Item 1.
Financial
Statements
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except share and
per share amounts)
|
|
October
31,
2018
|
|
|
April
30,
2018
|
|
|
|
(Unaudited)
|
|
|
(Revised)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,993
|
|
|
$
|
14,041
|
|
Receivables, net
|
|
|
5,542
|
|
|
|
5,901
|
|
Real estate inventory
|
|
|
58,968
|
|
|
|
58,874
|
|
Investment assets
|
|
|
9,713
|
|
|
|
9,714
|
|
Property, plant and equipment, net
|
|
|
9,207
|
|
|
|
9,745
|
|
Other assets, net
|
|
|
2,366
|
|
|
|
2,321
|
|
Taxes receivable, net
|
|
|
-
|
|
|
|
209
|
|
Deferred income
taxes, net
|
|
|
4,829
|
|
|
|
4,865
|
|
TOTAL ASSETS
|
|
$
|
104,618
|
|
|
$
|
105,670
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
7,767
|
|
|
$
|
7,497
|
|
Taxes payable, net
|
|
|
44
|
|
|
|
-
|
|
Notes payable, net
|
|
|
1,972
|
|
|
|
1,843
|
|
Other liabilities and deferred revenue
|
|
|
99
|
|
|
|
149
|
|
Accrued pension
costs
|
|
|
6,970
|
|
|
|
9,051
|
|
TOTAL LIABILITIES
|
|
|
16,852
|
|
|
|
18,540
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $.10 par value; shares authorized –
20,000,000; shares issued – 8,353,154 at October 31, 2018 and 8,323,954 at April 30, 2018
|
|
|
835
|
|
|
|
832
|
|
Capital contributed in excess of par value
|
|
|
51,125
|
|
|
|
50,922
|
|
Retained earnings
|
|
|
47,641
|
|
|
|
47,525
|
|
Accumulated other comprehensive loss, net
|
|
|
(7,620
|
)
|
|
|
(7,934
|
)
|
Treasury stock, at cost; 225,250
shares at October 31, 2018 and April 30, 2018
|
|
|
(4,215
|
)
|
|
|
(4,215
|
)
|
TOTAL SHAREHOLDERS’
EQUITY
|
|
|
87,766
|
|
|
|
87,130
|
|
TOTAL LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
$
|
104,618
|
|
|
$
|
105,670
|
|
The accompanying
notes to consolidated financial statements are an
integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and
Retained Earnings (Unaudited)
Three Months Ended October 31, 2018 and
2017
(Amounts in thousands, except per share
amounts)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Fulfillment services
|
|
$
|
6,941
|
|
|
$
|
7,673
|
|
Real estate land sales
|
|
|
2,367
|
|
|
|
1,416
|
|
Other
|
|
|
300
|
|
|
|
86
|
|
|
|
|
9,608
|
|
|
|
9,175
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
Real estate land sales
|
|
|
2,162
|
|
|
|
1,139
|
|
Operating and selling expenses:
|
|
|
|
|
|
|
|
|
Fulfillment services
|
|
|
5,974
|
|
|
|
5,983
|
|
Real estate
|
|
|
245
|
|
|
|
582
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
Fulfillment services
|
|
|
334
|
|
|
|
308
|
|
Real estate operations
|
|
|
116
|
|
|
|
86
|
|
Corporate operations
|
|
|
762
|
|
|
|
696
|
|
Interest expense
|
|
|
7
|
|
|
|
18
|
|
|
|
|
9,600
|
|
|
|
8,812
|
|
Income before income taxes
|
|
|
8
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
|
(47
|
)
|
|
|
85
|
|
Net income
|
|
|
55
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, beginning of period (Revised)
|
|
|
47,586
|
|
|
|
48,735
|
|
Retained earnings, end of period (2017 Revised)
|
|
$
|
47,641
|
|
|
$
|
49,013
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – basic and diluted
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic
|
|
|
8,095
|
|
|
|
8,070
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – diluted
|
|
|
8,146
|
|
|
|
8,102
|
|
The accompanying notes to consolidated financial
statements are an
integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and
Retained Earnings (Unaudited)
Six Months Ended October 31, 2018 and 2017
(Amounts in thousands, except per share
amounts)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Fulfillment services
|
|
$
|
14,386
|
|
|
$
|
14,916
|
|
Real estate land sales
|
|
|
6,548
|
|
|
|
4,093
|
|
Other
|
|
|
389
|
|
|
|
1,492
|
|
|
|
|
21,323
|
|
|
|
20,501
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
Real estate land sales
|
|
|
5,893
|
|
|
|
2,362
|
|
Operating and selling expenses:
|
|
|
|
|
|
|
|
|
Fulfillment services
|
|
|
12,312
|
|
|
|
12,077
|
|
Real estate
|
|
|
521
|
|
|
|
1,093
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
Fulfillment services
|
|
|
680
|
|
|
|
657
|
|
Real estate operations
|
|
|
304
|
|
|
|
200
|
|
Corporate operations
|
|
|
1,584
|
|
|
|
1,504
|
|
Interest expense
|
|
|
12
|
|
|
|
31
|
|
|
|
|
21,306
|
|
|
|
17,924
|
|
Income before income taxes
|
|
|
17
|
|
|
|
2,577
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes
|
|
|
(99
|
)
|
|
|
851
|
|
Net income
|
|
|
116
|
|
|
|
1,726
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, beginning of period (Revised)
|
|
|
47,525
|
|
|
|
47,287
|
|
Retained earnings, end of period (2017 Revised)
|
|
$
|
47,641
|
|
|
$
|
49,013
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – basic and diluted
|
|
$
|
0.01
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – basic
|
|
|
8,090
|
|
|
|
8,067
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding – diluted
|
|
|
8,135
|
|
|
|
8,096
|
|
The accompanying notes to consolidated financial
statements are an
integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive
Income (Unaudited)
Three and Six Months Ended October 31, 2018
and 2017
(Amounts in thousands)
|
|
Three Months Ended
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
55
|
|
|
$
|
278
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Decrease in pension liability, net of tax ($69 in 2019 and $98 in 2018)
|
|
|
157
|
|
|
|
225
|
|
Other comprehensive income
|
|
|
157
|
|
|
|
225
|
|
Total comprehensive income
|
|
$
|
212
|
|
|
$
|
503
|
|
|
|
Six Months Ended
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
116
|
|
|
$
|
1,726
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Decrease in pension liability, net of tax ($138 in 2019 and $196 in 2018)
|
|
|
314
|
|
|
|
450
|
|
Other comprehensive income
|
|
|
314
|
|
|
|
450
|
|
Total comprehensive income
|
|
$
|
430
|
|
|
$
|
2,176
|
|
The accompanying notes to consolidated financial
statements are an
integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended October 31, 2018 and 2017
(Amounts in thousands)
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
116
|
|
|
$
|
1,726
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
573
|
|
|
|
635
|
|
Amortization of debt issuance costs
|
|
|
11
|
|
|
|
-
|
|
Non-cash credits and charges:
|
|
|
|
|
|
|
|
|
Non-cash gain on settlement
