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| AXR > SEC Filings for AXR > Form 10-Q on 10-Dec-2008 | All Recent SEC Filings |
10-Dec-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 second quarter or first six months of 2009 and 2008 mean the fiscal three and six month periods ended October 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 April 30, 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 April 30, 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 these 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 Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements", 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", 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 new accounting policies during the quarter ended October 31, 2008.
RESULTS OF OPERATIONS
For the second quarter of 2009, net income was $2,895,000, or $0.48 per share, compared to net income of $3,467,000, or $0.55 per share, in the second quarter of 2008. Results for the second quarters of 2009 and 2008 were entirely from continuing operations. For the first six months of fiscal 2009, net income was $2,966,000, or $0.49 per share, compared to net income of $9,730,000, or $1.50 per share, for the same period of 2008. Results for the first six months of 2009 were from continuing operations while results for the first six months of 2008 included a loss on discontinued operations of $57,000, net of tax, 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 fiscal 2007. Revenues were $40,290,000 and $75,860,000 in the second quarter and first six months of 2009 compared to $42,090,000 and $93,449,000 in the same periods last year.
Revenues from land sales at AMREP Southwest were $4,810,000 and $6,073,000 for the three and six month periods ended October 31, 2008 compared to $3,161,000 and $21,311,000 for the same periods of the prior year. The increase of $1,649,000 for the second quarter of 2009 compared to the same quarter of 2008 reflected the sale in this period's second quarter of approximately 50 acres of undeveloped land for $3,849,000. Except for this sale, the Company continues to experience 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. In total, second quarter land sales revenues and gross profits in fiscal 2009 were from the sale of approximately 87 acres of undeveloped land, including the aforementioned sale of approximately 50 acres to one purchaser, and the sale of three developed residential lots, while in the same period of fiscal 2008 they were from the sale of 58 developed residential lots to homebuilders and commercial developers as well as from the sale of approximately 11 acres of undeveloped land. In addition, the trend of declining permits for new home construction in the Rio Rancho area also continues, with 28% fewer single-family residential building permits issued during the first ten calendar months of 2008 compared to the same period in 2007. The Company believes that this decline is generally consistent with the well-publicized problems of the national home building industry and credit markets, 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 have slowed the pace of building on developed lots previously purchased from the Company in Rio Rancho and 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 second quarter and first six months of fiscal 2009 and 2008, the Company's land sales in Rio Rancho were as follows:
--------------------------------------------------------------------------------------
2008 2007
--------------------------------------- -----------------------------------------
Revenues Revenues
Acres Revenues Per Acre Acres Revenues Per Acre
Sold (in 000s) (in 000s) Sold (in 000s) (in 000s)
--------- ----------- ----------- -------- ------------ -----------
Three months ended
October 31:
Developed
Residential 0.4 $ 86 $ 244 10.0 $ 2,740 $ 274
Commercial - - - - - -
--------- ----------- ----------- -------- ------------ -----------
Total Developed 0.4 86 244 10.0 2,740 274
Undeveloped 87.1 4,724 54 11.0 421 38
--------- ----------- ----------- -------- ------------ -----------
Total 87.5 $ 4,810 $ 55 21.0 $ 3,161 $ 151
--------- ----------- ----------- -------- ------------ -----------
Six months ended
October 31:
Developed
Residential 1.8 $ 428 $ 238 30.0 $ 9,468 $ 316
Commercial 1.0 126 126 14.0 2,921 209
--------- ----------- ----------- -------- ------------ -----------
Total Developed 2.8 554 198 44.0 12,389 282
Undeveloped 131.9 5,519 42 302.0 8,922 30
--------- ----------- ----------- -------- ------------ -----------
Total 134.7 $ 6,073 $ 45 346.0 $ 21,311 $ 62
--------- ----------- ----------- -------- ------------ -----------
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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 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 revenue per acre of undeveloped land in the second quarter of 2009 was higher compared to the same period in the prior year due to the undeveloped land sold in the current year being from locations nearer developed areas and thus generally having higher average selling prices. The average gross profit percentage on land sales increased from 50% and 66% for the second quarter and first six months of 2008 to 97% and 91% for the same periods in 2009. This increase was attributable to the mix of land sold, and principally was the result of the previously described 50 acre sale of undeveloped land in the second quarter of 2009 to one purchaser with revenues of $3,849,000, which contributed a gross profit of $3,825,000 (99%). Revenues, gross profits, average sales prices 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, remained nearly unchanged for the second quarter of 2009 versus the same period in 2008, totaling $35,254,000 this year compared to $35,592,000 last year, and increased from $67,890,000 in the first six months of 2008 to $69,277,000 for the same period in 2009. The six month increase was primarily attributable to the Company's Fulfillment Services operations, where revenues were $32,158,000 and $62,826,000 for the second quarter and first six months of 2009 compared to $32,036,000 and $61,023,000 in the same periods of the prior year. The principal reason for the revenue increase in 2009 was the net effect of revenue gains from new and existing clients that were offset in part by reduced and lost business from certain customers. Revenues from Newsstand Distribution Services operations decreased from $3,556,000 and
$6,867,000 for the second quarter and first six months of 2008 to $3,096,000 and $6,451,000 for the same periods in 2009, primarily reflecting a softening of magazine newsstand demand. Kable's operating expenses increased by $172,000 and $552,000 for the second quarter and first six months of 2009 compared to the same periods in 2008, primarily attributable to computer systems integration costs and consulting costs of the Fulfillment Services business.
