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| AXR > SEC Filings for AXR > Form 10-Q on 8-Sep-2008 | All Recent SEC Filings |
8-Sep-2008
Quarterly Report
INTRODUCTION
The Company, through its subsidiaries, is primarily engaged in three business segments: the Real Estate business operated by AMREP Southwest Inc. and its subsidiaries (collectively, "AMREP Southwest") and the Fulfillment Services and Newsstand Distribution Services businesses operated by Kable Media Services, Inc. and its subsidiaries (collectively, "Kable" or "Media Services"). The Company's foreign sales and activities are not significant.
The following provides information that management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the April 30, 2008 consolidated financial statements and accompanying notes. All references in this Item 2 to the first quarter or first three months of 2009 and 2008 mean the fiscal three-month periods ended July 31, 2008 and 2007.
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 2008 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of the Company's annual report on Form 10-K for the year ended April 30, 2008 (the "2008 Form 10-K"). The preparation of those consolidated financial statements required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those estimates.
The significant accounting policies of the Company are described in Note 1 to the 2008 consolidated financial statements, and the critical accounting policies and estimates are described in Management's Discussion and Analysis included in Item 7 of the 2008 Form 10-K. There have been no changes in the critical accounting policies. Information concerning the implementation and the impact of new accounting standards issued by the Financial Accounting Standards Board ("FASB") is included in the notes to the April 30, 2008 consolidated financial statements.
The Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157") effective May 1, 2008. The adoption of SFAS No. 157 did not have an impact on the Company's consolidated financial position or results of operations. The Company also adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS No. 159") effective May 1, 2008. The adoption of SFAS No. 159 did not have an impact on the Company's consolidated financial position or results of operations. The Company did not adopt any other new accounting policies during the quarter ended July 31, 2008.
RESULTS OF OPERATIONS
For the first quarter of 2009, net income was $71,000, or $0.01 per share, compared to net income of $6,263,000, or $0.94 per share, in the first quarter of 2008. Results for the first quarter of 2009 were entirely from continuing operations. Results for the first quarter of 2008 included net income from continuing operations of $6,320,000, or $0.95 per share, and a loss on discontinued operations, net of tax, of $57,000, or $0.01 per share, that reflected costs incurred in connection with the settlement of all litigation related to the Company's El Dorado, New Mexico water utility subsidiary that were in addition to costs estimated and accrued for this matter in the fourth quarter of 2007. Revenues were $35,570,000 in the first quarter of fiscal 2009 compared to $51,359,000 for the same period last year.
First quarter 2009 revenues from land sales at AMREP Southwest were $1,263,000 compared to $18,150,000 for the same period of fiscal 2008. This significant year-over-year revenue decrease reflected substantially lower land sales in the Company's principal market of Rio Rancho, New Mexico due to the severe decline in the real estate market in the greater Albuquerque-metro and Rio Rancho areas that began in earlier periods. First quarter land sales revenues and gross profits in fiscal 2009 were primarily from the sale of scattered residential lots, while in the same period of fiscal 2008 they were from sales of developed lots to homebuilders and commercial developers as well as from sales of undeveloped land. The trend of the declining number of permits for new home construction, as previously reported, continues with 20% fewer building permits issued during the first six calendar months of 2008 compared to the same period in 2007. The Company believes that this decline has been generally consistent with the well-publicized problems of the national home building industry, including fewer sales of both new and existing homes, an increasing number of mortgage delinquencies and foreclosures and a tightening of mortgage availability. Faced with these adverse conditions, builders continued to slow the pace of building on developed lots previously purchased from the Company in Rio Rancho and, in some cases, delayed or cancelled the purchase of additional developed lots. These factors have also contributed to a steep decline in the sale of undeveloped land to both builders and investors.