|
|
|
-
|
|
|
|
(1,318
|
)
|
Non-cash deferred revenue recognized
|
|
|
-
|
|
|
|
(40
|
)
|
Provision for (recovery of) doubtful accounts
|
|
|
37
|
|
|
|
(14
|
)
|
Stock-based compensation
|
|
|
81
|
|
|
|
45
|
|
Net periodic pension cost
|
|
|
371
|
|
|
|
500
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
322
|
|
|
|
15
|
|
Real estate inventory and investment assets
|
|
|
(93
|
)
|
|
|
161
|
|
Other assets
|
|
|
(6
|
)
|
|
|
153
|
|
Accounts payable and accrued expenses
|
|
|
270
|
|
|
|
236
|
|
Taxes receivable (payable)
|
|
|
253
|
|
|
|
(6
|
)
|
Other liabilities and deferred revenue
|
|
|
(50
|
)
|
|
|
(262
|
)
|
Deferred income taxes
|
|
|
(102
|
)
|
|
|
856
|
|
Accrued pension costs
|
|
|
(2,000
|
)
|
|
|
(640
|
)
|
Total adjustments
|
|
|
(333
|
)
|
|
|
321
|
|
Net cash (used in) provided by operating activities
|
|
|
(217
|
)
|
|
|
2,047
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from corporate-owned life insurance policy
|
|
|
85
|
|
|
|
-
|
|
Capital expenditures – property, plant and equipment
|
|
|
(34
|
)
|
|
|
(29
|
)
|
Net cash provided by (used in) investing activities
|
|
|
51
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from debt financing
|
|
|
1,335
|
|
|
|
-
|
|
Principal debt payments
|
|
|
(1,171
|
)
|
|
|
-
|
|
Payments for debt issuance costs
|
|
|
(46
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
118
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(48
|
)
|
|
|
2,018
|
|
Cash and cash equivalents, beginning of period
|
|
|
14,041
|
|
|
|
11,811
|
|
Cash and cash equivalents, end of period
|
|
$
|
13,993
|
|
|
$
|
13,829
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
$
|
1
|
|
|
$
|
26
|
|
Income taxes (refunded) paid, net
|
|
$
|
(249
|
)
|
|
$
|
6
|
|
The accompanying notes to consolidated financial
statements are an
integral part of these consolidated financial
statements.
AMREP CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Six Months Ended October 31, 2018 and 2017
|
(1)
|
SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING
POLICIES
|
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 the context otherwise indicates, all references to 2019 and
2018 are to the fiscal years ending April 30, 2019 and 2018 and all references to the second quarter and first six months of 2019
and 2018 mean the fiscal three month and six month periods ended October 31, 2018 and 2017.
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, 2018, which
was filed with the SEC on July 20, 2018 (the “2018 Form 10-K”). Certain 2018 balances in these financial statements
have been reclassified to conform to the current year presentation with no effect on either net income or shareholders’ equity.
Summary of Significant Accounting Policies
The significant accounting policies used in
preparing these consolidated financial statements are consistent with the accounting policies described in the 2018 Form 10-K,
except for those effective May 1, 2018 as described below.
Recently Adopted Accounting Pronouncements
Revenue Recognition
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 are required under Topic 606 than were required under the prior generally accepted accounting principles
of Topic 605,
Revenue Recognition
(“Topic 605”). In accordance with Topic 606, fulfillment services revenues
are recognized as the services are performed in proportion to the transfer of control to the customer and real estate revenues
are recognized at the time of sale when consideration has been exchanged and title has been conveyed to the buyer.
Topic 606 was effective for the Company’s
fiscal year beginning May 1, 2018. The Company adopted Topic 606 using the modified retrospective method. Results for reporting
periods beginning after May 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to
be reported in accordance with Topic 605. The adoption of Topic 606 had no impact on the Company’s results of operations.
Statements of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 reduces the
diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of cash
flows, including classifying proceeds from company-owned life insurance proceeds as an investing activity. ASU 2016-15 was effective
for the Company’s fiscal year beginning May 1, 2018. The Company received life insurance proceeds of $85,000 during the three
months ended July 31, 2018, which is reflected in the accompanying Consolidated Statement of Cash Flows as an investing activity.
The income associated with the life insurance proceeds was recognized in various years prior to 2019.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases
. Since that date, the FASB has issued additional ASUs providing further guidance for lease transactions (collectively
“ASU 2016-02”). 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 (the lease liability) 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.
Upon adoption of ASU 2016-02, the Company will be required to recognize and measure leases at the beginning of the earliest period
presented using a modified retrospective approach. ASU 2016-02 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 January 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income
, which permits the reclassification to retained earnings of certain tax effects resulting from the
U.S. Tax Cuts and Jobs Act related to items in accumulated other comprehensive income. ASU 2018-02 may be applied retrospectively
to each period in which the effect of the U.S. Tax Cuts and Jobs Act is recognized or may be applied in the period of adoption.
ASU 2018-02 will be effective for the Company’s fiscal year 2020 beginning May 1, 2019. The Company has not determined whether
it will elect to reclassify such tax effects. The adoption of ASU 2018-02 by the Company is not expected to have a material effect
on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment Accounting
.
ASU 2018-07 addresses several aspects of the accounting for nonemployee share-based payment transactions, including share-based
payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 will be effective for the Company’s
fiscal year 2020 beginning May 1, 2019. The adoption of ASU 2018-07 by the Company is not expected to have a material effect on
its consolidated financial statements.