In October 2008, the Company announced a project to unify its magazine
subscription, membership and direct mail fulfillment services under one brand,
Palm Coast Data, and in one location, Palm Coast, Florida. This unification
project is expected to streamline operations, improve service to clients and
create cost efficiencies through reduced overhead costs and the elimination of
operating redundancies. The Company is still evaluating various alternatives for
this expansion, which could be in the range of $15,000,000 to $20,000,000 in
capital expenditures. The project is scheduled to be implemented over a
two-to-three year period, and over that period may involve approximately
$6,000,000 of non-recurring cash costs for severance, training and transition,
facility closings and equipment relocation. The State of Florida and the City of
Palm Coast have agreed to provide incentives for the program, including cash and
employee training grants and tax relief, which could amount to as much as
$8,000,000, largely contingent on existing job retention and new job creation.
Previously during fiscal 2008, the Company announced (i) one significant
workforce reduction in its Fulfillment Services business that occurred in the
second quarter of fiscal 2008, (ii) a plan to redistribute the work performed at
the Marion, Ohio facility of its Fulfillment Services business and the scheduled
closing of that facility that was substantially completed in August 2008, and
(iii) the consolidation of fulfillment operations customer call centers. The
Company incurred total costs directly related to the unification project of
$75,000 and $573,000 in the second quarter and first six months of 2009 compared
to $117,000 and $419,000 for the same periods of 2008, principally for severance
and consulting costs. These costs are included in the Restructuring and fire
recovery costs in the Company's consolidated statements of income and retained
earnings.
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 filled back-issue orders as part of its services. The Company has filed a preliminary claim with its insurance carrier 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 November 30, 2008, the Company's insurance provider had paid approximately $164,000 to customers for lost materials. The Company also recorded in the first quarter of 2009 $173,000 of other income for a business interruption claim resulting from the fire. The Company believes that the net effect of the outcome of other pending or unasserted claims 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.
The Company recorded charges to operations of $50,000 and $139,000 for the second quarter and first six months of 2009 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 and retained earnings.
Interest and other revenues decreased $3,129,000 and $3,776,000 for the second quarter and six month periods ended October 31, 2008 compared to the same periods in the prior year, primarily due to a pre-tax gain from the sale of a commercial property ($1,873,000) and the forfeiture of a deposit for the purchase of land by a homebuilder who did not exercise a purchase option ($618,000) in the second quarter of 2008, with no similar transactions occurring in the first six months of 2009. To a lesser extent, interest and other revenues were also lower in the first six months of 2009 compared to the same period in 2008 due to lower cash balances.
Real estate commissions and selling expenses were generally unchanged for the quarter ended October 31, 2008 compared to the same period in 2007. For the six month period ended October 31, 2008, real estate commissions and selling expenses decreased $172,000 principally due to the reduced volume of land sales. Other operating expenses decreased $179,000 and $391,000 for the three and six month periods ended October 31, 2008 compared to the same periods last year, primarily due to the previously mentioned sale of a commercial property in the second quarter last year, which eliminated related operating expenses.
General and administrative expenses of Media Services operations increased $651,000 and $92,000 in the second quarter and first six months of 2009 compared to the same periods in 2008, primarily due to the aforementioned consulting fees associated with the unification project of the Fulfillment Services business. Real estate operations and corporate general and administrative expense decreased $96,000 and $113,000 for the second quarter and first six months of 2009, primarily due to reduced professional fees.
