UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2009
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4702
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AMREP Corporation
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(Exact name of registrant as specified in its charter)
Oklahoma 59-0936128
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 Alexander Park , Suite 204, Princeton, New Jersey 08540
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (609) 716-8200
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Not Applicable
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X
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Non-accelerated filer Smaller reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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Number of Shares of Common Stock, par value $.10 per share, outstanding at
February 28, 2009 - 5,996,212.
AMREP CORPORATION AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
January 31, 2009 and April 30, 2008 1
Consolidated Statements of Operations and Retained Earnings
(Unaudited) Three Months Ended January 31, 2009 and 2008 2
Consolidated Statements of Operations and Retained Earnings
(Unaudited) Nine Months Ended January 31, 2009 and 2008 3
Consolidated Statements of Cash Flows
(Unaudited) Nine Months Ended January 31, 2009 and 2008 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 6. Exhibits 23
SIGNATURE 24
EXHIBIT INDEX 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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AMREP CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(Thousands, except par value and number of shares)
January 31, April 30,
2009 2008
------------------ ------------------
ASSETS:
Cash and cash equivalents $ 18,347 $ 32,608
Restricted cash 3,856 -
Receivables, net:
Real estate operations 4,064 13,124
Media services operations 50,059 45,701
------------------ ------------------
54,123 58,825
Taxes receivable 1,487 -
Real estate inventory 81,817 70,252
Investment assets, net 11,394 10,300
Property, plant and equipment, net 32,500 28,914
Intangible and other assets, net 27,182 29,913
Goodwill 54,139 54,139
------------------ ------------------
TOTAL ASSETS $ 284,845 $ 284,951
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable, net and accrued expenses $ 77,850 $ 98,532
Notes payable:
Amounts due within one year 27,029 4,816
Amounts subsequently due 15,366 21,164
------------------ ------------------
42,395 25,980
Taxes payable - 980
Deferred income taxes and other long-term liabilities 14,653 12,358
Accrued pension cost 2,010 2,045
------------------ ------------------
TOTAL LIABILITIES 136,908 139,895
------------------ ------------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
Shares authorized - 20,000,000; 7,420,704 shares issued at
January 31, 2009 and 7,419,704 at April 30, 2008 742 742
Capital contributed in excess of par value 46,100 46,085
Retained earnings 131,274 128,408
Accumulated other comprehensive loss, net (3,522) (3,522)
Treasury stock, at cost; 1,424,492 shares (26,657) (26,657)
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 147,937 145,056
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 284,845 $ 284,951
================== ==================
1
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings (Unaudited)
Three Months Ended January 31, 2009 and 2008
(Thousands, except per share amounts)
2009 2008
------------------ ------------------
REVENUES:
Real estate land sales $ 521 $ 6,302
Media services operations 35,051 36,458
Interest and other 148 675
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35,720 43,435
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COSTS AND EXPENSES:
Cost of sales - real estate land sales 333 2,332
Operating expenses:
Media services operations 30,874 30,492
Real estate commissions and selling 79 300
Other 465 (305)
General and administrative:
Media services operations 3,545 3,228
Real estate operations and corporate 1,182 1,259
Restructuring and fire recovery costs, net (83) 387
Interest expense, net of capitalized amounts 222 274
------------------ ------------------
36,617 37,967
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INCOME (LOSS) BEFORE INCOME TAXES (897) 5,468
PROVISION (BENEFIT) FOR INCOME TAXES (797) 2,022
------------------ ------------------
NET INCOME (LOSS) (100) 3,446
RETAINED EARNINGS, beginning of period 131,374 124,433
------------------ ------------------
RETAINED EARNINGS, end of period $ 131,274 $ 127,879
================== ==================
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (0.02) $ 0.57
================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,996 6,014
================== ==================
2
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Retained Earnings (Unaudited)
Nine Months Ended January 31, 2009 and 2008
(Thousands, except per share amounts)
2009 2008
------------------ ------------------
REVENUES:
Real estate land sales $ 6,594 $ 27,613
Media services operations 104,328 104,317
Interest and other 658 4,955
------------------ ------------------
111,580 136,885
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COSTS AND EXPENSES:
Cost of sales - real estate land sales 853 9,663
Operating expenses:
Media services operations 91,324 90,237
Real estate commissions and selling 248 641
Other 999 620
General and administrative:
Media services operations 9,825 9,568
Real estate operations and corporate 3,257 3,447
Restructuring and fire recovery costs, net 629 807
Interest expense, net of capitalized amounts 481 899
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107,616 115,882
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 3,964 21,003
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS 1,098 7,770
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INCOME FROM CONTINUING OPERATIONS 2,866 13,233
LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS (NET OF INCOME TAXES) - (57)
------------------ ------------------
NET INCOME 2,866 13,176
RETAINED EARNINGS, beginning of period 128,408 121,333
DIVIDENDS PAID - (6,630)
------------------ ------------------
RETAINED EARNINGS, end of period $ 131,274 $ 127,879
================== ==================
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
CONTINUING OPERATIONS $ 0.48 $ 2.09
DISCONTINUED OPERATIONS - (0.01)
------------------ ------------------
EARNINGS PER SHARE - BASIC AND DILUTED $ 0.48 $ 2.08
================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,996 6,332
================== ==================
3
AMREP CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended January 31, 2009 and 2008
(Thousands)
2009 2008
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,866 $ 13,176
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,644 8,014
Non-cash credits and charges:
Pension benefit (35) (246)
Allowance for doubtful accounts 190 (349)
(Gain) loss on disposition of assets, net 59 (1,781)
Changes in assets and liabilities:
Receivables (1,459) 3,184
Real estate inventory (5,020) (15,940)
Intangible and other assets (196) (1,152)
Accounts payable and accrued expenses (21,369) 4,944
Taxes payable (2,467) 2,053
Deferred income taxes and other long-term liabilities 2,295 3,236
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Total adjustments (20,358) 1,963
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Net cash provided by (used in) operating activities (17,492) 15,139
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant and equipment (1,521) (4,565)
Capital expenditures - investment assets - (1,097)
Acquisition, net of cash acquired (3,075) 195
Proceeds from disposition of assets - 4,749
Restricted cash (3,856) -
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Net cash used in investing activities (8,452) (718)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock - (21,363)
Exercise of stock options 15 -
Proceeds from debt financing 51,137 71,081
Principal debt payments (39,469) (74,683)
Dividends paid - (6,630)
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Net cash provided by (used in) financing activities 11,683 (31,595)
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DECREASE IN CASH AND CASH EQUIVALENTS (14,261) (17,174)
CASH AND CASH EQUIVALENTS, beginning of period 32,608 42,102
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $ 18,347 $ 24,928
================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 458 $ 1,029
================== ==================
Income taxes paid - net of refunds $ 1,834 $ 2,447
================== ==================
Non-cash transactions:
Transfer to real estate inventory from receivables $ 6,530 $ 3,892
================== ==================
Transfer to real estate investment assets from receivables $ 1,125 $ -
================== ==================
4
AMREP CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended January 31, 2009 and 2008
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
by AMREP Corporation (the "Registrant" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission 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. In the opinion of management, these unaudited
consolidated financial statements include all adjustments, which are of a normal
recurring nature, 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.