Receivables, net consist of:
|
|
October 31,
2018
|
|
|
April 30,
2018
|
|
|
|
(in thousands)
|
|
Fulfillment services
|
|
$
|
5,805
|
|
|
$
|
6,189
|
|
Real estate operations
|
|
|
68
|
|
|
|
10
|
|
Corporate operations
|
|
|
20
|
|
|
|
16
|
|
|
|
|
5,893
|
|
|
|
6,215
|
|
Less allowance for doubtful accounts
|
|
|
(351
|
)
|
|
|
(314
|
)
|
|
|
$
|
5,542
|
|
|
$
|
5,901
|
|
|
(3)
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment, net consist
of:
|
|
October 31,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Land, buildings and improvements
|
|
$
|
15,946
|
|
|
$
|
15,932
|
|
Furniture and equipment
|
|
|
18,287
|
|
|
|
18,239
|
|
|
|
|
34,233
|
|
|
|
34,171
|
|
Less accumulated depreciation
|
|
|
(25,026
|
)
|
|
|
(24,426
|
)
|
|
|
$
|
9,207
|
|
|
$
|
9,745
|
|
Depreciation of property, plant and equipment
charged to operations was $286,000 and $573,000 for the second quarter and first six months of 2019 and $314,000 and $635,000 for
the second quarter and first six months of 2018.
Other assets consist of:
|
|
October 31,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Prepaid expenses
|
|
$
|
1,582
|
|
|
$
|
1,561
|
|
Deferred order entry costs
|
|
|
578
|
|
|
|
513
|
|
Other
|
|
|
206
|
|
|
|
247
|
|
|
|
$
|
2,366
|
|
|
$
|
2,321
|
|
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,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(Revised)
|
|
Fulfillment services
|
|
$
|
4,863
|
|
|
$
|
4,730
|
|
Real estate operations
|
|
|
2,646
|
|
|
|
2,425
|
|
Corporate operations
|
|
|
258
|
|
|
|
342
|
|
|
|
$
|
7,767
|
|
|
$
|
7,497
|
|
As of October 31, 2018, accounts payable
and accrued expenses for the Company’s fulfillment services business included customer postage deposits of $2,327,000,
accrued expenses of $368,000, trade payables of $635,000 and other of $1,533,000. As of April 30, 2018, accounts payable and
accrued expenses (revised) for the Company’s fulfillment services business included customer postage deposits of
$2,505,000, accrued expenses of $515,000, trade payables of $388,000 and other of $1,322,000.
As of October 31, 2018, accounts payable and
accrued expenses for the Company’s real estate business included accrued expenses of $653,000, trade payables of $899,000,
and real estate customer deposits of $1,094,000. As of April 30, 2018, accounts payable and accrued expenses for the Company’s
real estate business included accrued expenses of $746,000, trade payables of $773,000, real estate customer deposits of $897,000
and other of $9,000.
Notes payable, net consist of:
|
|
October 31,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Real estate notes payable
|
|
$
|
2,051
|
|
|
$
|
1,887
|
|
Unamortized debt issuance costs
|
|
|
(79
|
)
|
|
|
(44
|
)
|
Notes payable, net
|
|
$
|
1,972
|
|
|
$
|
1,843
|
|
Lomas Encantadas Subdivision
–
Refer to Note 8 to the consolidated financial statements contained in the 2018 Form 10-K for detail about the loan agreement and
related documentation entered into with BOKF, NA dba Bank of Albuquerque in December 2017 with respect to the development of certain
planned residential lots within the Lomas Encantadas subdivision located in Rio Rancho, New Mexico.
Pursuant to such loan documentation, BOKF,
NA agrees to lend up to $4,750,000 to the borrower on a non-revolving line of credit basis to partially fund the development of
certain planned residential lots within the Lomas Encantadas subdivision. Interest on the outstanding principal amount of the loan
is payable monthly at the annual rate equal to the London Interbank Offered Rate for a thirty-day interest period plus a spread
of 3.0%, adjusted monthly. The outstanding principal amount of the loan as of October 31, 2018 was $2,009,000 and the borrower
made principal repayments of $1,171,000 during the first six months of 2019. The loan is scheduled to mature in December 2021.
The total book value of the property within the Lomas Encantadas subdivision mortgaged to BOKF, NA was $11,273,000 as of October
31, 2018. The Company capitalized $25,000 and $51,000 of interest related to this loan in the second quarter and first six months
of 2019. At October 31, 2018, both the borrower and AMREP Southwest were in compliance with the covenants contained within the
loan documentation.
Hawk Site Subdivision
– In July
2018, Hawksite 27 Development Company, LLC (“HDC”), a subsidiary of AMREP Southwest, entered into a Business Loan Agreement
with Main Bank. The loan under the Business Loan Agreement is evidenced by a Promissory Note and is secured by a Mortgage, between
HDC and Main Bank with respect to certain planned residential lots within the Hawk Site subdivision located in Rio Rancho, New
Mexico. Pursuant to a Commercial Guaranty entered into by AMREP Southwest in favor of Main Bank, AMREP Southwest has guaranteed
HDC’s obligations under each of the above agreements. The Business Loan Agreement, Promissory Note, Mortgage, Commercial
Guaranty and other related transaction documents are collectively referred to as the “HS Loan Documentation.”
Pursuant to the HS Loan Documentation, Main
Bank agrees to lend up to $1,800,000 to HDC on a non-revolving line of credit basis to partially fund the development of certain
planned residential lots within the Hawk Site subdivision. Interest on the outstanding principal amount of the loan is payable
monthly at the annual rate equal to the Wall Street Journal Prime Rate plus a spread of 2.38%, adjusted annually. Main Bank is
required to release the lien of its mortgage on any lot upon HDC making a principal payment equal to the greater of $30,000 or
55% of the sales price of the lot. HDC is required to reduce the principal balance of the loan to a maximum of $1,700,000 in July
2020. The outstanding principal amount of the loan may be prepaid at any time without penalty. The loan is scheduled to mature
in July 2021. HDC incurred customary costs and expenses and paid fees to Main Bank in connection with the loan. The outstanding
principal amount of the loan as of October 31, 2018 was $42,000 and HDC made no principal repayments during the first six months
of 2019. The total book value of the property within the Hawk Site subdivision mortgaged to Main Bank was $3,883,000 as of October
31, 2018. The Company capitalized $1,000 of interest related to this loan in the second quarter and first six months of 2019.
HDC and AMREP Southwest have made certain representations
and warranties in the HS Loan Documentation and are required to comply with various covenants, reporting requirements and other
customary requirements for similar loans. The HS Loan Documentation contains customary events of default for similar financing
transactions, including: HDC’s failure to make principal, interest or other payments when due; the failure of HDC or AMREP
Southwest to observe or perform their respective covenants under the HS Loan Documentation; the representations and warranties
of HDC or AMREP Southwest being false; and the insolvency or bankruptcy of HDC or AMREP Southwest. Upon the occurrence and during
the continuance of an event of default, Main Bank may declare the outstanding principal amount and all other obligations under
the HS Loan Documentation immediately due and payable. At October 31, 2018, both HDC and AMREP Southwest were in compliance with
the covenants contained within the HS Loan Documentation.
