillment services  $14,916   $15,686 
Real estate land sales   4,093    6,249 
Other   1,492    1,738 
    20,501    23,673 
COSTS AND EXPENSES:          
Real estate land sales   2,362    5,522 
Operating and selling expenses:          
Fulfillment services   12,077    13,380 
Real estate   1,093    818 
General and administrative expenses:          
Fulfillment services   657    680 
Real estate   200    303 
Corporate   1,504    1,577 
Interest expense   31    306 
    17,924    22,586 
Income before income taxes   2,577    1,087 
           
Provision for income taxes   851    345 
Net income   1,726    742 
           
Retained earnings, beginning of period   46,764    46,779 
Retained earnings, end of period  $48,490   $47,521 
Earnings per share, net - basic and diluted  $0.21   $0.09 
Weighted average number of common shares outstanding – basic   8,067    8,046 
Weighted average number of common shares outstanding – diluted   8,096    8,071 

 

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

 

 3 

 

 

AMREP CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows from Operations (Unaudited)

Six Months Ended October 31, 2017 and 2016

(Amounts in thousands)

 

   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income from operations  $1,726   $742 
Adjustments to reconcile net income to net cash  provided by operating activities:          
Depreciation and amortization   635    717 
Non-cash credits and charges:          
Non-cash gain on settlement   (1,318)   - 
Non-cash deferred revenue recognized   (40)   - 
Provision for (recovery of) doubtful accounts   (14)   15 
Stock-based compensation   45    35 
Changes in assets and liabilities:          
Receivables   15    306 
Real estate inventory and investment assets   161    4,529 
Other assets   153    355 
Accounts payable and accrued expenses   236    (875)
Taxes receivable and payable   (6)   (21)
Other liabilities and deferred revenue   (262)   (117)
Deferred income taxes   856    361 
Accrued pension costs   (140)   630 
Total adjustments   321    5,935 
Net cash provided by operating activities   2,047    6,677 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Capital expenditures – property, plant and equipment   (29)   (49)
Net cash used in investing activities   (29)   (49)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from debt financing   -    340 
Principal debt payments   -    (895)
Principal debt payments – related party   -    (8,729)
Net cash used in financing activities   -    (9,284)
           
Increase (decrease) in cash and cash equivalents   2,018    (2,656)
Cash and cash equivalents, beginning of period   11,811    14,562 
Cash and cash equivalents, end of period  $13,829   $11,906 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Interest paid, net of amounts capitalized  $26   $292 
Income taxes paid, net  $6   $3 

 

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

 

 4 

 

 

AMREP CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Six Months Ended October 31, 2017 and 2016

 

(1)BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared by AMREP Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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. The Company, through its subsidiaries, is primarily engaged in two business segments: the real estate business operated by AMREP Southwest Inc. (“AMREP Southwest”) and its subsidiaries and the fulfillment services business operated by Palm Coast Data LLC (“Palm Coast”) and its affiliates. The Company’s foreign sales are insignificant. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

In the opinion of management, these unaudited consolidated financial statements include all adjustments, which are of a normal recurring nature, considered 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. Unless otherwise qualified, all references to 2018 and 2017 are to the fiscal years ending April 30, 2018 and 2017 and all references to the second quarter and first six months of 2018 and 2017 mean the fiscal three month and six month periods ended October 31, 2017 and 2016.

 

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, 2017, which was filed with the SEC on July 18, 2017 (the “2017 Form 10-K”). Certain 2017 balances in these financial statements have been reclassified to conform to the current year presentation with no effect on the net income or shareholders’ equity.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs providing further revenue recognition guidance (collectively, “Topic 606”). Topic 606 clarifies the principles for recognizing revenues and costs related to obtaining and fulfilling customer contracts, with the objective of improving financial reporting. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Topic 606 defines a five-step process to achieve this core principle, and more judgment and estimates may be required under Topic 606 than are currently required under generally accepted accounting principles. The two permitted transition methods under Topic 606 are (i) the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or (ii) the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of adoption. The Company intends to use the modified retrospective transition method upon adoption. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the required adoption date until May 1, 2018, although an earlier adoption is permitted. The Company does not intend to early adopt Topic 606.