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, 2008, which was previously filed with the Securities and Exchange
Commission. All references to the third quarter or first nine months of 2009 and
2008 mean the fiscal three and nine month periods ended January 31, 2009 and
2008.
Certain 2008 financial statement amounts have been reclassified to conform to
the current year presentation.
(2) Restricted Cash
---------------
Restricted cash of $3,856,000 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 purchase of identified
replacement assets.
(3) Receivables, Net
----------------
Accounts receivable, net consist of the following (in thousands):
January 31, April 30,
2009 2008
--------------- -----------------
Real estate operations:
Mortgage notes and other receivables $ 4,166 $ 13,236
Less allowance for doubtful accounts (102) (112)
--------------- -----------------
$ 4,064 $ 13,124
=============== =================
Media Services operations:
Subscription Fulfillment Services 29,381 27,915
Newsstand Distribution Services,
net of estimated returns 18,997 18,008
Product Fulfillment Services and other 2,596 433
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50,974 46,356
Less allowance for doubtful accounts (915) (655)
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$ 50,059 $ 45,701
=============== =================
Real estate operations mortgage notes and other receivables have decreased from
April 30, 2008, primarily due to the reclassification of approximately
$6,530,000 to real estate inventory and $1,125,000 to investment assets from
5
mortgage notes receivable resulting from the Company's acceptance of deeds in
lieu of foreclosure related to delinquent mortgage note receivables.
Newsstand Distribution Services accounts receivable are net of estimated
magazine returns of $55,154,000 at January 31, 2009 and $55,930,000 at April 30,
2008. In addition, pursuant to an arrangement with one publisher customer of the
Newsstand Distribution Services business, the publisher bears the ultimate
credit risk of non-collection of amounts due from the wholesaler customers to
which the Company distributed the publisher's magazines under this arrangement.
Accounts receivable subject to this arrangement were netted ($29,662,000 was
netted at January 31, 2009 and $22,703,000 at April 30, 2008) against the
related accounts payable due the publisher on the accompanying consolidated
balance sheets.
At January 31, 2009, net accounts receivable of Newsstand Distribution Services
includes approximately $7,500,000 from a wholesaler customer that suspended
normal business activities in February, which amount is subject to adjustment by
magazine return activity subsequent to the end of the quarter that may differ
from the Company's estimates. No payments of accounts receivable have been
received by the Company from this customer after January 31, 2009. Because the
amount of potential loss on amounts due from this wholesaler is unable to be
estimated, the Company has not provided a specific allowance for
uncollectibility, but it continues to monitor the collectibility of the net
receivable and will provide an appropriate allowance if and when deemed
necessary (see Note 14).
(4) Investment Assets, Net
----------------------
Investment assets, net consist of the following (in thousands):
January 31, April 30,
2009 2008
--------------- -----------------
Land held for long-term investment $ 10,880 $ 9,771
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Commercial rental properties:
Land, buildings and improvements 754 754
Furniture and fixtures 40 40
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794 794
Less accumulated depreciation (280) (265)
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514 529
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$ 11,394 $ 10,300
=============== =================
(5) Property, Plant and Equipment, Net
----------------------------------
Property, plant and equipment, net consist of the following (in thousands):
January 31, April 30,
2009 2008
--------------- -----------------
Land, buildings and improvements $ 24,640 $ 17,875
Furniture and equipment and other 46,521 45,300
--------------- -----------------
71,161 63,175
Less accumulated depreciation (38,661) (34,261)
--------------- -----------------
$ 32,500 $ 28,914
=============== =================
The increase in Land, buildings and improvements is primarily attributable to
the purchase of a warehouse in November 2008 (see Note 13).
6
(6) Intangible and Other Assets, Net
--------------------------------
Intangible and other assets, net consist of the following (in thousands):
January 31, 2009 April 30, 2008
------------------------------------ -----------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------------- ---------------- ------------- ----------------
Software development costs $ 10,143 $ 5,583 $ 10,017 $ 3,780
Deferred order entry costs 5,183 - 5,681 -
Prepaid expenses 3,394 - 3,047 -
Customer contracts and relationships 15,000 2,551 15,000 1,613
Other 2,694 1,098 2,430 869
-------------- ---------------- ------------- ----------------
$ 36,414 $ 9,232 $ 36,175 $ 6,262
============== ================ ============= ================
Software development costs include internal and external costs of the
development of new or enhanced software programs and are generally amortized
over five years. 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 over a twelve month period.
Customer contracts and relationships are amortized over twelve years.
(7) Accounts Payable, Net and Accrued Expenses
------------------------------------------
Accounts payable, net and accrued expenses consist of the following (in
thousands):
January 31, April 30,
2009 2008
----------------- ----------------
Publisher payables, net $ 59,606 $ 77,003
Accrued expenses 4,261 5,000
Trade payables 3,917 5,753
Other 10,066 10,776
----------------- ----------------
$ 77,850 $ 98,532
================= ================
As described in Note 3, pursuant to the arrangement with one publisher customer
of the Newsstand Distribution Services business, the publisher bears the
ultimate credit risk of non-collection of amounts due from the customers to
which the Company distributed the publisher's magazines under this arrangement.
Accounts receivable subject to this arrangement were netted ($29,662,000 was
netted at January 31, 2009 and $22,703,000 at April 30, 2008) against the
related accounts payable due the publisher on the accompanying consolidated
balance sheets.
7
(8) Notes Payable
-------------
Notes payable consist of the following (in thousands):
January 31, April 30,
2009 2008
----------------- ----------------
Notes payable:
Line-of-credit borrowings:
Real estate operations $ 25,000 $ 18,000
Media services operations 12,243 4,582
Real estate operations term loan - 2,774
Other notes payable 5,152 624
----------------- ----------------
$ 42,395 $ 25,980
================= ================
The increase in Other notes payable is due to the assumption of a mortgage note
payable in connection with the purchase of a warehouse in November 2008 (see
Note 13).