Other revenues for the second quarter and first
six months of 2019 and 2018 consist of:
|
|
Three Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Deferred revenue and other
|
|
$
|
300
|
|
|
$
|
86
|
|
|
|
$
|
300
|
|
|
$
|
86
|
|
|
|
Six Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Settlement gain
|
|
$
|
-
|
|
|
$
|
1,318
|
|
Deferred revenue and other
|
|
|
389
|
|
|
|
174
|
|
|
|
$
|
389
|
|
|
$
|
1,492
|
|
Deferred revenue and other includes the recognition
of deferred revenue related to an oil and gas lease noted below, as well as fees and forfeited deposits from customers earned by
AMREP Southwest, together with miscellaneous other income items.
Refer to Note 9 to the consolidated financial
statements contained in the 2018 Form 10-K for detail about the settlement agreement entered into between Palm Coast and the State
of Florida during the three months ended July 31, 2017. As a result of this settlement agreement, the Company’s fulfillment
services business recognized a gain of $1,318,000 during the three months ended July 31, 2017.
In addition, refer to Note 9 to the consolidated
financial statements contained in the 2018 Form 10-K for detail about an oil and gas lease with respect to all minerals and mineral
rights owned by the Company or for which the Company has executive rights in and under approximately 55,000 surface acres of land
in Sandoval County, New Mexico. No royalties under the lease were received during the second quarter and first six months of 2019.
Revenue from this transaction was recorded over the lease term though September 2018 and was $19,000 and $76,000 for the second
quarter and first six months of 2019 and $57,000 and $114,000 for the second quarter and first six months of 2018. At October 31,
2018, there was no additional deferred revenue remaining to be recognized. In September 2018, the oil and gas lease was amended
pursuant to a lease extension agreement. The lease extension agreement extends the expiration date of the initial term of the lease
from September 2018 to September 2020. No fee was paid by the lessee to the Company with respect to such extension. If lessee or
any of its affiliates provides any consideration to obtain, enter into, option, extend or renew an interest in any minerals or
mineral rights within Sandoval County, Bernalillo County, Santa Fe County or Valencia County in New Mexico at any time from September
2017 through September 2020, lessee shall pay the Company an amount equal to the amount of such consideration paid per acre multiplied
by 54,793.24. The lease extension agreement further provides that the lessee shall assign, or shall cause their affiliate to assign,
to the Company an overriding royalty interest of 1% with respect to the proceeds derived from any minerals or minerals rights presently
or hereinafter owned by, leased by, optioned by or otherwise subject to the control of lessee or any of its affiliates in any part
of Sandoval County, Bernalillo County, Santa Fe County or Valencia County in New Mexico.
Pension Plan
The Company has a defined benefit pension plan
for which accumulated benefits were frozen and future service credits were curtailed as of March 1, 2004. Refer to Note 11 to the
consolidated financial statements contained in the 2018 Form 10-K for additional detail regarding the Company’s agreements
with the Pension Benefit Guaranty Corporation (the “PBGC”). The agreements with the PBGC terminated by their terms
in August 2018 with the PBGC being deemed to have released and discharged the Company and all other members of its controlled group
from any claims under such agreements.
The Company recognizes the known changes in
the funded status of the pension plan in the period in which the changes occur through other comprehensive income, net of the related
deferred income tax effect. The Company recognized other comprehensive income of $157,000 and $314,000 for the second quarter and
first six months of 2019 and $225,000 and $450,000 for the second quarter and first six months of 2018, related to the amortization
of the plan’s unrecognized net loss included in Accumulated other comprehensive loss, net in the accompanying financial statements.
The Company funds the pension plan in compliance
with IRS funding requirements. The Company made contributions of $2,000,000 and $640,000 to the pension plan during first six months
of 2019 and 2018.
Equity Compensation Plan
Refer to Note 11 to the consolidated financial
statements contained in the 2018 Form 10-K for additional detail regarding the AMREP Corporation 2016 Equity Compensation Plan
(the “2016 Equity Plan”) and the AMREP Corporation 2006 Equity Compensation Plan (together with the 2016 Equity Plan,
the “Equity Plans”). The Company issued 29,200 shares of restricted common stock under the 2016 Equity Plan during
the first six months of 2019. During the first six months of 2019, 16,583 shares of restricted common stock previously issued under
the Equity Plans vested leaving 47,367 restricted shares issued under the Equity Plans that had not vested as of October 31, 2018.
For the second quarter and first six months of 2019, the Company recognized $53,000 and $81,000 of non-cash compensation expense
related to the vesting of restricted shares of common stock, and $27,000 and $45,000 for the same periods of 2018. As of October
31, 2018, there was $221,000 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. In addition, the Company recognized $20,000 and $40,000 of expense during the second quarter and first six months
of 2019 related to deferred stock units expected to be issued in December 2018 to non-employee members of the Company’s Board
of Directors.
The U.S. Tax Cuts and Jobs Act (the “Act”)
was signed into law in December 2017. The Act significantly revised the future ongoing U.S. corporate income tax by, among other
things, lowering U.S. corporate income tax rates. The Act reduced the federal corporate tax rate to 21.0% effective January 1,
2018. As the Company has an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in the Company
having a blended federal tax rate of 29.7% for 2018. Effective May 1, 2018, the Company’s federal corporate tax rate is 21.0%.
In December 2017, the SEC staff issued Staff
Accounting Bulletin No. 118 (“SAB 118”), which addresses how a company recognizes provisional amounts when a company
does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete
its accounting for the effect of the changes in the Act. SAB 118 provides for a measurement period that should not extend beyond
one year from the Act enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740,
Income Taxes (“ASC 740”). As of October 31, 2018, the Company had not completed its accounting for the tax effects
of the Act and expects to complete the accounting during the three month period ending January 31, 2019, which could potentially
affect the measurement of deferred tax balances or potentially give rise to new deferred tax balances.