In Rio Rancho, the Company offers for sale both developed and undeveloped lots to national, regional and local home builders, commercial and industrial property developers and others. For the first quarter of 2009 and 2008, the Company's land sales in Rio Rancho have been as follows:
2009 2008
--------------------------------------- -----------------------------------------
Revenues Revenues
Acres Revenues Per Acre Acres Revenues Per Acre
Sold (in 000s) (in 000s) Sold (in 000s) (in 000s)
--------- ----------- ----------- -------- ------------ -----------
Developed
Residential 1.4 $ 342 $ 244 19.5 $ 6,729 $ 345
Commercial 1.0 126 126 13.7 2,920 213
--------- ----------- ----------- -------- ------------ -----------
Total Developed 2.4 468 195 33.2 9,649 291
Undeveloped 44.8 795 18 290.8 8,501 29
--------- ----------- ----------- -------- ------------ -----------
Total 47.2 $ 1,263 $ 27 324.0 $ 18,150 $ 56
--------- ----------- ----------- -------- ------------ -----------
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The average selling price of land sold by the Company in Rio Rancho in recent years has fluctuated, as the Company offers for sale developed and undeveloped land in Rio Rancho from a number of different projects, and selling prices may vary from project to project and within projects depending on location, the stage of development and other factors. The price per acre of developed land in the first quarter of 2009 was lower compared to the same period in the prior year due to a change in the mix and the stage of development of specific projects from which the land was sold. The decrease in the average selling price of undeveloped land in the first quarter of 2009 was primarily attributable to a higher proportion of undeveloped land sold in the current year from locations in
Rio Rancho that are further removed from developed areas and thus generally have lower average selling prices. The average gross profit percentage on land sales increased from 68% for the first quarter of 2008 to 71% for the first quarter of 2009. This increase was attributable to the mix of lots sold, with 2009 sales including a higher percentage of revenues from sales of commercial and undeveloped lots, which generally have higher gross profit percentages than sales of developed residential lots. Revenues and gross profits, average sales prices of land and related gross profit percentages from land sales can vary significantly from period to period as a result of many factors, including the nature and timing of specific transactions, and prior results are not necessarily a good indication of what may occur in future periods.
Revenues from Media Services, including both Fulfillment Services and Newsstand Distribution Services, increased from $32,299,000 for the first quarter of 2008 to $34,023,000 for the same period in 2009. This increase was primarily attributable to the Company's Fulfillment Services operations, where revenues increased from $28,988,000 for the first quarter of 2008 to $30,667,000 for the same period of 2009. Revenues from Kable's Newsstand Distribution Services operations were generally unchanged, $3,311,000 for the first quarter 2008 compared to $3,355,000 for the same period of 2009. Kable's operating expenses increased by $381,000 for the first quarter of 2009 compared to the same period in 2008, primarily attributable to computer systems integration costs and consulting costs.
During fiscal 2008, the Company announced a project to integrate certain aspects of the Kable's Fulfillment Services operations in order to improve operating efficiencies and customer service and also to reduce costs. To date, this project has resulted in (i) one significant workforce reduction that occurred in the first quarter of 2008, (ii) the substantial completion of a plan announced in the second quarter of 2008 to redistribute the work performed at the Marion, Ohio facility of its Fulfillment Services business and the scheduled closing of that facility, and (iii) the consolidation of a fulfillment operations customer call center. The Company incurred costs directly related to the integration project of $498,000 and $303,000 for the quarters ending July 31, 2008 and 2007, principally for severance and other consulting costs related to the integration, and these costs are included in the Restructuring and fire recovery costs in the Company's consolidated statements of income.
On December 5, 2007 a warehouse of approximately 38,000 square feet leased by the Company in Oregon, Illinois was totally destroyed by fire. The warehouse was used principally to store back issues of magazines published by certain customers for whom the Company fills back-issue orders as part of its services. The Company has filed a preliminary claim with its insurance provider for its property loss and has been advanced $500,000 for replacement of such property. In addition, the Company was required to provide insurance for certain of those customers whose property was destroyed in the warehouse fire. Through August 31, 2008, the Company's insurance provider had paid approximately $65,000 to customers for lost materials. The Company believes that the net effect of the outcome of other claims pending or unasserted related to materials of certain publishers for whom it was required to provide insurance, together with proceeds from its property claims, will not have a material effect on its financial position, results of operations or cash flows.
During the quarter ended July 31, 2008, the Company recorded other income of $173,000 for a business interruption claim resulting from the fire that was approved by its insurer. The Company also recorded charges to operations of $89,000 related to fire recovery costs, principally for legal and other advisory costs that were not covered by insurance. These costs are included in the Restructuring and fire recovery costs in the Company's consolidated statements of income.
Interest and other revenues were $284,000 for the three-month period ended July 31, 2008 compared to $910,000 for the same period in the prior year. The decrease in the 2009 first quarter was the result of reduced interest income due to lower cash balances to invest.
Real estate commissions and selling expenses decreased $175,000 in the first quarter of 2009 compared to the same period in 2008, principally due to the reduced volume of land sales. Other operating expenses decreased $212,000 for the three-month period ended July 31, 2008 compared to the same period in 2007 primarily due to the sale of certain AMREP Southwest non-inventory real estate assets in the second quarter of 2008, which eliminated related operating expenses.
