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| AXR > SEC Filings for AXR > Form 10-Q on 9-Sep-2009 | All Recent SEC Filings |
9-Sep-2009
Quarterly Report
INTRODUCTION
The Company, through its subsidiaries, is primarily engaged in four business segments: the Real Estate business operated by AMREP Southwest Inc. and its subsidiaries (collectively, "AMREP Southwest") and the Subscription Fulfillment Services, Newsstand Distribution Services and Product Fulfillment 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, 2009 consolidated financial statements and accompanying notes. Unless otherwise qualified, all references to 2010 and 2009 are to the fiscal years ending April 30, 2010 and 2009 and all references to the first quarter or first three months of 2010 and 2009 mean the fiscal three-month periods ended July 31, 2009 and 2008.
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 2009 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, 2009 (the "2009 Form 10-K"). The preparation of those consolidated financial statements required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those estimates.
The critical accounting policies, assumptions and estimates are described in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Assumptions and Estimates" in the Company's 2009 Form 10-K. There have been no changes in these accounting policies.
The significant accounting policies of the Company are described in Note 1 to the 2009 consolidated financial statements contained in the Company's 2009 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 2009 consolidated financial statements and also in Note 1 to the consolidated financial statements contained in this quarterly report on Form 10-Q. The Company did not adopt any accounting policy in the first quarter of 2010 that had a material impact on its consolidated financial statements.
RESULTS OF OPERATIONS
For the first quarter of 2010, the Company had a net loss of $1,056,000, or $0.18 per share, compared to net income of $71,000, or $0.01 per share, in the first quarter of 2009. Revenues were $32,457,000 in the first quarter of fiscal 2010 compared to $35,570,000 for the same period last year.
First quarter 2010 revenues from land sales at AMREP Southwest were $1,485,000 compared to $1,263,000 for the same period of 2009. 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 2010 and 2009, the Company's land sales in Rio Rancho were as follows:
Three Months Ended July 31,
--------------------------------------------------------------------------------------
2009 2008
--------------------------------------- -----------------------------------------
Revenues Revenues
Acres Revenues Per Acre Acres Revenues Per Acre
Sold (in 000s) (in 000s) Sold (in 000s) (in 000s)
---------- ----------- ----------- -------- ------------ -----------
Developed
Residential 2.8 $ 670 $ 239 1.4 $ 342 $ 244
Commercial - - - 1.0 126 126
---------- ----------- ----------- -------- ------------ -----------
Total Developed 2.8 670 239 2.4 468 195
Undeveloped 26.0 815 31 44.8 795 18
---------- ----------- ----------- -------- ------------ -----------
Total 28.8 $ 1,485 $ 52 47.2 $ 1,263 $ 27
---------- ----------- ----------- -------- ------------ -----------
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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 revenue per acre of developed residential land was generally unchanged for the first quarter of 2010 compared to the same period in 2009. The revenue per acre of undeveloped land in the first quarter of 2010 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 selling prices. The average gross profit percentage on land sales decreased from 71% for the first quarter of 2009 to 57% for the first quarter of 2010. This decrease was primarily attributable to the mix of undeveloped residential lots sold, with first quarter 2010 sales including land that was previously taken back by deeds in lieu of foreclosure, thus generally having a higher cost basis and lower gross profit percentage than sales that occurred in the first quarter of 2009. Revenues, gross profits 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 decreased from $34,023,000 for the first quarter of 2009 to $30,768,000 for the same period in 2010. Magazine publishers, who are the principal customers of the Company's Media Services operations, suffered generally from lower advertising revenues and lower subscription and newsstand sales during the quarter, which led to reduced business for the Company's Media Services operations. Revenues from Kable's Subscription Fulfillment Services operations decreased from $29,842,000 for the first quarter of 2009 to $25,127,000 for the same period of 2010, primarily as a result of lower publisher customer volumes and higher attrition of magazine titles offset, in part, by revenue gains from new and some existing clients. Revenues from Kable's Newsstand Distribution Services operations decreased from $3,355,000 for the first quarter 2009 to $3,205,000 for the same period of 2010 as a result of lower distribution volumes. These decreases in revenues from Subscription Fulfillment Services and Newsstand Distribution Services were partly offset by increased revenues from Kable's Product Fulfillment Services and Other business segment, which increased from $825,000 for the first quarter of 2009 to $2,436,000 for the same period in 2010, primarily from the inclusion of the revenues of a product repackaging and fulfillment business and a temporary staffing business, which were acquired in the third quarter of 2009. Kable's operating expenses decreased by $2,215,000 for the first quarter of 2010 compared to the same period in 2009, primarily attributable lower payroll and benefits costs
and, to a lesser extent, efficiencies related to the ongoing project to consolidate the Subscription Fulfillment Services business from three locations in Colorado, Florida and Illinois into one existing location at Palm Coast, Florida.