 

 5 

 

 

The Company has established an implementation team to evaluate the impact of Topic 606 on the Company’s accounting policies, processes and system requirements, as well as its consolidated financial statements. Depending on the results of the evaluation, there could be changes to the timing of recognition of revenues and related costs. As the Company considers itself to be in the early stages of its evaluation of the impact of Topic 606, the Company does not know and cannot reasonably estimate quantitative information related to the impact of these new ASUs on its consolidated financial statements, including the effect on the Company’s operating results, if any. The implementation team has reported its progress on its evaluation to the Audit Committee of the Company’s Board of Directors.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in its balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU will be effective for the Company for fiscal year 2020 beginning on May 1, 2019. The Company has not yet concluded how the new standard will impact its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The purpose of ASU 2016-15 is to reduce the diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for the Company’s fiscal year 2019 beginning May 1, 2018. Early adoption is permitted, but the Company does not intend to early adopt ASU 2016-15. A retrospective transition method is to be used in the application of this amendment. The adoption of ASU 2016-15 by the Company is not expected to have a material effect on its consolidated financial statements.

 

(2)RECEIVABLES

 

Receivables, net consist of:

 

   October 31,
2017
   April 30,
2017
 
   (in thousands) 
Fulfillment services  $6,657   $6,725 
Real estate   12    - 
Corporate   41    2 
    6,710    6,727 
Less allowance for doubtful accounts   (332)   (348)
   $6,378   $6,379 

 

During the first six months of 2018, revenues from one major customer of the Company’s fulfillment services business totaled $2,164,000 or approximately 10.6% of total revenues for the Company. As of October 31, 2017, the Company’s fulfillment services business had $706,000 of outstanding accounts receivable from this customer, which was reduced by collections to $363,000 at December 1, 2017. This customer has given the Company’s fulfillment services business notice that a significant portion of its business will be transferred from Palm Coast during 2018.

 

 6 

 

 

(3)PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment, net consist of:

 

   October 31,   April 30, 
   2017   2017 
   (in thousands) 
Land, buildings and improvements  $15,924   $15,995 
Furniture and equipment   18,360    18,350 
    34,284    34,345 
Less accumulated depreciation   (24,038)   (23,493)
   $10,246   $10,852 

 

Depreciation of property, plant and equipment charged to operations was $314,000 and $635,000 for the three and six month periods ended October 31, 2017 and $350,000 and $710,000 for the three and six month periods ended October 31, 2016.

 

(4)OTHER ASSETS

 

Other assets consist of:

 

   October 31,   April 30, 
   2017   2017 
   (in thousands) 
Prepaid expenses  $1,467   $1,491 
Deferred order entry costs   524    553 
Other   271    266 
   $2,262   $2,310 

 

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 generally over a twelve month period.

 

(5)ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of:

 

   October 31,   April 30, 
   2017   2017 
   (in thousands) 
Fulfillment services  $5,002   $5,637 
Real estate   1,942    1,138 
Corporate   327    260 
   $7,271   $7,035 

 

The October 31, 2017 accounts payable and accrued expenses total included customer postage deposits of $2,690,000, accrued expenses of $1,665,000, trade payables of $1,127,000 and other of $1,789,000. The April 30, 2017 accounts payable and accrued expenses total included customer postage deposits of $3,178,000, accrued expenses of $1,669,000, trade payables of $619,000 and other of $1,569,000.

 

 7 

 

 

(6)OTHER LIABILITIES AND DEFERRED REVENUE; OTHER REVENUES

 

Refer to Note 9 to the consolidated financial statements contained in the 2017 Form 10-K for detail about the settlement agreement entered into between Palm Coast and the State of Florida in the first quarter of 2018. As a result of the settlement agreement, in the first quarter of 2018, Palm Coast reduced its previously recorded liability of $3,000,000 and a related $26,000 interest accrual by $1,620,000 to $1,406,000 by recognizing a pre-tax gain of $1,318,000 and recording a deferred gain of $302,000. In connection with the settlement, Palm Coast made a payment of $163,000 to the State of Florida during the first quarter of 2018 thereby reducing its remaining liability to $1,243,000. The $1,318,000 pre-tax gain is included in Other revenues in the accompanying financial statements. The deferred gain of $302,000 was reduced to $262,000 as of October 31, 2017, which $262,000 will be recognized over a period of seven and a half years from October 31, 2017.

 

In addition, refer to Note 10 to the consolidated financial statements contained in the 2017 Form 10-K for detail about the Oil and Gas Lease and the Addendum thereto with Thrust Energy, Inc. and Cebolla Roja, LLC. No royalties under the Lease were received during the first quarter of 2018. Revenue from this transaction is being recorded over the lease term and approximately $57,000 and $114,000 was recognized during the second quarter and first six months of each of 2018 and 2017. At October 31, 2017, there was $189,000 of deferred revenue remaining to be recognized before the end of the lease term in September 2018.