(9) Taxes
-----
The Company recognized a net tax benefit of $797,000 during the three month
period ended January 31, 2009, primarily resulting from a pre-tax loss for the
quarter of $897,000 and a reduction in liabilities related to unrecognized tax
benefits pursuant to Financial Accounting Standards Board Interpretation No. 48
("FIN 48"), "Accounting for Uncertainty in Income Taxes". The liabilities
related to unrecognized tax benefits that would have an impact on the effective
tax rate were $1,585,000 at January 31, 2009 and $2,076,000 at April 30, 2008.
(10) Fair Value Measurements
-----------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements". SFAS No. 157 establishes a common definition for fair value to be
applied to U.S. GAAP requiring use of fair value, establishes a framework for
measuring fair value and expands disclosure about such fair value measurements.
SFAS No. 157 is effective for financial assets and financial liabilities for
fiscal years beginning after November 15, 2007. The Company's adoption of SFAS
No. 157 for financial assets and financial liabilities, effective May 1, 2008,
did not have an impact on its consolidated financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities". SFAS No. 159 permits entities to choose, at specified election
dates, to measure many financial instruments and certain other items at fair
value that are not currently measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected would be
reported in earnings at each subsequent reporting date. SFAS No. 159 also
establishes presentation and disclosure requirements in order to facilitate
comparisons between entities choosing different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 does not affect existing
accounting requirements for certain assets and liabilities to be carried at fair
value. SFAS No. 159 became effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. The Company adopted
SFAS No. 159 effective May 1, 2008, but it has not designated any financial
instruments to be subject to the fair value option.
8
(11) Discontinued Operations
-----------------------
Loss from operations of discontinued business (net of income taxes) in the nine
month period ended January 31, 2008 reflected costs associated with the
settlement of all litigation related to the Company's El Dorado, New Mexico
former water utility subsidiary that were in addition to costs that had been
accrued for this matter in prior years.
(12) Restructuring and Fire Recovery Costs
-------------------------------------
In January 2008, the Company announced a project to unify its magazine
subscription, membership and direct mail fulfillment services from three
locations into one 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.
The Company is still evaluating various alternatives for this expansion, which
could require capital expenditures in the range of $15,000,000 to $20,000,000.
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 project, 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, new job creation and capital investment. Previously
during fiscal 2008, the Company announced (i) one significant workforce
reduction in its Subscription Fulfillment Services business that occurred in the
third 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. During
the quarter ended January 31, 2009, the Company recognized $175,000 of income
for certain incentives related to the unification project, which are netted with
costs of $169,000. As a result, the Company reported a net gain of $6,000
related to the unification project in the third quarter of 2009 and incurred net
costs of $567,000 for the first nine months of 2009 compared to net costs of
$136,000 and $556,000 for the same periods of 2008, principally for severance
and consulting costs. The items of income related to incentives and costs
related to the unification project are included in Restructuring and fire
recovery costs in the Company's consolidated statements of operations and
retained earnings.
On December 5, 2007, a warehouse of approximately 38,000 square feet leased by
the Company's Kable News Company, Inc. subsidiary ("Kable News") 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 was
required to provide insurance for certain of those customers whose property was
destroyed in the warehouse fire. Through February 28, 2009, the Company's
insurance carrier had paid approximately $211,000 to customers for lost
materials. Subject to the outcome of the lawsuit referred to in the final
paragraph of this Note 12, 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 has filed a preliminary claim with its insurance provider for its
property loss as a result of the fire and has been advanced $500,000 for
replacement of such property. During the quarter ended January 31, 2009, the
Company replaced a portion of the fixed assets lost in the warehouse fire and
recorded a $134,000 gain resulting from the recognition of insurance proceeds,
which is netted against costs related to the fire. As a result, the Company
reported a net gain of $77,000 for the third quarter and net charges to
operations of $62,000 for the first nine months of 2009 related to fire recovery
costs, principally for legal and other advisory costs that were not covered by
insurance. The item of income 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
9
addition, the Company recorded $173,000 of other income in the first quarter of
2009 for a business interruption claim resulting from the fire, and has
approximately $140,000 of business interruption claims pending with but not
approved by its insurance provider.
In June 2008, a lawsuit was brought against Kable News by the owner of the
warehouse building leased by the subsidiary that was totally destroyed in the
fire. A temporary staffing company that provided the subsidiary with an employee
who is alleged to have had a role in causing the fire while operating a forklift
is also named as a defendant. Plaintiff's claims specific to Kable News are
based on allegations of negligence and willful and wanton misconduct. The
Company's liability insurance provides coverage for the negligence claim up to
the policy limit, which may or may not be as much as the full amount of
plaintiff's claimed damages, which is unknown at this time. Additionally, the
insurance carrier has indicated it intends to deny coverage of the willful and
wanton misconduct claim. A summary judgment motion brought by the temporary
staffing company defendant has been denied. The Company believes Kable News has
good defenses to the claims and also has potential cross-claims against the
other parties for their conduct in the matter, and Kable News intends vigorously
to defend the lawsuit. However, the proceeding remains at an early stage, and
the Company is not in a position to predict its outcome.
In November 2008, a lawsuit was brought against Kable News by a magazine
publisher and a number of insurance companies as the subrogees of other magazine
publishers whose property stored by Kable News in the warehouse was destroyed in
the fire. The three defendants are the warehouse owner, Kable News and the
temporary staffing company that provided an employee who is alleged to have had
a role in causing the fire. Plaintiffs' claims specific to Kable News are based
on allegations of negligence, breach of contract and willful and wanton
misconduct. The complaint seeks damages in an amount in excess of $1,000,000.
The Company believes that Kable News has good defenses to the claims and also
has potential cross-claims against the other defendants for their conduct in the
matter, and intends vigorously to defend the lawsuit. However, the proceeding is
at a very early stage, and the Company is not in a position to predict its
outcome.
(13) Acquisitions
------------
On November 7, 2008, the Company announced the purchase, through a newly-formed
subsidiary of Kable Media Services, Inc., of certain assets of Service Parts
Supply Corp. ("SPS"), a privately-held company engaged in the product
repackaging and fulfillment industry located in Fairfield, Ohio. In a separate
transaction, another Company subsidiary purchased a warehouse leased by SPS.
These transactions are expected to provide benefits to many of the customers of
the Company's product fulfillment subsidiary through the combination of that
subsidiary's services with those to be provided with the purchased SPS assets.
Lastly, on the same date, another newly-formed subsidiary of Kable Media
Services, Inc. purchased certain assets of Resource One Staffing, LLC, a
provider of temporary staffing services that was majority-owned by the same
individual who owned SPS. The aggregate purchase price of the assets purchased
in the three transactions was approximately $8,500,000, and was financed from
working capital, bank borrowings and the assumption of a mortgage note on the
warehouse. The transactions have been accounted for as a business combination.