The total tax effect of gross unrecognized
tax benefits in the accompanying financial statements at both October 31, 2018 and April 30, 2018 was $58,000, which, if recognized,
will have an impact on the effective tax rate. As a result of the lapse of the statute of limitations, this amount is expected
to be recognized during the three month period ending January 31, 2019.
|
(10)
|
PRIOR PERIOD REVISIONS
|
Deferred income taxes, net,
accounts payable and accrued expenses and retained earnings of the Company at May 1, 2017 have been revised to reduce the
carrying value of certain liabilities. Management has determined that the revisions as shown below are not material to the
Company’s consolidated financial statements.
|
|
|
|
|
|
|
|
Revised
|
|
|
|
Balance
|
|
|
Adjustment
|
|
|
Balance
|
|
|
|
April 30, 2017
|
|
|
Increase
|
|
|
May 1, 2017
|
|
Revisions to the consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
46,764
|
|
|
$
|
523
|
|
|
$
|
47,287
|
|
|
|
|
|
|
|
|
|
Revised
|
|
|
|
Balance
|
|
|
Adjustment
|
|
|
Balance
|
|
|
|
July 31, 2017
|
|
|
Increase
|
|
|
August 1, 2017
|
|
Revisions to the consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
48,212
|
|
|
$
|
523
|
|
|
$
|
48,735
|
|
|
|
|
|
|
|
|
|
Revised
|
|
|
|
Balance
|
|
|
Adjustment
|
|
|
Balance
|
|
|
|
October 31, 2017
|
|
|
Increase
|
|
|
November 1, 2017
|
|
Revisions to the consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
48,490
|
|
|
$
|
523
|
|
|
$
|
49,013
|
|
|
|
|
|
|
Adjustment
|
|
|
Revised
|
|
|
|
Balance
|
|
|
Increase
|
|
|
Balance
|
|
|
|
April 30, 2018
|
|
|
(Decrease)
|
|
|
April 30, 2018
|
|
Revisions to the consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
$
|
5,060
|
|
|
$
|
(195
|
)
|
|
$
|
4,865
|
|
Accounts payable and accrued expenses
|
|
$
|
8,215
|
|
|
$
|
(718
|
)
|
|
$
|
7,497
|
|
Retained earnings
|
|
$
|
47,002
|
|
|
$
|
523
|
|
|
$
|
47,525
|
|
|
|
|
|
|
|
|
|
Revised
|
|
|
|
Balance
|
|
|
Adjustment
|
|
|
Balance
|
|
|
|
July 31, 2018
|
|
|
Increase
|
|
|
August 1, 2018
|
|
Revisions to the consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
47,063
|
|
|
$
|
523
|
|
|
$
|
47,586
|
|
|
(11)
|
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 periods indicated (in thousands):
|
|
Real Estate
|
|
|
Fulfillment
Services (d)
|
|
|
Corporate
and
Other
|
|
|
Consolidated
|
|
Three months ended October 31, 2018 (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,636
|
|
|
$
|
6,941
|
|
|
$
|
31
|
|
|
$
|
9,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(466
|
)
|
|
$
|
93
|
|
|
$
|
428
|
|
|
$
|
55
|
|
(Benefit) provision for income taxes
|
|
|
(163
|
)
|
|
|
26
|
|
|
|
90
|
|
|
|
(47
|
)
|
Interest expense (income), net (b)
|
|
|
592
|
|
|
|
296
|
|
|
|
(881
|
)
|
|
|
7
|
|
Depreciation
|
|
|
23
|
|
|
|
263
|
|
|
|
-
|
|
|
|
286
|
|
EBITDA (c)
|
|
$
|
(14
|
)
|
|
$
|
678
|
|
|
$
|
(363
|
)
|
|
$
|
301
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Real Estate
|
|
|
Fulfillment
Services (d)
|
|
|
Corporate
and
Other
|
|
|
Consolidated
|
|
Three months ended October 31, 2017 (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,476
|
|
|
$
|
7,673
|
|
|
$
|
26
|
|
|
$
|
9,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(577
|
)
|
|
$
|
560
|
|
|
$
|
295
|
|
|
$
|
278
|
|
(Benefit) provision for income taxes
|
|
|
(338
|
)
|
|
|
289
|
|
|
|
134
|
|
|
|
85
|
|
Interest expense (income), net (b)
|
|
|
524
|
|
|
|
293
|
|
|
|
(799
|
)
|
|
|
18
|
|
Depreciation
|
|
|
17
|
|
|
|
297
|
|
|
|
-
|
|
|
|
314
|
|
EBITDA (c)
|
|
$
|
(374
|
)
|
|
$
|
1,439
|
|
|
$
|
(370
|
)
|
|
$
|
695
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
19
|
|
|
$
|
-
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended October 31, 2018 (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,875
|
|
|
$
|
14,386
|
|
|
$
|
62
|
|
|
$
|
21,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(977
|
)
|
|
$
|
288
|
|
|
$
|
805
|
|
|
$
|
116
|
|
(Benefit) provision for income taxes
|
|
|
(343
|
)
|
|
|
81
|
|
|
|
163
|
|
|
|
(99
|
)
|
Interest expense (income), net (b)
|
|
|
1,177
|
|
|
|
587
|
|
|
|
(1,752
|
)
|
|
|
12
|
|
Depreciation
|
|
|
44
|
|
|
|
529
|
|
|
|
-
|
|
|
|
573
|
|
EBITDA (c)
|
|
$
|
(99
|
)
|
|
$
|
1,485
|
|
|
$
|
(784
|
)
|
|
$
|
602
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
34
|
|
|
$
|
-
|
|
|
$
|
34
|
|
Total assets as of October 31, 2018
|
|
$
|
74,196
|
|
|
$
|
18,410
|
|
|
$
|
12,012
|
|
|
$
|
104,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended October 31, 2017 (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,223
|
|
|
$
|
16,234
|
|
|
$
|
44
|
|
|
$
|
20,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(397
|
)
|
|
$
|
1,600
|
|
|
$
|
523
|
|
|
$
|
1,726
|
|
(Benefit) provision for income taxes
|
|
|
(204
|
)
|
|
|
825
|
|
|
|
230
|
|
|
|
851
|
|
Interest expense (income), net (b)
|
|
|
1,048
|
|
|
|
596
|
|
|
|
(1,613
|
)
|
|
|
31
|
|
Depreciation
|
|
|
35
|
|
|
|
600
|
|
|
|
-
|
|
|
|
635
|
|
EBITDA (c)
|
|
$
|
482
|
|
|
$
|
3,621
|
|
|
$
|
(860
|
)
|
|
$
|
3,243
|
|
Capital expenditures
|
|
$
|
-
|
|
|
$
|
29
|
|
|
$
|
-
|
|
|
$
|
29
|
|
Total assets as of October 31, 2017
|
|
$
|
74,233
|
|
|
$
|
25,745
|
|
|
$
|
7,044
|
|
|
$
|
107,022
|
|
|
(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)
|
Interest expense (income), net includes inter-segment interest
expense (income) that is eliminated in consolidation.