 

During the first quarter of 2017, a subsidiary of AMREP Southwest sold a single tenant retail commercial building in Rio Rancho, New Mexico, which resulted in a pre-tax gain of $1,496,000 that was included in Other revenues for that quarter.

 

Other revenues for the second quarter and first six months of 2018 and 2017 consist of:

 

   Second Quarter
of 2018
   Second Quarter
of 2017
 
   (in thousands) 
Deferred revenue and other  $86   $78 
   $86   $78 

 

   First Six Months
of 2018
   First Six Months
of 2017
 
   (in thousands) 
Settlement gain  $1,318   $- 
Sale of commercial building   -    1,496 
Deferred revenue and other   174    242 
   $1,492   $1,738 

 

(7)BENEFIT PLANS

 

Retirement plan

 

The Company has a defined benefit retirement plan for which accumulated benefits were frozen and future service credits were curtailed as of March 1, 2004. The Company has secured $4,535,000 of accrued pension-related obligations with first lien mortgages on certain real property in favor of the Pension Benefit Guaranty Corporation (the “PBGC”). On an annual basis, the Company is required to provide updated appraisals on each mortgaged property and, if the appraised value of the mortgaged properties is less than two times the amount of the accrued pension-related obligations secured by the mortgages, the Company is required to make a payment to its pension plan in an amount equal to one-half of the amount of the shortfall. During the second quarter of 2018, there was no change in the appraised value of the mortgaged properties that required the Company to make any additional payments to its pension plan.

 

 8 

 

 

Equity compensation plan

 

In September 2016, the AMREP Corporation 2016 Equity Compensation Plan (the “2016 Equity Plan”) replaced the AMREP Corporation 2006 Equity Compensation Plan (together with the 2016 Equity Plan, the “Equity Plans”). The Company issued 14,500 and 25,750 shares of restricted common stock under the 2016 Equity Plan during the second quarter and first six months of 2018. In addition, 5,000 shares of restricted common stock issued under the 2006 Equity Plan prior to 2018 were returned to the Company during the second quarter of 2018 and will not vest due to the retirement of an employee. During the second quarter and first six months of 2018, 2,500 and 10,500 shares of restricted common stock previously issued under the Equity Plans vested leaving 34,750 restricted shares issued under the Equity Plans that had not vested as of October 31, 2017. For the second quarter and first six months of 2018, the Company recognized $27,000 and $45,000 of compensation expense related to the restricted shares of common stock issued, and $20,000 and $35,000 for the same periods of 2017. As of October 31, 2017, there was $169,000 of unrecognized compensation expense related to restricted shares of common stock issued under the Equity Plans which had not vested as of that date, which is expected to be recognized over the remaining vesting term not to exceed three years.

 

(8)       INFORMATION ABOUT THE COMPANY’S OPERATIONS IN DIFFERENT INDUSTRY SEGMENTS

 

The following tables set forth summarized data relative to the industry segments in which the Company operated for the three and six month periods ended October 31, 2017 and 2016 (in thousands):

 

   Real Estate   Fulfillment
Services
   Corporate
and 
Other
   Consolidated 
Three months ended October 31, 2017 (a):                    
Revenues  $1,476   $7,673   $26   $9,175 
                     
Net income from operations  $(577)  $560   $295   $278 
Provision for income taxes   (338)   289    134    85 
Interest expense (income), net   524    293    (799)   18 
Depreciation   17    297    -    314 
EBITDA (b)  $(374)  $1,439   $(370)  $695 
Capital expenditures  $-   $19   $-   $19 

 

 9 

 

 

   Real Estate   Fulfillment
Services (c)
   Corporate
and 
Other
   Consolidated 
Three months ended October 31, 2016 (a):                    
Revenues  $3,597   $7,858   $10   $11,465 
                     
Net income (loss) from operations  $(402)  $(32)  $546   $112 
Provision (benefit) for income taxes   (236)   (13)   257    8 
Interest expense (income), net   574    268    (760)   82 
Depreciation and amortization   20    330    -    350 
EBITDA (b)  $(44)  $553   $43   $552 
Capital expenditures  $-   $10   $-   $10 
                     
Six months ended October 31, 2017 (a):                    
Revenues  $4,223   $16,234   $44   $20,501 
                     
