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AXR > SEC Filings for AXR > Form 10-Q on 15-Mar-2013All Recent SEC Filings

Show all filings for AMREP CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AMREP CORP.


15-Mar-2013

Quarterly Report


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 Subscription Fulfillment Services business operated by Palm Coast Data LLC ("Palm Coast"), the Newsstand Distribution Services business and the Product Services and Other businesses operated by Kable Media Services, Inc. and its subsidiaries ("Kable") (the businesses being operated by Palm Coast and Kable are collectively referred to as "Media Services"), and the real estate business operated by AMREP Southwest Inc. and its subsidiaries (collectively, "AMREP Southwest"). On December 31, 2012, a new Palm Coast subsidiary, FulCircle Media, LLC, acquired certain assets from a third party. The results of this new subsidiary since December 31, 2012 are included in the

Subscription Fulfillment Services business segment. 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, 2012 consolidated financial statements and accompanying notes. Unless otherwise qualified, all references to 2013 and 2012 are to the fiscal years ending April 30, 2013 and 2012 and all references to the third quarter and first nine months of 2013 and 2012 mean the fiscal three and nine month periods ended January 31, 2013 and 2012.

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 2012 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, 2012 (the "2012 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 2012 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 consolidated financial statements contained in the 2012 Form 10-K. Information concerning the Company's implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in the notes to the consolidated financial statements contained in the 2012 Form 10-K. The Company did not adopt any accounting policy in the third quarter of 2013 that had a material impact on its consolidated financial statements.

RESULTS OF OPERATIONS

For the third quarter of 2013, the Company had net income of $3,000, or $0.00 per share, compared to a net loss of $316,000, or $0.05 per share, for the third quarter of 2012. For the first nine months of 2013, the Company had a net loss of $329,000, or $0.05 per share, compared to net income of $488,000, or $0.08 per share, for the same period of 2012. The results for the first nine months of 2013 included a pre-tax, non-cash impairment charge of $169,000 ($107,000 after tax, or $0.02 per share), reflecting the write-down of a real estate investment asset during the first quarter of 2013. Revenues were $21,752,000 and $62,665,000 in the third quarter and first nine months of 2013 compared to $21,424,000 and $66,268,000 for the same periods of the prior year.

Revenues from Media Services decreased from $21,419,000 and $64,815,000 for the third quarter and first nine months of 2012 to $21,225,000 and $62,079,000 for the same periods in 2013. Magazine publishers are the principal customers of these businesses, and they have continued to be negatively impacted by increased competition from new media sources and weakness in the U.S. economy. The result has been reduced subscription and newsstand magazine sales, which has caused publishers to close some magazine titles and seek more favorable terms from Palm Coast and Kable

and their competitors when contracts are up for bid or renewal. As a consequence of these and other factors, including customer losses, revenues from Subscription Fulfillment Services operations decreased from $15,589,000 and $48,775,000 for the third quarter and first nine months of 2012 to $15,011,000 and $43,069,000 for the same periods of 2013. The 2013 numbers for the third quarter and first nine months also included one month of operations ($611,000 in revenues) from Palm Coast's new FulCircle Media subsidiary, which acquired certain assets from a third party on December 31, 2012. Revenues from Newsstand Distribution Services operations decreased from $2,213,000 and $7,112,000 for the third quarter and first nine months of 2012 to $2,169,000 and $6,795,000 for the same periods of 2013. Revenues from Product Services and Other operations increased from $3,617,000 and $8,928,000 for the third quarter and first nine months of 2012 to $4,045,000 and $12,215,000 for the same periods of 2013, reflecting increases in both the product services business and the temporary staffing business. Media Services operating expenses were $17,569,000 and $50,976,000 (82.8% and 82.1% of related revenues) for the third quarter and first nine months of 2013 compared to $18,254,000 and $53,333,000 (85.2% and 82.3% of related revenues) for the same periods in 2012. The decrease in Media Services operating expenses for the third quarter of 2013 compared to the prior year period was primarily attributable to reduced (i) payroll and benefits ($387,000) and (ii) facilities and equipment expense, including depreciation, ($353,000), partially offset by increased supplies expense ($210,000). The decrease in Media Services operating expenses for the nine month period of 2013 compared to the prior year period was primarily attributable to reduced (i) facilities and equipment expense, including depreciation, ($1,321,000) and (ii) payroll and benefits ($687,000).