|
|
(c)
|
The Company uses EBITDA (which the Company defines as (loss)
income before net interest expense, income taxes, depreciation and amortization, and non-cash impairment charges) in addition
to net (loss) income as a key measure of profit or loss for segment performance and evaluation purposes.
|
|
(d)
|
Fulfillment services revenues and EBITDA for the first
six months of 2018 included a pre-tax gain of $1,318,000 resulting from the settlement agreement with the State of Florida (see
Note 7).
|
Disaggregation of Revenues
The Company presents revenues disaggregated
by business segment and, in the case of fulfillment services, by service provided, and, in the case of real estate, by type of
lots sold. The Company believes this disaggregation best depicts how its various business segments perform and are affected by
economic factors. The following table presents the Company’s revenues disaggregated by revenue source (in thousands):
|
|
Three Months
Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Fulfillment revenues:
|
|
|
|
|
|
|
|
|
Subscription services
|
|
$
|
4,484
|
|
|
$
|
4,669
|
|
Membership fulfillment
|
|
|
1,188
|
|
|
|
1,802
|
|
Contact center
|
|
|
1,087
|
|
|
|
1,020
|
|
Other revenues
|
|
|
182
|
|
|
|
182
|
|
Total fulfillment revenues
|
|
|
6,941
|
|
|
|
7,673
|
|
|
|
|
|
|
|
|
|
|
Real estate revenues:
|
|
|
|
|
|
|
|
|
Developed land sales
|
|
|
|
|
|
|
|
|
Residential land sales
|
|
|
2,367
|
|
|
|
1,411
|
|
Commercial land sales
|
|
|
-
|
|
|
|
-
|
|
Undeveloped land sales
|
|
|
-
|
|
|
|
5
|
|
Total real estate revenues
|
|
|
2,367
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
Total corporate and other revenues
|
|
|
300
|
|
|
|
86
|
|
Total revenues
|
|
$
|
9,608
|
|
|
$
|
9,175
|
|
|
|
Six Months
Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Fulfillment revenues:
|
|
|
|
|
|
|
|
|
Subscription services
|
|
$
|
8,873
|
|
|
$
|
8,929
|
|
Membership fulfillment
|
|
|
3,119
|
|
|
|
3,639
|
|
Contact center
|
|
|
2,063
|
|
|
|
1,967
|
|
Other revenues
|
|
|
331
|
|
|
|
381
|
|
Total fulfillment revenues
|
|
|
14,386
|
|
|
|
14,916
|
|
|
|
|
|
|
|
|
|
|
Real estate revenues:
|
|
|
|
|
|
|
|
|
Developed land sales
|
|
|
|
|
|
|
|
|
Residential land sales
|
|
|
6,517
|
|
|
|
4,053
|
|
Commercial land sales
|
|
|
-
|
|
|
|
-
|
|
Undeveloped land sales
|
|
|
31
|
|
|
|
40
|
|
Total real estate revenues
|
|
|
6,548
|
|
|
|
4,093
|
|
|
|
|
|
|
|
|
|
|
Total corporate and other revenues
|
|
|
389
|
|
|
|
1,492
|
|
Total revenues
|
|
$
|
21,323
|
|
|
$
|
20,501
|
|
|
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. Data concerning industry segments is set forth in Note 11 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 consolidated financial statements and
related notes thereto included in this report on Form 10-Q and with the Company’s annual report on Form 10-K for the year
ended April 30, 2018, which was filed with the Securities and Exchange Commission on July 20, 2018 (the “2018 Form 10-K”).
Many of the amounts and percentages presented in this Item 2 have been rounded for convenience of presentation. Unless the context
otherwise indicates, all references to 2019 and 2018 are to the fiscal years ending April 30, 2019 and 2018 and all references
to the second quarter and first six months of 2019 and 2018 mean the fiscal three month and six month periods ended October 31,
2018 and 2017.
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 2018 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 2018 Form 10-K and in Note 1 of the notes to the consolidated financial statements
included in this report on Form 10-Q. 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 and assumptions.
The critical accounting policies, assumptions
and estimates are described in Item 7 of Part II of the 2018 Form 10-K. There have been no changes in these critical accounting
policies.
The significant accounting policies of the
Company are described in Note 1 to the consolidated financial statements contained in the 2018 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 2018 Form 10-K and in the notes to the consolidated
financial statements included in this report on Form 10-Q. The Company did not adopt any accounting policy during the first six
months of 2019 that had a material impact on its consolidated financial statements. The Company adopted the following accounting
policies effective May 1, 2018.
Revenue Recognition
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 are required under Topic 606 than were required under the prior generally accepted accounting principles
of Topic 605,
Revenue Recognition
(“Topic 605”). In accordance with Topic 606, fulfillment services revenues
are recognized as the services are performed in proportion to the transfer of control to the customer and real estate revenues
are recognized at the time of sale when consideration has been exchanged and title has been conveyed to the buyer.
Topic 606 was effective for the Company’s
fiscal year beginning May 1, 2018. The Company adopted Topic 606 using the modified retrospective method. Results for reporting
periods beginning after May 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to
be reported in accordance with Topic 605. The adoption of Topic 606 had no impact on the Company’s results of operations.
Statements of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 reduces the
diversity in practice regarding how certain cash receipts and cash payments are presented and classified in the statement of cash
flows, including classifying proceeds from company-owned life insurance proceeds as an investing activity. ASU 2016-15 was effective
for the Company’s fiscal year beginning May 1, 2018.
RESULTS OF OPERATIONS
For the second quarter of 2019, the Company
recorded net income of $55,000, or $0.00 per share, compared to net income of $278,000, or $0.03 per share, for the second quarter
of 2018. For the first six months of 2019, the Company recorded net income of $116,000, or $0.01 per share, compared to net income
of $1,726,000, or $0.21 per share, for the same period of 2018. Revenues were $9,608,000 and $21,323,000 for the second quarter
and first six months of 2019 compared to $9,175,000 and $20,501,000 for the same periods of the prior year.
Revenues from land sales at AMREP Southwest
and its subsidiaries were $2,367,000 and $6,548,000 for the second quarter and first six months of 2019 compared to $1,416,000
and $4,093,000 for the same periods of the prior year. For the first six months of 2018, $2,044,000 of the $4,093,000 of revenues
from land sales was for an approximate five acre undeveloped commercial property in Colorado, which was sold with a gross profit
percentage of 65%.