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 $10,084,000 at October 31, 2008 reflecting the net effect of (i) 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 second quarter of 2009 and (ii) the reclassification of approximately $1,962,000 to real estate inventory from receivables resulting from the receipt of deeds in lieu of foreclosure related to delinquent mortgage notes receivable. Receivables from Media Services operations increased from $45,701,000 at April 30, 2008 to $46,139,000 at October 31, 2008, primarily due to the effect of higher quarter-end billings at October 31, 2008 compared to April 30, 2008.
Real estate inventory was $76,423,000 at October 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 $69,213,000 at October 31, 2008, primarily reflecting the net effect of development spending and land sales and the reclassification of mortgage notes receivable to inventory discussed above. 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 $85,156,000 at October 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 ($21,100,000 was netted at October 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
Restricted cash of $3,840,000 reflects amounts held in escrow that were received in connection with the sale of investment assets that are identified as "1031 Exchange assets" and which are restricted pending the identification and purchase of replacement assets.
Capital expenditures for property, plant and equipment, primarily for computer hardware and software development expenditures related to the Fulfillment Services business, totaled $660,000 and $2,927,000 in the first six months of 2009 and 2008. In addition, in the first six months of 2008, the Company spent $1,092,000 for certain real estate investment 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
The Company's subsidiaries have various 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 October 31, 2008.
AMREP Southwest has a $25,000,000 revolving credit facility with a bank that matures in September, 2009. As a result of the extreme volatility in the financial markets, the cost of obtaining money has increased and many lenders have increased interest rates, imposed tighter lending standards, refused to refinance existing debt at maturity on terms similar to current terms and, in some cases, have ceased to provide funding to borrowers. The bank has recently informed AMREP Southwest that it presently anticipates, as a matter of policy, discussing a renewal of the arrangement and providing a terms letter 90-days prior to the expiration of the current agreement; however, the bank has also indicated that, due to the credit markets and the real estate economy, it would expect different terms and conditions, including a higher interest rate, in order to extend the line.
With respect to the Kable Fulfillment/Palm Coast Data unification project described above in Results of Operations, the Company expects that this project will include a two-to-three year capital expansion program. The Company is still evaluating various alternatives for this expansion, which could be in the range of $15,000,000 to $20,000,000, of which $3,800,000 is contemplated to be provided by AMREP Southwest in the form of an "IRS Section 1031 reinvestment" purchase of an office building that will be leased back to Palm Coast. The Company estimates that the implementation of this program will also result in approximately $6,000,000 of non-recurring cash costs for severance, training and transition, facility closings and equipment relocation. To assist in the program, Palm Coast has procured approximately $8,000,000 of governmental incentives from the State of Florida and the City of Palm Coast for the program, including cash and employee training grants and tax relief that are largely contingent on existing job retention and new job creation. The Company is also in various stages of discussions with several possible lenders to provide financing for part of this expansion, with the balance anticipated to be funded from operations.
In both of the above cases, there can be no assurance the required financing will be available on satisfactory terms.
Future Payments Under Contractual Obligations
---------------------------------------------
The Company is obligated to make future payments under various contracts,
including its debt agreements and lease agreements, and is subject to certain
other commitments and contingencies. The table below summarizes significant
contractual obligations as of October 31, 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 $ 37,518 $ 25,928 $ 11,377 $ 213 $ -
Operating leases and other 26,811 5,511 10,809 7,076 3,415
----------- -------------- ------------- ------------- --------------
Total $ 64,329 $ 31,439 $ 22,186 $ 7,289 $ 3,415
=========== ============== ============= ============= ==============
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The increase in notes payable from April 30, 2008 was due to increased borrowings by AMREP Southwest and Media Services. Operating leases and other includes liabilities of $2,890,000 related to unrecognized tax benefits and related accrued interest recorded 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.
Pension Plan
With the recent substantial declines in the global equity and debt markets, there has been a substantial decline in the fair market value of the assets in the Retirement Plan for Employees of AMREP Corporation ("Plan"), from $27,225,000 at April 30, 2008 to approximately $17,900,000 at November 30, 2008, which will likely result in additional funding requirements from the Company to the Plan beginning in calendar 2009. Funding requirements to the Plan are determined based upon the provisions of the Pension Protection Act of 2006, which generally requires "full funding" (as defined) of defined benefit pension plans to be made over a seven year period. The amount that may be required to be funded by the Company is not presently determinable, as it will be based upon the fair market value of assets of the Plan as compared to the actuarially computed value of the Plan's vested liabilities, in each case as of December 31, 2008. In addition, the change in the previously accrued pension liability for the Plan based upon the fair market value of assets compared to the pension benefit obligation as of April 30, 2009 will be reflected as a component of comprehensive income or loss in the Company's 2009 financial statements.
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", . . .
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