The purchase price (including closing costs and excluding cash acquired) has
been preliminarily allocated as follows: Receivables - $1,565,000; Inventory -
$118,000; Property, plant and equipment - $6,826,000; Mortgage note payable -
$4,747,000, and Other liabilities - $687,000.
(14) Subsequent Events
-----------------
In January 2009, Anderson News, LLC ("ANCO"), a major wholesaler of magazines
for retail distribution and a major Newsstand Distribution Services customer,
announced a significant price surcharge and substantive changes to inventory
10
risk practices effective February 1, 2009 and advised that it would no longer
distribute publishers' magazines if the publisher did not agree to the revised
policies. Shortly thereafter, Source Interlink Distribution, LLC ("SID"),
another major wholesaler and Newsstand Distribution Services customer, announced
that it also was imposing the price surcharge. ANCO and SID accounted for
approximately 50% of nationwide magazine retail distribution. In response to
these announcements, many publishers and national distributors, including the
Company's Kable Distribution Services, Inc. ("KDS") subsidiary, which operates
the Newsstand Distribution Services business, suspended shipments to ANCO and
SID and made alternative distribution arrangements, principally with the two
other major industry wholesalers.
On February 7, 2009, ANCO announced that it planned to suspend normal business
activities, which occurred on February 16, 2009. On February 19, 2009, KDS was
informed that ANCO was in the process of an orderly liquidation and that it was
in default of its extensively secured bank loan. On March 2, five publishers
filed an involuntary bankruptcy petition against ANCO under chapter 7 of the
U.S. Bankruptcy Code seeking to have ANCO declared bankrupt and liquidated, but
no decision on this petition has yet been announced by the Bankruptcy Court. At
January 31, 2009, KDS had estimated net accounts receivable from ANCO of
approximately $7,500,000, which amount is subject to adjustment by magazine
return activity subsequent to the end of the quarter that may differ from the
Company's estimates. No payments of accounts receivable have been received by
KDS from ANCO after January 31, 2009. As the amount, if any, of ANCO's assets
that may be available for payment to ANCO's unsecured creditors, including KDS,
is presently unable to be estimated, no allowance for uncollectibility of this
account receivable has yet been established, but the Company believes it is
possible that a significant amount of the ANCO account receivable may ultimately
be determined to be uncollectible, that such determination could be made as
early as during the Company's current fiscal quarter ending April 30, 2009, and
that the effect of this determination on Kable's financial results could be to
place Kable (including its subsidiaries) in default of its credit facility. If
Kable is unable to obtain a waiver for any event of default on satisfactory
terms, Kable (including its subsidiaries) would not be able to borrow funds
under the credit facility until the non-compliance is cured and the lender would
be permitted to exercise a number of remedies, including the right to seek
immediate repayment of all outstanding loans.
On February 9, 2009, SID brought a lawsuit against KDS, certain other national
distributors, two of the major wholesalers and certain major publishers in which
it alleged that the magazine publishers and distributors conspired to boycott
SID to drive it out of business, and that the wholesalers participated in this
effort. It has asserted claims under Section 1 of the Sherman Act (antitrust)
for defamation and for tortious interference with its contracts with retailers.
Damages have not been quantified. SID requested a preliminary injunction and
obtained a temporary restraining order which required the publishers and
distributors to continue to ship magazines to SID pending the hearing on the
preliminary injunction motion. On February 18, 2009, SID settled with one of the
publishers and advised the Court that it would no longer seek a preliminary
injunction. Accordingly, the temporary restraining order was vacated. On
February 27, 2009, SID announced it had settled with another publisher. The
remaining defendants, including KDS, have moved to dismiss the lawsuit. The
Company believes that KDS has good defenses to the claims and intends vigorously
to defend the lawsuit. In view of the very early stage of this case, the Company
is not in a position to predict its outcome. In the meantime, KDS is continuing
to ship product to SID without the surcharge.
On March 10, 2009, ANCO commenced a civil action against KDS and others. The
complaint contains allegations substantially similar to those made by SID.
As a result of the disruption to the magazine distribution system described
above, there has been an adverse effect on commission revenues in the Newsstand
Distribution Services business that is continuing, and at this time the Company
is not able to quantify the effect of this disruption on its financial condition
and results of operations.
(15) Information About the Company's Operations in Different Industry Segments
--------------------------------------------------------------------------
As a result of the purchase of assets of certain businesses in November 2008
(see Note 13), the Company reclassified for both 2009 and 2008 certain revenues,
expenses and capital expenditures previously reported as part of its
Subscription Fulfillment Services segment and has reported them with revenues,
expenses and capital expenditures of those businesses since the date of purchase
as a separate segment, "Product Fulfillment Services and Other". The following
tables set forth summarized data relative to the industry segments for
continuing operations in which the Company operated for the three and nine month
periods ended January 31, 2009 and 2008 (in thousands):
11
Product
Subscription Newsstand Fulfillment
Real Estate Fulfillment Distribution Services and Corporate
Operations Services Services Other and Other Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Three months ended January 31, 2009:
Revenues $ 656 $ 28,998 $ 2,923 $ 3,130 $ 13 $ 35,720
Income (loss) from continuing operations 96 (540) 29 140 175 (100)
Provision (benefit) for income taxes from
continuing operations (1,026) (40) 32 74 163 (797)
--------------- -------------- -------------- --------------- ------------ -----------
Income (loss) from continuing operations
before income taxes (930) (580) 61 214 338 (897)
Interest expense (income), net (b) 24 619 (223) 16 (214) 222
Depreciation and amortization 10 2,610 149 19 37 2,825
--------------- -------------- -------------- --------------- ------------ -----------
EBITDA (c) $ (896) $ 2,649 $ (13) $ 249 $ 161 $ 2,150
--------------- -------------- -------------- --------------- ------------ -----------
Capital expenditures $ - $ 730 $ - $ 134 $ 6,498 $ 7,362
------------------------------------------------------------------------------------------------------------------------------------
Three months ended January 31, 2008 (a):
Revenues $ 6,943 $ 32,645 $ 2,944 $ 892 $ 11 $ 43,435
Income (loss) from continuing operations 2,440 622 151 (106) 339 3,446
Provision for income taxes from continuing
operations 1,433 303 89 - 197 2,022
--------------- -------------- -------------- --------------- ------------ -----------
Income (loss) from continuing operations
before income taxes 3,873 925 240 (106) 536 5,468
Interest expense (income), net (b) - 1,236 (346) - (616) 274
Depreciation and amortization 9 2,404 246 10 2 2,671
--------------- -------------- -------------- --------------- ------------ -----------
EBITDA (c) $ 3,882 $ 4,565 $ 140 $ (96) $ (78) $ 8,413
--------------- -------------- -------------- --------------- ------------ -----------
Capital expenditures $ 26 $ 1,544 $ 74 $ - $ - $ 1,644
------------------------------------------------------------------------------------------------------------------------------------
Product
Subscription Newsstand Fulfillment
Real Estate Fulfillment Distribution Services and Corporate