For the second quarter and first six months
of 2019 and 2018, the Company’s land sales in New Mexico were as follows (dollars in thousands):
|
|
Ended October 31, 2018
|
|
|
Ended October 31, 2017
|
|
|
|
Acres
Sold
|
|
|
Revenue
|
|
|
Revenue
Per Acre
|
|
|
Acres
Sold
|
|
|
Revenue
|
|
|
Revenue
Per Acre
|
|
Three months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
6.7
|
|
|
$
|
2,367
|
|
|
$
|
353
|
|
|
|
3.9
|
|
|
$
|
1,411
|
|
|
$
|
362
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Developed
|
|
|
6.7
|
|
|
|
2,367
|
|
|
|
353
|
|
|
|
3.9
|
|
|
|
1,411
|
|
|
|
362
|
|
Undeveloped
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.1
|
|
|
|
5
|
|
|
|
5
|
|
Total
|
|
|
6.7
|
|
|
$
|
2,367
|
|
|
$
|
353
|
|
|
|
5.0
|
|
|
$
|
1,416
|
|
|
$
|
283
|
|
|
|
Ended October 31, 2018
|
|
|
Ended October 31, 2017
|
|
Six months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
18.2
|
|
|
$
|
6,517
|
|
|
$
|
358
|
|
|
|
5.7
|
|
|
$
|
2,009
|
|
|
$
|
352
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Developed
|
|
|
18.2
|
|
|
|
6,517
|
|
|
|
358
|
|
|
|
5.7
|
|
|
|
2,009
|
|
|
|
352
|
|
Undeveloped
|
|
|
.8
|
|
|
|
31
|
|
|
|
39
|
|
|
|
3.6
|
|
|
|
40
|
|
|
|
11
|
|
Total
|
|
|
19.0
|
|
|
$
|
6,548
|
|
|
$
|
345
|
|
|
|
9.3
|
|
|
$
|
2,049
|
|
|
$
|
220
|
|
The average gross profit percentage on land
sales in New Mexico before indirect costs was 9% and 10% for the second quarter and first six months of 2019 compared to 20% and
19% for the same periods of 2018. The profit percentage is attributable to the mix of lots sold with developed lots having a lower
profit percentage compared to undeveloped lots. 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 were $6,941,000 and $14,386,000 for the second quarter and first six months of 2019 compared to $7,673,000
and $14,916,000 for the same periods of 2018. The decreased revenues were primarily attributable to reduced business volumes from
existing customers, price concessions on renewed contracts and lost business, offset in part by new business. The Company’s
fulfillment services business has been successful in obtaining new business partially as a result of a significant competitor announcing
its intention to cease operations; however, one customer of the Company’s fulfillment services business whose revenues were
approximately 7.8% of total Company revenues for the first six months of 2019 in-sourced a significant portion of its business
from the Company’s fulfillment services business in August 2018, which transfer had been expected and previously disclosed.
Otherwise, 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 the Company’s fulfillment services business
and its competitors when contracts are up for bid or renewal.
Other revenues were $300,000 and $389,000 for
the second quarter and first six months of 2019 compared to $86,000 and $1,492,000 for the same periods of 2018. 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 7 of the notes to the consolidated financial statements included in this report on
Form 10-Q). In addition to this pre-tax gain in 2018, Other revenues in the second quarter and first six months of 2019 and 2018
included the recognition of deferred revenue related to an oil and gas lease, fees and forfeited deposits from customers earned
by AMREP Southwest and miscellaneous other income items.
Operating and selling expenses for real estate
decreased from $582,000 and $1,093,000 for the second quarter and first six months of 2018 to $245,000 and $521,000 for the same
periods of 2019, primarily due to reduced commissions on sales activity and lower real estate taxes and costs of storm water pollution
prevention. Operating and selling expenses for fulfillment services were $5,974,000 and $12,312,000 for the second quarter and
first six months of 2019 compared to $5,983,000 and $12,077,000 for the same periods of 2018. The increase for the six month period
was primarily due to increased costs related to payroll and benefits, bad debt expense, supplies expense and outside services,
offset in part by reduced depreciation expense.
Real estate general and administrative expenses
increased from $86,000 and $200,000 for the second quarter and first six months of 2018 to $116,000 and $304,000 for the same periods
of 2019, primarily due to an increase in legal expenses related to debt financing contracts. Fulfillment services general and administrative
expenses increased from $308,000 and $657,000 for the second quarter and first six months of 2018 to $334,000 and $680,000 for
the same periods of 2019, primarily due to an increase in legal expenses related to a specific project that has been completed.
Corporate general and administrative expenses increased from $696,000 and $1,504,000 for the second quarter and first six months
of 2018 to $762,000 and $1,584,000 for the same periods of 2019, primarily due to increased costs related to payroll and healthcare
benefits, offset in part by lower travel and legal expenses.
Interest expense was $7,000 and $12,000 for
the second quarter and first six months of 2019 compared to $18,000 and $31,000 for the same periods of 2018. Interest expense
in 2019 was related to borrowings for land development activities, while interest expense in 2018 was primarily related to the
liability with the State of Florida noted above. The Company capitalized interest of $26,000 and $52,000 for the second quarter
and first six months of 2019 compared to none for the same periods of 2018.
The U.S. Tax Cuts and Jobs Act (the “Act”)
was signed into law in December 2017. The Act significantly revised the future ongoing U.S. corporate income tax by, among other
things, lowering U.S. corporate income tax rates. The Act reduced the federal corporate tax rate to 21.0% effective January 1,
2018. As the Company has an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in the Company
having a blended federal tax rate of 29.7% for 2018. Effective May 1, 2018, the Company’s federal corporate tax rate is 21.0%.
The Company had a benefit for income taxes
of $47,000 and $99,000 for the second quarter and first six months of 2019 compared to a provision for income taxes of $85,000
and $851,000 for the same periods of 2018. The benefit or provision for income taxes includes expenses related to federal income
tax as well as the net tax benefits related to state operating losses.
The total tax effect of gross unrecognized
tax benefits in the accompanying financial statements at both October 31, 2018 and April 30, 2018 was $58,000, which, if recognized,
will have an impact on the effective tax rate. As a result of the lapse of the statute of limitations, this amount is expected
to be recognized during the three month period ending January 31, 2019.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funding
for working capital requirements are cash flow from operations, bank financing for specific real estate projects and existing cash
balances. 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 2018 Form 10-K.
Pension Plan
The Company has a defined benefit pension plan
for which accumulated benefits were frozen and future service credits were curtailed as of March 1, 2004. Refer to Note 11 to the
consolidated financial statements contained in the 2018 Form 10-K for additional detail regarding the Company’s agreements
with the Pension Benefit Guaranty Corporation (the “PBGC”). The agreements with the PBGC terminated by their terms
in August 2018 with the PBGC being deemed to have released and discharged the Company and all other members of its controlled group
from any claims under such agreements.