Net income (loss) from operations  $(397)  $1,600   $523   $1,726 
Provision (benefit) for income taxes   (204)   825    230    851 
Interest expense (income), net   1,048    596    (1,613)   31 
Depreciation and amortization   35    600    -    635 
EBITDA (b)  $482   $3,621   $(860)  $3,243 
Capital expenditures  $-   $29   $-   $29 
Total assets  $74,233   $25,745   $7,044   $107,022 
                     
Six months ended October 31, 2016 (a):                    
Revenues  $7,967   $15,686   $20   $23,673 
                     
Net income (loss) from operations  $(155)  $(74)  $971   $742 
Provision (benefit) for income taxes   (91)   (38)   474    345 
Interest expense (income), net   1,221    537    (1,452)   306 
Depreciation and amortization   44    673    -    717 
EBITDA (b)  $1,019   $1,098   $(7)  $2,110 
Capital expenditures  $-   $49   $-   $49 
Total assets  $77,638   $28,974   $5,204   $111,816 

 

(a)Revenue information provided for each segment includes amounts grouped as Other in the accompanying consolidated statements of operations. Corporate and Other is net of intercompany eliminations.

 

(b)The Company uses EBITDA (which the Company defines as income (loss) before net interest expense, income taxes, depreciation and amortization, and non-cash impairment charges) in addition to net income (loss) as a key measure of profit or loss for segment performance and evaluation purposes.

 

(c)Fulfillment services revenues and EBITDA for the six months ending October 31, 2017 included a pre-tax gain of $1,318,000 resulting from the settlement agreement with the State of Florida (see Note 6).

 

 10 

 

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

INTRODUCTION

 

AMREP Corporation (the “Company”), through its subsidiaries, is primarily engaged in two business segments: the real estate business operated by AMREP Southwest Inc. (“AMREP Southwest”) and its subsidiaries and the fulfillment services business operated by Palm Coast Data LLC (“Palm Coast”) and its affiliates. Information concerning industry segments is set forth in Note 8 of the notes to the consolidated financial statements included in this report on Form 10-Q. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 information contained in this section should be read in conjunction with the unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q and with the Company’s annual report on Form 10-K for the year ended April 30, 2017, which was filed with the Securities and Exchange Commission on July 18, 2017 (the “2017 Form 10-K”). Many of the amounts and percentages presented in this Item 2 have been rounded for convenience of presentation. Unless otherwise qualified, all references to 2018 and 2017 are to the fiscal years ending April 30, 2018 and 2017 and all references to the second quarter and first six months of 2018 and 2017 mean the fiscal three month and six month periods ended October 31, 2017 and 2016.

 

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 2017 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 2017 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 critical accounting policies, assumptions and estimates are described in Item 7 of Part II of the 2017 Form 10-K. There have been no changes in these accounting policies.

 

The significant accounting policies of the Company are described in Note 1 to the consolidated financial statements contained in the 2017 Form 10-K. Information concerning the Company’s implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in the notes to the consolidated financial statements contained in the 2017 Form 10-K and in the notes to the unaudited consolidated financial statements included in this quarterly report on Form 10-Q. The Company did not adopt any accounting policy in the first six months of 2018 that had a material impact on its consolidated financial statements.

 

RESULTS OF OPERATIONS

 

For the second quarter of 2018, the Company recorded net income of $278,000, or $0.03 per share, compared to net income of $112,000, or $0.01 per share, for the second quarter of 2017. For the first six months of 2018, the Company recorded net income of $1,726,000, or $0.21 per share, compared to net income of $742,000, or $0.09 per share, for the same period of 2017. Revenues were $9,175,000 and $20,501,000 for the second quarter and first six months of 2018 compared to $11,465,000 and $23,673,000 for the same periods of the prior year.

 

Revenues from land sales at AMREP Southwest and its subsidiaries were $1,416,000 and $4,093,000 for the second quarter and first six months of 2018 compared to $3,529,000 and $6,249,000 for the same periods of 2017. $2,044,000 of the $4,093,000 of revenues from land sales for the first six months of 2018 was for an approximate five acre undeveloped commercial property in Colorado, which was sold in the first quarter of 2018 and had a gross profit percentage of 65%.