General and administrative costs of Media Services operations were $2,063,000 and $6,101,000 (9.7% and 9.8% of Media Services revenues) for the third quarter and first nine months of 2013 compared to $2,312,000 and $6,650,000 (10.8% and 10.3% of Media Services revenues) for the same periods of 2012. The decreases in both periods were primarily attributable to lower payroll and benefits.

Revenues from land sales at AMREP Southwest were $525,000 for the third quarter and first nine months of 2013 compared to zero and $1,435,000 for the same periods of 2012. The 2013 third quarter revenues were attributable to one commercial lot sale that had a gross profit percentage of 28% before indirect costs. The average gross profit percentage on land sales for the first nine months of 2012 was 91% before indirect costs. For the third quarter and first nine months of 2013 and 2012, the Company's land sales in Rio Rancho were as follows:

                                Fiscal 2013                                Fiscal 2012
                                               Revenues                                   Revenues
                   Acres       Revenues        Per Acre       Acres       Revenues        Per Acre
                    Sold       (in 000s)       (in 000s)       Sold       (in 000s)       (in 000s)
Three months:
 Developed
    Residential         -     $         -     $         -          -     $         -     $         -
    Commercial        3.0             525             175          -               -               -
 Total Developed      3.0             525             175          -               -               -
 Undeveloped            -               -               -          -               -               -
   Total              3.0     $       525     $       175          -     $         -     $         -
Nine months:
 Developed
    Residential         -     $         -     $         -          -     $         -     $         -
    Commercial        3.0             525             175        4.2             748             178
 Total Developed      3.0             525             175        4.2             748             178
 Undeveloped            -               -               -       16.0             687              43
   Total              3.0     $       525     $       175       20.2     $     1,435     $        71

AMREP Southwest's results for the 2013 and 2012 periods were substantially lower than the Company experienced prior to fiscal 2009 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 late in fiscal 2008. 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.

Real estate selling and commissions expenses were $60,000 and $171,000 for the third quarter and first nine months of 2013 compared to $60,000 and $199,000 for the same periods of 2012. Other operating expenses increased $42,000 for the third quarter and decreased $145,000 for the first nine months of 2013 compared to the same periods of 2012, primarily due to a favorable adjustment in the third quarter of 2012 resulting from a successful appeal of 2011 tax valuations. The reduced tax valuations then lowered the tax expense for the first nine months of 2013.

General and administrative costs of real estate operations and corporate were $1,006,000 and $3,184,000 for the third quarter and first nine months of 2013 compared to $995,000 and $3,041,000 for the same periods of 2012. The increase in the both the three and nine month periods was primarily attributable to an increase in payroll and benefits resulting from changes in certain management positions.

The Company recognized net tax benefits of $226,000 and $305,000 during the third quarter and first nine months of 2013, which included the impact of a reduction in unrecognized tax benefits pursuant to Accounting Standards Codification ("ASC") 740 that totaled $85,000 and $53,000 for those periods. Net tax benefits of $668,000 and $33,000 were recognized in the comparable periods of 2012 and included a similar reduction in liabilities related to previously unrecognized tax benefits that occurred in the third quarter and first nine months of 2012 and totaled $382,000 and $335,000 for those periods. The difference between the tax benefits recognized in the third quarter and first nine months of both 2013 and 2012 and the amount that would be expected based upon the statutory rate was primarily attributable to the aforementioned reduction of liabilities related to unrecognized tax positions due to the expiration of the statute of limitations on certain prior year tax benefits. The Company expects to utilize federal net operating loss carryforwards to offset current year taxable income, if any.