Operations Services Services Other and Other Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Nine months ended January 31, 2009:
Revenues $ 7,186 $ 90,175 $ 9,374 $ 4,779 $ 66 $ 111,580
Income (loss) from continuing operations 2,556 (1,349) 609 226 824 2,866
Provision (benefit) for income taxes from
continuing operations 566 (515) 445 124 478 1,098
--------------- -------------- -------------- --------------- ------------ -----------
Income (loss) from continuing operations
before income taxes 3,122 (1,864) 1,054 350 1,302 3,964
Interest expense (income), net (b) 24 2,300 (841) 16 (1,018) 481
Depreciation and amortization 30 7,103 434 37 40 7,644
--------------- -------------- -------------- --------------- ------------ -----------
EBITDA (c) $ 3,176 $ 7,539 $ 647 $ 403 $ 324 $ 12,089
--------------- -------------- -------------- --------------- ------------ -----------
Capital expenditures $ 8 $ 1,371 $ 10 $ 134 $ 6,499 $ 8,022
------------------------------------------------------------------------------------------------------------------------------------
Nine months ended January 31, 2008 (a):
Revenues $ 32,234 $ 92,111 $ 9,811 $ 2,449 $ 280 $ 136,885
Income (loss) from continuing operations 12,167 (1,318) 954 114 1,316 13,233
Provision (benefit) for income taxes from
continuing operations 7,145 (705) 557 - 773 7,770
--------------- -------------- -------------- --------------- ------------ -----------
12
Income (loss) from continuing operations
before income taxes 19,312 (2,023) 1,511 114 2,089 21,003
Interest expense (income), net (b) - 4,097 (1,215) - (1,983) 899
Depreciation and amortization 125 7,083 733 68 5 8,014
--------------- -------------- -------------- --------------- ------------ -----------
EBITDA (c) $ 19,437 $ 9,157 $ 1,029 $ 182 $ 111 $ 29,916
--------------- -------------- -------------- --------------- ------------ -----------
Capital expenditures $ 1,204 $ 4,344 $ 111 $ - $ 3 $ 5,662
(a) Segment information does not include net loss from discontinued
operations of $57,000 in the nine months ended January 31, 2008.
(b) Interest expense (income), net includes inter-segment interest
income and expense that is eliminated in consolidation.
(c) The Company uses EBITDA (which the Company defines as income from
continuing operations before interest expense, net, income taxes
and depreciation and amortization) in addition to income from
continuing operations as a key measure of profit or loss for
segment performance and evaluation purposes.
Item 2. Management's Discussion and Analysis of Financial Condition
------------------------------------------------------------
and Results of Operations
-------------------------
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, 2008 consolidated financial statements and accompanying notes. All
references in this Item 2 to the third quarter or first nine months of 2009 and
2008 mean the fiscal three and nine month periods ended January 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 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.
13
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 January 31, 2009.
RESULTS OF OPERATIONS
---------------------
For the third quarter of 2009, the Company had net loss of $100,000, or $0.02
per share, compared to net income of $3,446,000, or $0.57 per share, in the
third quarter of 2008. For the first nine months of fiscal 2009, net income was
$2,866,000, or $0.48 per share, compared to net income of $13,176,000, or $2.08
per share, for the same period of 2008. Revenues were $35,720,000 and
$111,580,000 in the third quarter and first nine months of 2009 compared to
$43,435,000 and $136,885,000 in the same periods last year.
Results for the first nine months of 2008 included a loss from discontinued
operations of $57,000, net of tax, or $0.01 per share, that reflected costs
incurred in the first quarter of 2008 in connection with the settlement of all
litigation related to the Company's El Dorado, New Mexico former water utility
subsidiary that were in addition to costs estimated and accrued for this matter
in the fourth quarter of fiscal 2007.
Revenues from land sales at AMREP Southwest were $521,000 and $6,594,000 for the
three and nine month periods ended January 31, 2009 compared to $6,302,000 and
$27,613,000 for the same periods of the prior year. The decrease of $5,781,000
for the third quarter of 2009 compared to the same quarter of 2008 reflected the
sale in last year's third quarter of two commercial lots totaling $5,731,000
with no comparable sales in 2009. AMREP Southwest continues to experience
substantially lower land sales in its 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. Third
quarter 2009 land sales revenues were from the sale of 11 developed residential
lots and 3 undeveloped residential lots to homebuilders, while in the same
period of fiscal 2008 there were land sales of 26 undeveloped residential lots
to homebuilders and the sale of approximately 25 acres of undeveloped land to
commercial developers. The trend of declining permits for new home construction
in the Rio Rancho area also continues, with 32% fewer single-family residential
building permits issued during calendar year 2008 than in calendar year 2007.
The Company believes that this decline has been 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.
14
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 third quarter and first nine months of
fiscal 2009 and 2008, the Company's land sales in Rio Rancho were as follows:
Fiscal Year
--------------------------------------------------------------------------------------
2009 2008
--------------------------------------- -----------------------------------------
Revenues Revenues
Acres Revenues Per Acre Acres Revenues Per Acre
Sold (in 000s) (in 000s) Sold (in 000s) (in 000s)
---------- ----------- ----------- -------- ------------ -----------
Three months ended
January 31:
Developed
Residential 1.5 $ 361 $ 241 - $ - $ -
Commercial - - - 25.0 5,731 229
---------- ----------- ----------- -------- ------------ -----------
Total Developed 1.5 361 241 25.0 5,731 229
Undeveloped 2.5 160 64 24.3 571 24
---------- ----------- ----------- -------- ------------ -----------
Total 4.0 $ 521 $ 130 49.3 $ 6,302 $ 128
---------- ----------- ----------- -------- ------------ -----------
Nine months ended
January 31:
Developed
Residential 3.2 $ 789 $ 247 30.0 $ 9,468 $ 316
Commercial 1.0 126 126 38.8 8,651 223
---------- ----------- ----------- -------- ------------ -----------
Total Developed 4.2 915 218 68.8 18,119 263
Undeveloped 134.4 5,679 42 326.5 9,494 29
---------- ----------- ----------- -------- ------------ -----------
Total 138.6 $ 6,594 $ 48 395.3 $ 27,613 $ 70
---------- ----------- ----------- -------- ------------ -----------
The average selling price of land sold by the Company in Rio Rancho in recent
years has fluctuated, as the Company offers for sale both 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 third 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 decreased from 63% in the
third quarter 2008 to 36% for the same period in 2009, reflecting the fact that
the 2008 third quarter land sales included approximately 25 acres of commercial
property which carried a higher profit margin than was produced by the sale of
developed residential lots in the third quarter of 2009. For the first nine
months the average gross profit percentage increased from 65% in 2008 to 87% in
2009. This increase for the first nine months of 2009 was attributable to the
mix of land sold, and principally was the result of a second quarter 2009 sale
of 50 acres of undeveloped land to one purchaser for $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 the Company's Media Services operations decreased from $36,458,000
for the third quarter of 2008 to $35,051,000 for the same period in 2009, a
decline of 4%. For the first nine months of 2009, Kable Media's revenues of
$104,328,000 were generally unchanged from $104,317,000 in the same period of
2008. The revenue decrease in the third quarter of 2009 reflected an 11% revenue
decrease from reduced and lost business from Subscription Fulfillment Services.