In January 2008, the Company announced a project to consolidate its Subscription Fulfillment Services business operations from three locations in Colorado, Florida and Illinois into one existing location at Palm Coast, Florida, which is expected to streamline operations, improve service to clients and create cost efficiencies through reduced overhead costs and the elimination of operating redundancies. This project, which is now well underway, is expected to require capital expenditures in the range of $9,000,000 to $12,000,000. It is scheduled to be substantially completed by the end of fiscal year 2011 (April 30, 2011) and 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 project, including cash and employee training grants and tax relief, which could amount to as much as $8,000,000, and which are largely contingent on existing job retention, new job creation and capital investment. For the three months ended July 31, 2009, the Company recognized $60,000 of income for certain incentives related to the consolidation project, which are netted with costs of $888,000, principally for severance. As a result, the Company reported a net charge to operations of $828,000 related to the consolidation project for the first quarter of 2010 compared to a net charge of $498,000, principally for severance, for the same period in 2009. The items of income for incentives and costs related to the consolidation project are included in Restructuring and fire recovery costs in the Company's consolidated statements of operations and retained earnings.
In December 2007, a warehouse leased by a Kable subsidiary in Oregon, Illinois and its contents were 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 was required to provide insurance for that property of certain of those customers. Through July 31, 2009, the Company's insurance carrier had paid approximately $263,000 to customers for lost materials. The Company believes that the resolution of other pending or unasserted claims related to materials of certain publishers for whom it was required to provide insurance after taking into account the proceeds from its property insurance claims, will not have a material effect on its consolidated financial position, results of operations or cash flows.
The Company has filed various claims with its insurance provider related to the fire. As of August 31, 2009, the Company had been reimbursed approximately $1,236,000 for assets lost in the fire, as well as for certain business interruption insurance claims made by the Company and other expenses of relocation and professional fees. As a result of reimbursements received during the three months ended July 31, 2009, the Company reported a net gain of $162,000 for the first quarter of 2010 related to fire recovery costs. For the same period in 2009, the Company recorded a net charge of $89,000. The items of income and expense related to insurance proceeds and the fire recovery costs are included in Restructuring and fire recovery costs in the Company's consolidated statements of operations and retained earnings. In addition, the Company recorded other income for a business interruption claim resulting from the fire for the first quarter of 2009 that totaled $173,000. No business interruption claims were recorded in the first quarter of 2010.
Interest and other revenues were $204,000 for the three-month period ended July 31, 2009 compared to $284,000 for the same period in the prior year. The decrease in the 2010 first quarter was the result of reduced interest income due to lower cash balances to invest.
Real estate commissions and selling expenses were generally unchanged from the prior year, $81,000 in the first quarter of 2010 compared to $78,000 in the same period of 2009. Other operating expenses increased $184,000 for the three-month
period ended July 31, 2009 compared to the same period in 2008 primarily due to an increase in real estate taxes.
General and administrative costs of Media Services operations increased $163,000 in the first quarter of 2010 compared to the same period in 2009. Real estate operations and corporate general and administrative expense increased $31,000 in the first quarter of 2010 compared to the same period in 2009.
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.
Cash Flows From Operating Activities
Real estate receivables increased from $3,367,000 at April 30, 2009 to $3,400,000 at July 31, 2009. Real estate receivables of approximately $3,100,000 were delinquent at July 31, 2009, and AMREP Southwest sent foreclosure notices to buyers from whom receivables exist totaling approximately $2,100,000 and deeds in lieu of foreclosure are expected to be returned from buyers from whom receivables exist totaling approximately $1,000,000. The Company believes that the ultimate resolution of these matters will not have a material impact on the Company's results of operations or financial position. Receivables from Media Services operations increased from $34,614,000 at April 30, 2009 to $37,066,000 at July 31, 2009, primarily due to the effect of higher quarter-end billings at July 31, 2009 compared to April 30, 2009.
Real estate inventory was $82,091,000 at July 31, 2009 compared to $81,561,000 at April 30, 2009. Inventory in the Company's core real estate market of Rio Rancho increased from $74,121,000 at April 30, 2009 to $74,610,000 at July 31, 2009, 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 increased from $81,699,000 at April 30, 2009 to $87,392,000 at July 31, 2009, primarily as a result of the timing of payments due to publishers and vendors.
Deferred income taxes and other long-term liabilities increased from $1,071,000 at April 30, 2009 to $3,878,000 at July 31, 2009, primarily as a result of Media Services having received a $3,000,000 award pursuant to an agreement with the State of Florida as part of certain incentives made available to the Company with the announced project to consolidate its magazine subscription, membership and direct mail fulfillment locations into one location at Palm Coast, Florida (the "Award Agreement"). The Award Agreement requires the Company to achieve certain objectives in terms of existing job retention, new job creation and capital investment through December 31, 2011; however, if the objectives are not met, the Company may need to return a portion, or all, of the $3,000,000. As such, the $3,000,000 has been recorded as a liability until the Company is irrevocably entitled to retain the award.