The liabilities in the accompanying financial statements related to unrecognized tax benefits that would have an impact on the effective tax rate if these tax benefits were recognized were $58,000 and $66,000 for the nine months ended January 31, 2013 and for the year ended April 30, 2012. As a result of either the expiration of statutes of limitations or the recognition and measurement considerations applicable to such benefits, the Company believes that it is reasonably possible that the amount of unrecognized tax benefits will decrease within the next twelve months.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funding for working capital requirements are cash flow from operations and its Media Services banking facility. The Company's liquidity is affected by many factors, including some that are based on normal operations and some that are related to the industries in which the Company operates and the economy generally. The Company's Media Services businesses finance their operations in part through a revolving credit facility (defined below as the Media Services Credit Facility) that matures May 12, 2014. These businesses also rely on cash flow from operations, and they are able to operate with negative working capital ($18,451,000 at January 31, 2013) primarily through liquidity provided by one material customer contract that

expires June 2014. A loss of this customer contract would have a material adverse effect on the Company. AMREP Southwest finances its business from cash flow from operations, which has been minimal in recent years due to the poor conditions in its real estate markets, and from advances made to it by its parent. AMREP Southwest has a loan agreement that matures December 1, 2017, which does not allow for additional borrowings.

Due to the closing of certain facilities in connection with the consolidation of the Company's Subscription Fulfillment Services business and an associated work force reduction, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the regulations thereunder accorded to the Pension Benefit Guaranty Corporation (the "PBGC") the right to require the Company to accelerate the funding of approximately $11,700,000 of accrued pension-related obligations to the Plan. In August 2012, the Company and the PBGC reached an agreement with respect to this funding obligation which provides for the Company to make a $3,000,000 cash contribution to the Plan, which was made on August 16, 2012. The agreement also provides that if, before the expiration of one year from its date, the Company is unable to pay the remaining liability or adequately secure it with collateral acceptable to the PBGC, the Company will be required to either (i) provide a letter of credit equal to 110% of the remaining liability or establish a cash escrow for 100% of the remaining liability, to be maintained for five years or until the remaining liability is discharged, if sooner or (ii) discharge the remaining liability in quarterly installments over a five year period and secure it with collateral acceptable to the PBGC. In the event the Company fails to meet the terms of the agreement, the PBGC could seek immediate payment of the amount due or attempt to force a termination of the Plan. The Company is unable to offer any assurance that it will be able to discharge the Plan funding obligation by August 15, 2013 or meet the PBGC's requirements for securing or paying the undischarged amount, nor can it offer any assurance that upon such inability it will be able to negotiate with the PBGC to obtain further relief. Refer to Note 11 to the consolidated financial statements included in the 2012 Form 10-K for additional Plan information.

In June 2009, Palm Coast received $3,000,000 pursuant to an agreement with the State of Florida (the "Award Agreement") as part of the incentives made available in connection with the Company's project, completed in the second quarter of fiscal 2011, to consolidate its Subscription Fulfillment Services operations at its Palm Coast, Florida location. The Award Agreement includes certain performance requirements in terms of job retention, job creation and capital investment which, if not met by Palm Coast, entitles the State of Florida to obtain the return of a portion, or all, of the $3,000,000. Accordingly, the $3,000,000 has been recorded as a liability in the accompanying balance sheet. The award monies, if any, to which Palm Coast becomes irrevocably entitled will be amortized into income over the life of the assets acquired with those funds. As of January 31, 2013, Palm Coast had not met certain of the performance requirements, in large part due to the adverse economic conditions experienced by the magazine publishing industry since the Award Agreement was executed. Palm Coast is currently in discussions with the State of Florida regarding a comprehensive approach to address the current and anticipated reduction of performance during the term of the Award Agreement. The Company is unable to offer any assurance as to whether or when the award monies, in whole or in part, may have to be returned to the State of Florida.