The well-publicized problems confronting the magazine publishing industry,
including declining advertising revenues, lower
15
subscription and newsstand sales and increasing costs, contributed to the
decline in the revenues of Kable since publishing is the principal industry
which Kable serves. Revenues from Subscription Fulfillment Services operations
decreased from $32,645,000 and $92,111,000 for the three and nine month periods
of 2008 to $28,998,000 and $90,175,000 for the comparable periods in 2009,
primarily reflecting the net effect of the previously mentioned reduced and lost
business from certain customers that was offset in part by revenue gains from
new and existing clients. Revenues from Newsstand Distribution Services
operations were generally unchanged for the third quarter of 2009 compared to
the third quarter of 2008, totaling $2,923,000 this year compared to $2,944,000
for the same period in 2008. Newsstand Distribution Services revenues decreased
from $9,811,000 for the first nine months of 2008 to $9,374,000 for the same
period in 2009, primarily reflecting a softening of magazine newsstand demand.
Revenues from Product Fulfillment Services and other increased from $892,000 and
$2,449,000 for the three and nine month periods of the prior year to $3,130,000
and $4,779,000 for the comparable periods in the current year, primarily as a
result of the inclusion of the results of operations of the Company's product
repackaging business and temporary staffing services business from early
November 2008 when the Company purchased certain assets of companies that had
been in those businesses. Kable's operating expenses increased by $382,000 and
$1,087,000 for the third quarter and first nine months of 2009 compared to the
same periods in 2008, primarily attributable to higher consulting and computer
systems integration costs of the Subscription Fulfillment Services business,
which were partly offset by lower interest expense principally due to lower
interest rates in both periods of 2009.
As a result of the significant disruption in the magazine distribution
system that occurred in February 2009 (see Note 14), there has been an adverse
effect on commission revenues in the Newsstand Distribution Services business
that is continuing. Because uncertainties still remain in the distribution
system, the Company is not yet able to predict the effect of this disruption on
its financial condition and results of operations.
In January 2008, the Company announced a project to unify its magazine
subscription, membership and direct mail fulfillment services from three
locations into one 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.
The Company is still evaluating various alternatives for this expansion, which
could require capital expenditures in the range of $15,000,000 to $20,000,000.
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 project, 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, new job creation and capital investment. Previously
during fiscal 2008, the Company announced (i) one significant workforce
reduction in its Subscription Fulfillment Services business that occurred in the
third 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. During
the quarter ended January 31, 2009, the Company recognized $175,000 of income
for certain incentives related to the unification project, which are netted with
costs of $169,000. As a result, the Company reported a net gain of $6,000
related to the unification project in the third quarter of 2009 and incurred net
costs of $567,000 for the first nine months of 2009 compared to net costs of
$136,000 and $556,000 for the same periods of 2008, principally for severance
and consulting costs. The items of income related to incentives and costs
related to the unification project are included in Restructuring and fire
recovery costs in the Company's consolidated statements of operations 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
16
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 certain of those customers
whose property was destroyed in the warehouse fire. Through February 28, 2009,
the Company's insurance carrier had paid approximately $211,000 to customers for
lost materials. 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 has filed a preliminary claim with its insurance provider for its
property loss as a result of the fire and has been advanced $500,000 for
replacement of such property. During the quarter ended January 31, 2009, the
Company replaced a portion of the fixed assets lost in the warehouse fire and
recorded a $134,000 gain resulting from the recognition of insurance proceeds,
which is netted against costs related to the fire. As a result, the Company
reported a net gain of $77,000 for the third quarter and net charges to
operations of $62,000 for the first nine months of 2009 related to fire recovery
costs, principally for legal and other advisory costs that were not covered by
insurance. The item of income 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 $173,000 of other income in the first quarter of
2009 for a business interruption claim resulting from the fire, and has
approximately $140,000 of business interruption claims pending with but not
approved by its insurance provider.
Interest and other revenues decreased $527,000 and $4,297,000 for the third
quarter and nine month periods ended January 31, 2009 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 nine months of 2009. In addition, interest and other revenues were
also lower in the third quarter and first nine months of 2009 compared to the
same periods in 2008 due to lower cash balances.
Real estate commissions and selling expenses decreased $221,000 and $393,000 for
the third quarter and nine month periods ended January 31, 2009 compared to the
same periods in the prior year, principally due to the reduced land sales. Other
operating expenses increased $770,000 and $379,000 for the three and nine month
periods ended January 31, 2009 compared to the same periods last year, primarily
due to a net favorable $558,000 adjustment to real estate tax expense in the
third quarter of 2008 resulting from the finalization of a property tax
valuation appeal by AMREP Southwest and a $184,000 adjustment to real estate tax
expense in 2009 as a result of receiving the final calendar year 2008 tax bills.
General and administrative expenses of Media Services operations increased
$317,000 and $257,000 in the third quarter and first nine months of 2009
compared to the same periods in 2008, primarily due to the aforementioned higher
consulting fees and computer system integration costs associated with the
unification project of the Subscription Fulfillment Services business. Real
estate operations and corporate general and administrative expense decreased
$77,000 and $190,000 for the third quarter and first nine months of 2009
compared to the same periods last year, 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.