Cash Flows From Investing Activities
Capital expenditures totaled $586,000 and $185,000 for the first three months of 2010 and 2009, primarily for expenditures related to the consolidation of the Subscription Fulfillment Services operations in 2010 and for computer hardware
and software development expenditures in 2009. 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 on September 17, 2009 under which $24,000,000 is presently outstanding. The conditional commitment of the lender previously reported in the Company's 2009 Form 10-K, to replace the expiring credit facility with a new revolving credit facility having a term selected by AMREP Southwest of either two years or 364 days included a lender imposed condition that it obtain a participant for 25% of the facility. On September 2, 2009, the lender notified AMREP Southwest that the lender's intended participant was requiring revised terms in the new facility that are substantially less favorable to AMREP Southwest than those contained in the lender's commitment. In the revised terms, the new facility is a 364 day term loan of $22,500,000 under which a portion of the proceeds from AMREP Southwest's land sales are required to be applied to the prepayment of the loan. On September 9, 2009, in response to AMREP Southwest's request for an extension of the existing facility in order to negotiate the proposed terms, the lender issued its commitment to grant the extension for 90 days, subject to certain changes in the existing facility's terms, which AMREP Southwest is considering. The significant terms of the existing facility are described in Note 8 of the Notes to the Company's consolidated financial statements included in the 2009 Form 10-K. The changes to the terms required by the lender to apply during the extension period are that (i) the interest rate per annum on borrowings increase to LIBOR plus 3.5%, but not less than 5%, (ii) the loan be secured by mortgages on certain identified real property of AMREP Southwest and that the appraised value of the collateral continue to be not less than 2.5 times the outstanding amount of the loan, and (iii) AMREP Southwest make no distributions or other payments to its parent.
On July 14, 2009, Kable and certain of its direct and indirect subsidiaries entered into an Amended and Restated Loan and Security Agreement (the "Present Credit Agreement") with a bank that further amended and restated an earlier agreement with the bank's predecessor (the latter agreement, the "Prior Credit Agreement").
The Present Credit Agreement provides for: (i) a revolving credit loan and
letter of credit facility of up to $20,000,000 ("Facility A") that may be used
for general business purposes, including the payment of expenses and other costs
associated with the consolidation of Kable's Subscription Fulfillment Services
business in Florida; and (ii) a second revolving credit loan facility of up to
$5,000,000 ("Facility D") that may be used exclusively for the payment of
accounts payable under a distribution agreement with a customer of Kable's
Distribution Services business. At the borrowers' option, up to $2,500,000 of
the bank's lending commitment for Facility D may be transferred to Facility A.
At July 31, 2009, $2,305,000 of Facility A loans and no Facility D loans were
outstanding. Additionally, term borrowings of approximately $2,354,000
("Facilities B and C") at July 31, 2009, bearing interest from 4.79% to 6.40%
per annum, that were incurred for capital expenditures under the Prior Credit
Agreement are now included in the borrowings under the Present Credit Agreement
in addition to Facilities A and D. Under the Present Credit Agreement, the
revolving credits mature on May 1, 2010 and the term borrowings are due in
installments through that date, as was the case under the Prior Credit
Agreement. The borrowers' obligations under the Present Credit Agreement are
secured by substantially all of their assets other than (i) real property and
(ii) any borrower's interest in the capital securities of any other borrower or
any subsidiary of any borrower, as were the borrowers' obligations under the
Prior Credit Agreement.
The revolving loans under the Present Credit Agreement bear interest at the borrowers' option at fluctuating rates that are either (i) a LIBOR-based rate (0.285% at July 31, 2009) plus 3.25%, or (ii) the bank's prime rate (3.25% at July 31, 2009) plus 1.75%.
The Present Credit Agreement requires the borrowers to maintain certain financial ratios, which are changed in a number of respects from those contained in the Prior Credit Agreement. The Present Credit Agreement also contains other
customary covenants and restrictions, the most significant of which limit the ability of the borrowers to declare or pay dividends or make other distributions to the Company, limit the annual amount borrowers may incur for capital expenditures and other purposes and impose certain minimum EBITDA requirements on the borrowers.
Each of the Company's financing facilities requires the borrowers to meet certain covenants. The borrowers were in compliance with these covenants at July 31, 2009.
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, 2009 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 $ 33,646 $ 28,977 $ 269 $ 222 $ 4,178
Operating leases and other 24,271 5,083 10,989 5,377 2,822
----------- -------------- ------------- ------------- --------------
Total $ 57,917 $ 34,060 $ 11,258 $ 5,599 $ 7,000
=========== ============== ============= ============= ==============
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The decrease in notes payable from April 30, 2009 was due to reduced borrowings by Kable. Operating leases and other includes $2,321,000 of uncertain tax positions and related accrued interest recorded in accordance with FIN 48. Refer to Notes 8, 12, 16 and 17 to the consolidated financial statements included in the 2009 Form 10-K for additional information on long-term debt, taxes 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 2009 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 2009 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 forward-looking statements contained in this report include, but are not limited to, statements regarding the consolidation project of the Subscription Fulfillment Services business (including the Company's estimated related capital expenditures and incentives anticipated to be received from the State of Florida and the City of Palm Coast), future financing requirements and the status of negotiations with the Company's existing real estate lenders. 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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