General and administrative costs of Media Services operations decreased $559,000 in the first quarter of 2009 compared to the same period in 2008 primarily due to realized savings from the Fulfillment Services operations integration project. Real estate and corporate general and administrative expense was comparable on a year-to-year basis.
LIQUIDITY AND CAPITAL RESOURCES
During the past several years, the Company has financed its operations from internally generated funds from real estate sales and Media Services operations, and from borrowings under its various lines-of-credit and development loan agreements.
Cash Flows From Operating Activities
Real Estate receivables decreased from $13,124,000 at April 30, 2008 to $12,084,000 at July 31, 2008 reflecting the net effect of payments received on mortgage notes held by AMREP Southwest offset in part by mortgages notes received by AMREP Southwest in connection with real estate sales that closed during the first three months of 2009. Receivables from Media Services operations increased from $45,701,000 at April 30, 2008 to $49,533,000 at July 31, 2008, primarily due to the effect of higher quarter-end billings at July 31, 2008 compared to April 30, 2008.
Real Estate inventory was $72,832,000 at July 31, 2008 compared to $70,252,000 at April 30, 2008. Inventory in the Company's core real estate market of Rio Rancho increased from $63,215,000 at April 30, 2008 to $65,689,000 at July 31, 2008, primarily reflecting the net effect of development spending and land sales. The balance of real estate inventory consisted of properties in Colorado.
Accounts payable and accrued expenses decreased from $98,532,000 at April 30, 2008 to $89,989,000 at July 31, 2008, primarily as a result of the timing of payments due to publishers and vendors. In addition, under a distribution arrangement with one publisher customer of the Newsstand Distribution Services business, that publisher bears the ultimate credit risk of non-collection of related amounts due from the customers to which the Company distributes the publisher's magazines. Accounts receivable subject to this arrangement were netted ($25,188,000 was netted at July 31, 2008 and $22,703,000 was netted at April 30, 2008) against the related accounts payable due the publisher on the accompanying consolidated balance sheets.
Cash Flows From Investing Activities
Capital expenditures totaled $185,000 and $1,656,000 in the first three months of 2009 and 2008, primarily for computer hardware and software development expenditures related to the Fulfillment Services business and, in 2008, $663,000 for certain real estate investments assets. The Company believes that it has adequate cash and financing capability to provide for its anticipated future capital expenditures.
Cash Flows From Financing Activities
AMREP Southwest has a revolving credit facility with a bank that matures in September 2009. Media Services has bank financing facilities that mature at various dates through May 2010. Each of the facilities requires the borrowers to meet certain covenants. The borrowers were in compliance with these covenants at July 31, 2008.
Future Payments Under Contractual Obligations
---------------------------------------------
The Company is obligated to make future payments under various contracts,
including its debt agreements and lease agreements, and is subject to certain
other commitments and contingencies. The table below summarizes significant
contractual obligations as of July 31, 2008 for the items indicated (in
thousands):
Less than 1 - 3 3 - 5 More than
Contractual Obligations Total 1 year years years 5 years
----------------------- ----- --------- ----- ----- ---------
Notes payable $30,561 $ 2,879 $27,267 $ 415 $ -
Operating leases and other 27,376 5,567 10,517 7,220 4,072
----------- -------------- ------------- ------------- --------------
Total $57,937 $ 8,446 $37,784 $ 7,635 $ 4,072
=========== ============== ============= ============= ==============
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The increase in notes payable from April 30, 2008 was due to increased borrowings by AMREP Southwest and Kable. Operating leases and other includes liabilities of $2,793,000 related to unrecognized tax benefits and related interest accrued in accordance with FIN 48. Refer to Notes 9, 14 and 16 to the consolidated financial statements included in the 2008 Form 10-K for additional information on long-term debt and commitments and contingencies.
Risk Factors
In addition to the other information set forth in this report, the factors discussed in Part I, "Item 1A. Risk Factors" in the 2008 Form 10-K, which could materially affect the Company's business, financial condition or future results, should be carefully considered. The risks described in the 2008 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that currently are deemed to be immaterial also may materially adversely affect the Company's business, financial condition or operating results.
Statement of Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are "forward-looking", including statements contained in this report and other filings with the Securities and Exchange Commission, reports to the Company's shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and contingencies that are difficult to predict. These risks and uncertainties include, but are not limited to, the risks described above under the heading "Risk Factors". Many of the factors that will determine the Company's future results are beyond the ability of management
to control or predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
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