17
Cash Flows From Operating Activities
------------------------------------
Real estate receivables decreased from $13,124,000 at April 30, 2008 to
$4,064,000 at January 31, 2009 reflecting the net effect of (i) the
reclassification of approximately $6,530,000 to real estate inventory and
$1,125,000 to investment assets from mortgage notes receivable resulting from
the Company's acceptance of deeds in lieu of foreclosure related to delinquent
mortgage note receivables and (ii) 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 nine months of
2009.
Media Services operations accounts receivable increased from $45,701,000 at
April 30, 2008 to $50,059,000 at January 31, 2009, primarily due to the effect
of higher quarter-end billings at January 31, 2009 compared to April 30, 2008
and the timing of payments by customers. Media Services operations accounts
receivable include approximately $7,500,000 from a distribution wholesaler
customer that suspended normal business activities in February, which amount is
subject to adjustment by magazine return activity subsequent to the end of the
quarter that may differ from the Company's estimates. No payments of accounts
receivable have been received by the Company from this customer after January
31, 2009. Because the potential loss on amounts due from this wholesaler is
unable to be estimated, the Company has not provided an allowance for
uncollectibility, but it continues to monitor the collectibility of the net
receivable and will provide an appropriate allowance if and when deemed
necessary (see Notes 3 and 14).
Real estate inventory was $81,817,000 at January 31, 2009 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 $74,442,000
at January 31, 2009, primarily reflecting the reclassification of mortgage notes
receivable to inventory discussed above and the net effect of development
spending and land sales. The balance of real estate inventory consisted of
properties in Colorado.
Property, plant and equipment increased from $28,914,000 at April 30, 2008 to
$32,500,000 at January 31, 2009, primarily due to a third quarter warehouse
acquisition by the Company, offset in part by normal depreciation charges.
Accounts payable and accrued expenses decreased from $98,532,000 at April 30,
2008 to $77,850,000 at January 31, 2009, 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 ($29,662,000 was netted at January 31, 2009 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 $3,856,000 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 purchase of identified
replacement assets.
On November 7, 2008, the Company, through a newly-formed subsidiary of Kable,
acquired certain assets of a privately-held product repackaging and fulfillment
industry company, including a warehouse. The aggregate purchase price of the
assets purchased was approximately $8,500,000, and was financed from working
capital, bank borrowings and the assumption of a $4,747,000 mortgage note on the
warehouse (see Note 13).
18
Capital expenditures totaled $1,521,000 and $5,662,000 in the first nine months
of 2009 and 2008. Capital expenditures in 2009 were primarily for computer
hardware and software development expenditures related to the Subscription
Fulfillment Services business. Capital expenditures in 2008 were also for
computer hardware and software development expenditures related to the
Subscription Fulfillment Services business, as well as for certain real estate
investment assets. Based in part on discussions with existing lenders, the
Company believes that it has adequate cash and financing capability to provide
for its anticipated future capital expenditures, subject in all respects to the
following discussion about cash flows from financing activities.
Cash Flows From Financing Activities
------------------------------------
AMREP Southwest has a $25,000,000 revolving credit facility with a bank that
matures in September 2009. The revolving credit facility had an outstanding
balance of $25,000,000 at January 31, 2009 and $24,000,000 at February 28, 2009.
At January 31, 2009, AMREP Southwest was in compliance with the facility's
covenants. 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 initiated discussions with
AMREP Southwest regarding a renewal of the arrangement; 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.
Kable maintains a bank credit facility aggregating $52,536,000, including
revolving credits of $45,000,000 maturing in May 2010 and term borrowings of
$7,536,000 maturing in part in December 2009 and the balance in May 2010, which
is described in greater detail in the 2008 Form 10-K. The total outstanding
balance of the bank credit facility was $12,244,000 at January 31, 2009. The
facility requires Kable to comply with a number of covenants, including some
based upon its financial performance measured at the end of its fiscal quarters.
At January 31, 2009, Kable was in compliance with these covenants. However, as
reported in Note 14 to the financial statements, Kable has a net estimated
account receivable of approximately $7,500,000 at January 31, 2009 from Anderson
News, LLC, a major wholesaler customer of Kable's Newsstand Distribution
Services business that has ceased operations and is liquidating, and at this
time Kable is unable to estimate the collectibility of the account. The Company
believes it is possible that a significant portion of the account will be
determined to be uncollectible and that such determination could be made as
early as during the Company's current fiscal quarter ending April 30, 2009.
Depending on the amount of the reserve that Kable establishes for this or other
uncollectible accounts receivable, Kable may become in default of one or more of
the covenants under its credit facility, unless the non-compliance is waived by
the lender. If Kable is unable to obtain a waiver for any event of default on
satisfactory terms, Kable would not be able to borrow funds under the facility
until the non-compliance is cured and the lender would be permitted to exercise
a number of remedies, including the rights to seek immediate repayment of all
outstanding loans. Kable is in discussions with the lending bank, which is
monitoring the situation but has not indicated what action, if any, it would
take should such a default occur.
With respect to the Subscription Fulfillment Services 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 require capital
expenditures 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 Data ("Palm Coast"), a Kable subsidiary. The Company also estimates
that the implementation of this program will result in approximately $6,000,000
19
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 actual and potential incentives from the
State of Florida and the City of Palm Coast for the project, including cash and
employee training grants and tax relief that are largely contingent on existing
job retention, new job creation and capital investment. The Company is 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 all 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 January 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 $ 42,395 $ 27,029 $ 10,818 $ 321 $ 4,227
Operating leases and other 24,992 5,233 10,363 6,637 2,759
----------- -------------- ------------- ------------- --------------
Total $ 67,387 $ 32,262 $ 21,181 $ 6,958 $ 6,986
=========== ============== ============= ============= ==============
The increase in notes payable from April 30, 2008 was due to increased
borrowings by AMREP Southwest and Media Services, and to the assumption of a
mortgage note payable in connection with the purchase of a warehouse in November
2008 (see Note 13). Operating leases and other includes liabilities of
$2,230,000 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 $15,623,000 at February 28, 2009.
Under current law, 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. As a result, it is expected that there will be funding
requirements from the Company to the Plan beginning in calendar 2010. 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 of
January 1, 2009 ($18,539,000) as compared to the actuarially computed value of
the Plan's vested liabilities at that date, which amount has not yet been
determined by the Plan actuary. In addition, the change from April 30, 2008 to
April 30, 2009 in the accrued pension liability for the Plan based upon the fair
market value of assets compared to the pension benefit obligation as of those
dates 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 included in Part
II, "Item 1A. Risk Factors", the factors discussed in Part I, "Item 1A. Risk
Factors" in the 2008 Form 10-K, which could materially affect the Company's
20
business, financial condition or future results, should be carefully considered.