Cash Flows from Operating Activities

Receivables from Media Services operations increased from $40,544,000 at April 30, 2012 to $46,900,000 at January 31, 2013, primarily due to the effect of increased quarter-end billings at January 31, 2013 compared to April 30, 2012 and the timing of the collection of receivables. Included in Media Services accounts receivable are receivables where a publisher bears the credit risk of non-collection of amounts due from customers to which the Company distributed the publisher's magazines. Receivables subject to this arrangement totaled $20,307,000 at January 31, 2013 and $19,383,000 at April 30, 2012.

Real estate inventory was $75,155,000 at January 31, 2013 compared to $75,401,000 at April 30, 2012. Inventory in the Company's core real estate market of Rio Rancho, New Mexico decreased from $71,109,000 at April 30, 2012 to $70,863,000 at January 31, 2013. The balance of real estate inventory consisted of properties in Colorado. Investment assets decreased from $11,262,000 at April 30, 2012 to $11,093,000 at January 31, 2013 as a result of a $169,000 impairment charge recognized on an asset in Rio Rancho, New Mexico during the quarter ended July 31, 2012.

Accounts payable and accrued expenses decreased from $85,720,000 at April 30, 2012 to $81,621,000 at January 31, 2013, primarily from the timing of billings and payments due to publishers and vendors, as well as lower business volumes.

Cash Flows from Investing Activities

Capital expenditures totaled $745,000 for the first nine months of 2013 and $761,000 for the same period of 2012, primarily for facility and equipment upgrades for the Media Services businesses.

Cash Flows From Financing Activities

Media Services - Media Services has a Revolving Credit and Security Agreement with a bank (the "Media Services Credit Facility") that provides for a revolving credit loan and letter of credit facility, with availability within the facility's limit based upon the lesser of (i) a percentage of the borrowers' eligible accounts receivable or (ii) the recent level of collections of accounts receivable. The facility's original maturity date was May 12, 2013, but the lender and the borrowers entered into the First Amendment dated October 1, 2012 (the "First Amendment") to the Media Services Credit Facility extending the term of the facility by one year to May 12, 2014. In addition, the First Amendment revised certain covenants and reduced the facility's borrowing limit from the original $20,000,000 to $15,000,000, in accordance with Media Services' request. Among the borrowers' covenants in the Media Services Credit Facility is one requiring the borrowers to maintain a minimum fixed charge coverage ratio (as defined). Subject to certain terms, funds may be borrowed, repaid and re-borrowed at any time. Borrowings under the Media Services Credit Facility are being used for Media Services working capital needs and general business purposes and, subject to the Media Services minimum fixed charge coverage ratio, as defined, being at least at a stated level, may also be used to provide payments on certain indebtedness due the borrowing group's parent that is not a party to the Media Services Credit Facility. At January 31, 2013, the borrowing availability under the Media Services Credit Facility was $11,374,000, and there was $5,961,000 outstanding against this availability. The highest amount borrowed during the quarter and nine months ended January 31, 2013 was $6,770,000.

On December 31, 2012, the borrowers entered into the Second Amendment and Joinder (the "Second Amendment") to the Media Services Credit Facility which, among other things, added as a borrower (the "New Borrower") a newly organized Media Services company, FulCircle Media, LLC, that on that date acquired the business and certain assets of a privately owned company. The Second Amendment contained the lender's consent to the acquisition of the assets, along with a number of new terms, including specifying an interim ceiling on the collateral value of the New Borrower's accounts receivable and the treatment for borrowing availability and fixed charge coverage ratio calculation purposes of a contingent additional purchase price payment.

The borrowers' obligations under the Media Services Credit Facility are secured by substantially all of their assets other than real property. The revolving loans under the Media Services Credit Facility may be fluctuating rate borrowings or Eurodollar fixed rate based borrowings or a combination of the two as the borrowers may select. Fluctuating rate borrowings bear interest at a rate which is, at the

borrowers' option, either (i) the reserve adjusted daily published rate for one month LIBOR loans plus a margin of 3%, or (ii) the highest of two daily published market rates and the bank lender's base commercial lending rate in effect from time to time, but in any case not less than 3% plus a margin of 2% (that is, not less than 5%). Eurodollar fixed rate based borrowings may be for one, two or six months and bear interest at the reserve adjusted Eurodollar interest rates for borrowings of such durations, plus a margin of 3%, which may be reduced to 2.75% depending on the borrowers' financial condition. The interest rate on outstanding borrowings at January 31, 2013 was 3.20%.