 

 11 

 

 

For the second quarter and first six months of 2018 and 2017, the Company’s land sales in New Mexico were as follows (dollars in thousands):

 

   Ended October 31, 2017   Ended October 31, 2016 
   Acres
Sold
   Revenue   Revenue
Per Acre
   Acres
Sold
   Revenue   Revenue
Per Acre
 
Three months:                              
Developed                              
Residential   3.9   $1,411   $362    8.4   $3,513   $418 
Commercial   -    -    -    -    -    - 
Total Developed   3.9    1,411    362    8.4    3,513    418 
Undeveloped   1.1    5    5    .4    16    40 
Total   5.0   $1,416   $283    8.8   $3,529   $401 
                               
Six months:                              
Developed                              
Residential   5.7   $2,009   $352    18.2   $6,141   $337 
Commercial   -    -    -    -    -    - 
Total Developed   5.7    2,009   $352    18.2    6,141    337 
Undeveloped   3.6    40    11    4.7    108    23 
Total   9.3   $2,049   $220    22.9   $6,249   $273 

 

The average gross profit percentage on New Mexico land sales was 20% and 19% for the second quarter and first six months of 2018 compared to 17% and 12% for the same periods of 2017. The increased profit percentage was attributable to the mix of lots sold with 2018 reflecting more favorable lot pricing relative to costs on developed lots compared to 2017. As a result of many factors, including the nature and timing of specific transactions and the type and location of land being sold, revenues, average selling prices and related average gross profits from land sales can vary significantly from period to period and prior results are not necessarily a good indication of what may occur in future periods.

 

Revenues from the Company’s fulfillment services operations decreased from $7,858,000 and $15,686,000 for the second quarter and first six months of 2017 to $7,673,000 and $14,916,000 for the same periods in 2018. The lower revenues were attributable to reduced business volumes from existing customers, certain price concessions on renewed contracts and lost business. Magazine publishers are one of the principal customers of the Company’s fulfillment services operations, and these customers have continued to be negatively impacted by increased competition from new media sources, alternative technologies for the distribution, storage and consumption of media content, weakness in advertising revenues and increases in paper costs, printing costs and postal rates. The result has been reduced subscription sales, which has caused publishers to close some magazine titles, change subscription fulfillment providers and seek more favorable terms from Palm Coast and its competitors when contracts are up for bid or renewal. One customer of the fulfillment services business whose revenues were approximately 10.6% of the total Company revenues for the first six months of 2018 has given notice that a significant portion of its business will be transferred from Palm Coast during 2018. Operating and selling expenses for fulfillment services decreased from $6,707,000 and $13,380,000 for the second quarter and first six months of 2017 to $5,983,000 and $12,077,000 for the same periods in 2018, primarily attributable to lower payroll and benefits, resulting from reduced business volumes, together with lower communications, software and equipment maintenance costs.

 

 12 

 

 

Other revenues were $86,000 and $1,492,000 for the second quarter and first six months of 2018 compared to $78,000 and $1,738,000 for the same periods of 2017. Other revenues for the first six months of 2018 were primarily due to a pre-tax gain of $1,318,000 related to a settlement agreement with the State of Florida by Palm Coast (refer to Note 6 of the notes to the consolidated financial statements included in this report on Form 10-Q). Other revenues for the first six months of 2017 were primarily the result of the sale of a retail commercial property by AMREP Southwest, which resulted in a pre-tax gain of $1,496,000. Operating and selling expenses for real estate increased from $407,000 and $818,000 for the second quarter and first six months of 2017 to $582,000 and $1,093,000 for the same periods of 2018, primarily due to increased employee costs, land maintenance expenses and broker commissions on sales activity, offset in part by lower consulting costs.

 

Fulfillment services general and administrative expenses decreased from $327,000 and $680,000 for the second quarter and first six months of 2017 to $308,000 and $657,000 for the same periods of 2018, primarily due to lower payroll and benefits, professional costs, bank fees and amortization of intangible assets. Real estate general and administrative expenses decreased from $134,000 and $303,000 in the second quarter and first six months of 2017 to $86,000 and $200,000 for the same periods in 2018, primarily due to reduced costs related to payroll and benefits, rent, outside services and insurance. Corporate general and administrative expenses decreased from $744,000 and $1,577,000 in the second quarter and first six months of 2017 to $696,000 and $1,504,000 for the same periods of 2018, primarily due to lower professional fees and pension costs, offset in part by increased payroll and benefits costs.

 

Interest expense was $18,000 and $31,000 for the second quarter and first six months of 2018 compared to $82,000 and $306,000 for the same periods of 2017. Interest expense in 2018 was primarily related to the settlement and remaining liability with the State of Florida noted above and interest expense in 2017 was primarily related to two notes payable of AMREP Southwest that were paid in full during 2017. There was no capitalized interest for the first six months of 2018 compared to $38,000 for the same period in 2017.