Operating Activities
Receivables, net decreased from $5,901,000
at April 30, 2018 to $5,542,000 at October 31, 2018, primarily due lower business volumes in the fulfillment services business.
Real estate inventory increased from $58,874,000 at April 30, 2018 to $58,968,000 at October 31, 2018, primarily due to an increase
in land development activity, offset in part by real estate land sales. Property, plant and equipment, net decreased from $9,745,000
at April 30, 2018 to $9,207,000 at October 31, 2018, primarily due to depreciation of fixed assets. Taxes receivable, net was $209,000
at April 30, 2018, and included an anticipated refund of federal taxes of $271,000. During the three months ended July 31, 2018,
the Company received the $271,000 tax refund, which resulted in a Taxes payable, net balance of $44,000 at October 31, 2018.
Accounts payable and accrued expenses increased
from $7,497,000 at April 30, 2018 to $7,767,000 at October 31, 2018, primarily due to an increase in land development activity
(refer to Note 10 of the notes to the consolidated financial statements included in this report on Form 10-Q regarding the prior
period revision to accounts payable and accrued expenses). Notes payable, net increased from $1,843,000 at April 30, 2018 to $1,972,000
at October 31, 2018, primarily due to financing of land development activity. Other liabilities and deferred revenue decreased
from $149,000 at April 30, 2018 to $99,000 at October 31, 2018, primarily due to the recognition of deferred revenue related to
an oil and gas lease.
Financing Activities
Lomas Encantadas Subdivision
–
Refer to Note 8 to the consolidated financial statements contained in the 2018 Form 10-K for detail about the loan agreement and
related documentation entered into with BOKF, NA dba Bank of Albuquerque in December 2017 with respect to the development of certain
planned residential lots within the Lomas Encantadas subdivision located in Rio Rancho, New Mexico.
Pursuant to such loan documentation, BOKF,
NA agrees to lend up to $4,750,000 to the borrower on a non-revolving line of credit basis to partially fund the development of
certain planned residential lots within the Lomas Encantadas subdivision. Interest on the outstanding principal amount of the loan
is payable monthly at the annual rate equal to the London Interbank Offered Rate for a thirty-day interest period plus a spread
of 3.0%, adjusted monthly. The outstanding principal amount of the loan as of October 31, 2018 was $2,009,000 and the borrower
made principal repayments of $1,171,000 during the first six months of 2019. The outstanding principal amount of the loan as of December 5, 2018 was $1,327,000. The loan is scheduled to mature in December 2021.
The total book value of the property within the Lomas Encantadas subdivision mortgaged to BOKF, NA was $11,273,000 as of October
31, 2018. The Company capitalized $25,000 and $51,000 of interest related to this loan in the second quarter and first six months
of 2019. At October 31, 2018, both the borrower and AMREP Southwest were in compliance with the covenants contained within the
loan documentation.
Hawk Site Subdivision
– In July
2018, Hawksite 27 Development Company, LLC (“HDC”), a subsidiary of AMREP Southwest, entered into a Business Loan Agreement
with Main Bank. The loan under the Business Loan Agreement is evidenced by a Promissory Note and is secured by a Mortgage, between
HDC and Main Bank with respect to certain planned residential lots within the Hawk Site subdivision located in Rio Rancho, New
Mexico. Pursuant to a Commercial Guaranty entered into by AMREP Southwest in favor of Main Bank, AMREP Southwest has guaranteed
HDC’s obligations under each of the above agreements. The Business Loan Agreement, Promissory Note, Mortgage, Commercial
Guaranty and other related transaction documents are collectively referred to as the “HS Loan Documentation.”
Pursuant to the HS Loan Documentation, Main
Bank agrees to lend up to $1,800,000 to HDC on a non-revolving line of credit basis to partially fund the development of certain
planned residential lots within the Hawk Site subdivision. Interest on the outstanding principal amount of the loan is payable
monthly at the annual rate equal to the Wall Street Journal Prime Rate plus a spread of 2.38%, adjusted annually. Main Bank is
required to release the lien of its mortgage on any lot upon HDC making a principal payment equal to the greater of $30,000 or
55% of the sales price of the lot. HDC is required to reduce the principal balance of the loan to a maximum of $1,700,000 in July
2020. The outstanding principal amount of the loan may be prepaid at any time without penalty. The loan is scheduled to mature
in July 2021. HDC incurred customary costs and expenses and paid fees to Main Bank in connection with the loan. The outstanding
principal amount of the loan as of October 31, 2018 was $42,000 and HDC made no principal repayments during the first six months
of 2019. The outstanding principal amount of the loan as of December 5, 2018 was $582,000. The total book value of the property within the Hawk Site subdivision mortgaged to Main Bank was $3,883,000 as of October
31, 2018. The Company capitalized $1,000 of interest related to this loan in the second quarter and first six months of 2019.
HDC and AMREP Southwest have made certain representations
and warranties in the HS Loan Documentation and are required to comply with various covenants, reporting requirements and other
customary requirements for similar loans. The HS Loan Documentation contains customary events of default for similar financing
transactions, including: HDC’s failure to make principal, interest or other payments when due; the failure of HDC or AMREP
Southwest to observe or perform their respective covenants under the HS Loan Documentation; the representations and warranties
of HDC or AMREP Southwest being false; and the insolvency or bankruptcy of HDC or AMREP Southwest. Upon the occurrence and during
the continuance of an event of default, Main Bank may declare the outstanding principal amount and all other obligations under
the HS Loan Documentation immediately due and payable. At October 31, 2018, both HDC and AMREP Southwest were in compliance with
the covenants contained within the HS Loan Documentation.
Investing Activities
Capital expenditures for property, plant and
equipment totaled $34,000 for the first six months of 2019 and $29,000 for the same period of 2018, primarily related to the Company’s
fulfillment services business in both periods.
The Company received life insurance proceeds
of $85,000 during the three months ended July 31, 2018. The income associated with the life insurance proceeds was recognized in
various years prior to 2019.
Statement of Forward-Looking Information
The Private Securities Litigation Reform Act
of 1995 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 Private Securities Litigation Reform Act of 1995. 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 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 issuance of deferred
stock units to non-employee members of the Company’s Board of Directors, the liability for unrecognized tax benefits changing
in the next twelve months, the availability of bank financing for projects, the expected utilization of existing bank financing,
the impact and the timing of completion of accounting for the tax effects of the U.S. Tax Cuts and Jobs Act on the Company 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 forward-looking statements 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.