The risks described herein and 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 forward-looking statements contained in this
report include, but are not limited to, statements regarding the unification
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), the
receivables owing from Anderson News, LLC, future financing requirements and the
status of negotiations with the Company's existing lenders, and future pension
plan funding obligations. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------- ----------------------------------------------------------
The Company has several credit facilities that require the Company to pay
interest at a rate that may change periodically. These variable rate obligations
expose the Company to the risk of increased interest expense in the event of
increases in short-term interest rates. At January 31, 2009, borrowings of
$33,999,000 were subject to variable interest rates. Refer to Item 7(A) of the
2008 Form 10-K for additional information regarding quantitative and qualitative
disclosures about market risk.
Item 4. Controls and Procedures
------- -----------------------
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief
financial officer and the other executive officers whose certifications
accompany this quarterly report, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report. As a result of such evaluation, the chief financial officer and such
other executive officers have concluded that such disclosure controls and
procedures are effective to provide reasonable assurance that the information
required to be disclosed in the reports the Company files or submits under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and (ii) accumulated and communicated to the
21
Company's management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate, to allow
timely decisions regarding disclosure. The Company believes that a control
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system will be met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
No change in the Company's system of internal control over financial reporting
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------- -----------------
On February 9, 2009, a civil action was commenced in the United States District
Court for the Southern District of New York entitled Source Interlink
Distribution, LLC, et al. v. American Media, Inc., et al. Source Interlink
Distribution, LLC ("Source") is a wholesaler of magazines. It has alleged that
magazine publishers and distributors, including Kable Distribution Services,
Inc. ("Kable"), which is a wholly-owned subsidiary of the Company, conspired to
boycott Source to drive it out of business, and that other wholesalers
participated in this effort. It has asserted claims under Section 1 of the
Sherman Act (antitrust) for defamation and for tortious interference with its
contracts with retailers. Damages have not been quantified. The Company believes
that Kable has good defenses to the claims and intends vigorously to defend the
lawsuit. However, the lawsuit was commenced very recently and the Company is not
in a position to predict its outcome.
On March 10, 2009, Anderson News, LLC commenced a civil action against Kable and
others. The complaint contains allegations substantially similar to those made
by Source.
Item 1A. Risk Factors
-------- ------------
As described below, a recent notification that a significant customer of the
Company has ceased operations and the impact of the current global financial
crisis and condition of credit and capital markets may involve further risks to
the Company's business.
Kable faces a risk of non-compliance with a financial covenant related to its
--------------------------------------------------------------------------------
bank credit facility, and may be unable to obtain a waiver of such covenant
--------------------------------------------------------------------------------
default.
--------
As reported in Note 14 to the financial statements included in this Quarterly
Report, Kable has a net estimated account receivable of approximately $7,500,000
from Anderson News, LLC, which has ceased operations and is in liquidation. At
this time, Kable is unable to estimate the collectibility of the account. Kable
was in compliance with all covenants in its bank credit facility as of January
31, 2009. However, the Company believes it is possible that a significant amount
of the Anderson News, LLC account receivable may ultimately be determined to be
uncollectible, that such determination could be made as early as during the
Company's current fiscal quarter ending April 30, 2009, and that the effect of
this determination on Kable's financial results could be to place Kable in
default of its credit facility. If Kable is unable to obtain a waiver for any
event of default on satisfactory terms, Kable would not be able to borrow funds
under the credit facility until the non-compliance is cured and the lender would
be permitted to exercise a number of remedies, including the right to seek
immediate repayment of all outstanding loans. Kable may not be able to obtain a
waiver of any default that occurs on acceptable terms, on a timely basis or at
all. In addition, any waiver may require Kable to pay a fee to the lender under
the credit facility or to amend the terms of the credit facility, which could
22
increase its cost of credit and related expenses and adversely impact the
Company's results of operations. If Kable fails to obtain a waiver of any
default and the lender under the credit facility requires Kable to immediately
repay all amounts outstanding under such facility, it would have a material
adverse effect on the Company's liquidity, business, financial condition and
results of operations.
The effects of the current global economic crisis may impact the Company's
--------------------------------------------------------------------------------
business, operating results or financial condition.
---------------------------------------------------
The current global economic crisis has caused a general tightening of the credit
markets, lower levels of liquidity, increases in the rates of default and
bankruptcy, and extreme volatility in credit, equity and fixed income markets.
The macroeconomic developments could negatively affect the Company's business,
operating results or financial condition in a number of ways. For example,
current or potential real estate developers may be unable to obtain financing
which could cause them to delay, decrease or cancel purchases of land from the
Company, and revenues from advertising sources may deteriorate such that
magazine publishers cease publishing certain titles and thus no longer have a
requirement for the Company's services.
The current deterioration of the credit and capital markets may adversely impact
--------------------------------------------------------------------------------
the Company's ability to obtain financing on acceptable terms, which may hinder
--------------------------------------------------------------------------------
or prevent the Company from meeting its future operational and capital needs.
-----------------------------------------------------------------------------
Global financial markets have been experiencing extreme volatility and
disruption, and the debt and equity capital markets have been exceedingly
distressed. These issues have made, and will likely continue to make, it
difficult to obtain financing. Also, as a result of the concerns about the
stability of financial markets, the cost of obtaining money from the credit
markets has increased, as many lenders have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt at maturity at all
or except on terms less favorable than those of the existing debt, and reduced
or, in some cases, ceased to provide funding to borrowers. Moreover, even if
lenders are willing and able to provide adequate funding, interest rates may
rise in the future and therefore increase the cost of borrowing. As a result,
the Company may be unable to obtain adequate financing for its operating needs
or for its anticipated future capital expenditures.
Item 6. Exhibits
------- --------
Exhibit No. Description
----------- -----------
10.1 Amended and Restated Distribution Agreement dated as of July 1, 2008
between Kappa Publishing Group, Inc. and Kable Distribution Services,
Inc.*
31.1 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
31.2 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
31.3 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934.
32 Certification required pursuant to 18 U.S.C. Section 1350.
*Portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934.
23
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 12, 2008 AMREP CORPORATION
(Registrant)
By: /s/ Peter M.Pizza
----------------------------------------------
Peter M. Pizza
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
24
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
10.1 Amended and Restated Distribution Agreement dated as of July 1, 2008
between Kappa Publishing Group, Inc. and Kable Distribution Services,
Inc.* - Filed Herewith
31.1 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934 - Filed herewith.
31.2 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934 - Filed herewith.
31.3 Certification required by Rule 13a-14(a) under the Securities Exchange
Act of 1934 - Filed herewith.
32 Certification required pursuant to 18 U.S.C. Section 1350 - Filed
herewith.
*Portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934.
25