Real Estate - AMREP Southwest had a bank loan scheduled to mature on September 1, 2012 that, at August 13, 2012, had an outstanding principal balance of $16,214,000. The loan bore fluctuating interest at the annual rate of reserve adjusted LIBOR plus 3.5%, but not less than 5%, and required that a cash reserve of at least $500,000 be maintained with the lender to fund interest. The loan was secured by a mortgage on certain real property of AMREP Southwest in Rio Rancho, New Mexico having a book value of approximately $54,987,000 and required that the appraised value of the collateral be at least 2.5 times the outstanding principal. The loan was subject to a number of restrictive covenants including a requirement that AMREP Southwest maintain a minimum tangible net worth and a restriction on AMREP Southwest making distributions and other payments to its parent or the Company beyond a stated management fee.

On August 13, 2012, a company (the "New Lender") owned by Nicholas G. Karabots, a significant shareholder of the Company who was then Vice Chairman of its Board of Directors, purchased the bank loan and agreed to extend its maturity to December 1, 2012 on substantially its existing terms to accord the parties time to negotiate a longer extension or for AMREP Southwest to identify a possible alternate financing source. In August 2012, another director of the Company purchased a 20% participation in the loan from the New Lender.

AMREP Southwest and the New Lender entered into an agreement effective December 1, 2012 amending the terms of the loan. At January 31, 2013, the outstanding principal of the loan was $16,083,000. Under the terms of the loan as now in effect, it matures on December 1, 2017, bears interest at 8.5% per annum and is secured by its original collateral and by additional collateral comprised of the balance of the real property owned by AMREP Southwest in Rio Rancho and by a pledge of the stock of its subsidiary, Outer Rim Investments, Inc., which owns approximately 12,000 acres, for the most part scattered lots, in Sandoval County, New Mexico and which are not currently being offered for sale. The total book value of the real property collateralizing the loan is approximately $73,212,000. The loan may be prepaid in whole or in part, generally without penalty, and 25% of the net proceeds, as defined, from any sales of real property by AMREP Southwest are required to be applied to the payment of the loan. No new borrowings are permitted under this facility. The requirement to maintain the reserve for interest and the restrictive covenants that applied prior to the amendment for the most part continue to apply, except that there is no longer a requirement regarding the ratio of the appraised value of the collateral to the amount of the loan.

At January 31, 2013, the borrowers under both the Media Services Credit Facility and the AMREP Southwest loan from the New Lender were in compliance with the covenants of each facility.

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, 2013 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                $ 26,430     $       142     $ 6,213     $ 16,360     $     3,715
Operating leases and other     17,513          14,365       2,271          677             200
Total                        $ 43,943     $    14,507     $ 8,484     $ 17,037     $     3,915

Operating leases and other includes approximately (i) $3,000,000 for the possible required return of grant monies received from the State of Florida,
(ii) $8,700,000 of accelerated pension funding as described above in the second paragraph under this Liquidity and Capital Resources section and (iii) $184,000 for the liability for uncertain tax positions and related accrued interest recorded in accordance with Accounting Standards Codification 740. The table does not include the impact of the expiration of the material customer contract referred to above in the fourth sentence of the first paragraph of this Liquidity and Capital Resources section, should that contract not be renewed or extended. Any additional future defined benefit pension plan contributions necessary to satisfy the minimum statutory funding requirements are dependent upon various factors, including actual plan asset investment returns and discount rates applied. Refer to Notes 8, 9, 11, 12, 16 and 17 to the consolidated financial statements included in the 2012 Form 10-K for additional information on long-term debt, other liabilities, pension contributions, 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 2012 Form 10-K and in Item 1A, Risk Factors in Part II of this Quarterly Report, which could materially affect the Company's business, financial condition or future results, should be carefully considered. The risks described in the 2012 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 . . .

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