 

The Company’s effective tax rate was 23.4% and 33.0% for the second quarter and first six months of 2018 compared to 6.7% and 31.7% for the same periods of 2017. The difference between the statutory tax rate and the effective rate of the tax provision in 2018 and 2017 was primarily due to state income taxes. The total tax effect of gross unrecognized tax benefits in the accompanying financial statements at both October 31, 2017 and April 30, 2017 was $58,000, which, if recognized, would have an impact on the effective tax rate. The Company believes it is reasonably possible that the liability for unrecognized tax benefits will not change in the next twelve months. 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary sources of funding for working capital requirements are cash flow from operations and existing cash balances. The Company may also seek bank financing on specific real estate projects. The Company’s liquidity is affected by many factors, including some that are based on normal operations and some that are related to the industries in which the Company operates and the economy generally. Except as described below, there have been no material changes to the Company’s liquidity and capital resources as reflected in the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2017 Form 10-K.

 

Refer to Note 9 to the consolidated financial statements contained in the 2017 Form 10-K for detail about the settlement agreement entered into between Palm Coast and the State of Florida in the first quarter of 2018. As a result of the settlement agreement, in the first quarter of 2018, Palm Coast reduced its previously recorded liability of $3,000,000 and a related $26,000 interest accrual by $1,620,000 to $1,406,000 by recognizing a pre-tax gain of $1,318,000 and recording a deferred gain of $302,000. In connection with the settlement, Palm Coast made a payment of $163,000 to the State of Florida during the first quarter of 2018 thereby reducing its remaining liability to $1,243,000. The $1,318,000 pre-tax gain is included in Other revenues in the accompanying financial statements. The deferred gain of $302,000 was reduced to $262,000 as of October 31, 2017, which $262,000 will be recognized over a period of seven and a half years from October 31, 2017.

 

 13 

 

 

Operating Activities

 

Accounts payable and accrued expenses increased from $7,035,000 at April 30, 2017 to $7,271,000 at October 31, 2017, primarily due to the timing of payments to vendors.

 

Real estate inventory decreased from $56,090,000 at April 30, 2017 to $55,930,000 at October 31, 2017, due to real estate land sales at AMREP Southwest. Property, plant and equipment decreased from $10,852,000 at April 30, 2017 to $10,246,000 at October 31, 2017 due to normal depreciation of fixed assets.

 

Other liabilities and deferred revenue decreased from $3,376,000 at April 30, 2017 to $1,756,000 at October 31, 2017, primarily due to the previously described settlement agreement between Palm Coast and the State of Florida.

 

Investing Activities

 

Capital expenditures totaled $29,000 for the first six months of 2018 and $49,000 for the same period of 2017, all for the fulfillment services business.

 

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. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on behalf of the Company are qualified by the cautionary statements in this section. 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, the expected loss of a material customer contract and the effect of such loss, the effect of recent accounting pronouncements on the Company, the timing of recognizing unrecognized compensation expense related to shares of restricted common stock issued under the Equity Plans, the liability for unrecognized tax benefits not changing in the next twelve months, the seeking of bank financing for real estate projects and the future business conditions that may be experienced by the Company. The Company undertakes no obligation to update or publicly release any revisions to any forward-looking statement to reflect events, circumstances or changes in expectations after the date of such forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

 

 14 

 

 

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 person whose certification accompanies 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 person 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 chief financial officer and such other person, as appropriate to allow timely decisions regarding disclosure. The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Changes in Internal Control over Financial Reporting

 

No change in the Company’s system of internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 6.Exhibits

 

Exhibit
Number
  Description
10.1   Employment Agreement, dated September 15, 2017, between Clifford R. Martin and AMREP Corporation. (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed September 18, 2017)
     
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
     
32   Certification required pursuant to 18 U.S.C. Section 1350
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

 15 

 

 

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 12, 2017 AMREP CORPORATION
  (Registrant)
     
  By:   /s/  James M. McMonagle
  James M. McMonagle
  Vice President and Chief Financial Officer
   (Principal Accounting Officer)

 

 16 

 

 

EXHIBIT INDEX

 

Exhibit
Number
  Description
10.1   Employment Agreement, dated September 15, 2017, between Clifford R. Martin and AMREP Corporation. (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed September 18, 2017)
     
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
     
32   Certification required pursuant to 18 U.S.C. Section 1350
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

 17