AMREP Corporation Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2014. The source is an annual report, not a quarterly filing; the request metadata references 2013 Q4, but the filing reports fiscal 2014 and comparative fiscal 2013 and 2012 results.
Business Context
AMREP operates through Media Services and real estate segments. Media Services includes subscription fulfillment, newsstand distribution, product packaging and fulfillment, and temporary staffing. Real estate operations primarily involve land sales and development in Rio Rancho, New Mexico. The company had approximately 1,278 full-time employees as of July 1, 2014, including approximately 474 temporary employees.
Financial Performance and Position
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Revenue | $87.337 million | $83.001 million |
| Net loss | $2.939 million | $2.838 million |
| Basic and diluted loss per share | $0.42 | $0.47 |
| Loss before taxes | $3.840 million | $4.597 million |
| Net cash used in operating activities | $6.572 million | $11.614 million |
| Capital expenditures | $1.411 million | $1.049 million |
| Cash and cash equivalents | $12.929 million | $13.714 million |
| Total debt | $20.604 million | $20.978 million |
| Total liabilities | $105.647 million | $123.315 million |
| Shareholders’ equity | $79.301 million | $72.541 million |
Media Services revenue increased to $83.619 million from $82.105 million, but included a full year of FulCircle revenue and $1.759 million of early termination payments. Excluding those items, Media Services revenue declined by approximately $4.408 million. Subscription fulfillment revenue excluding FulCircle and the termination payments declined to $50.855 million from $55.713 million, while newsstand distribution revenue declined to $6.906 million from $8.867 million. Product packaging and staffing revenue increased to $18.177 million from $15.766 million.
Real estate revenue increased to $3.634 million from $0.833 million. AMREP sold 89 acres in fiscal 2014 versus 12 acres in fiscal 2013, but the average gross profit percentage before indirect costs declined to 23% from 38%.
Media Services operating expenses were $72.494 million, or 86.7% of related revenue, compared with $69.880 million, or 85.1%, in fiscal 2013. Consolidated EBITDA, as defined by the company, was $2.639 million versus $2.187 million.
Material Changes Versus the Prior Period
- Revenue increased 5.2%, but the company remained unprofitable; reported net loss increased modestly, while loss per share improved because of the higher weighted-average share count.
- Fiscal 2014 included $0.955 million of non-cash impairment charges versus $1.511 million in fiscal 2013. It also included $2.458 million of doubtful-account reserves versus $2.000 million in fiscal 2013.
- Excluding impairment charges and doubtful-account reserves, the adjusted net loss was $0.788 million, or $0.11 per share, compared with $0.626 million, or $0.10 per share, in fiscal 2013.
- The company completed a rights offering, issuing 1,199,242 shares at $6.25 per share and receiving approximately $7.144 million of net proceeds. A portion funded a $3.243 million pension contribution.
- The defined-benefit pension plan’s underfunded status improved to $7.349 million from $13.805 million, primarily due to company contributions and investment returns.
- Accounts receivable reserves increased, and Media Services receivables declined to $43.497 million from $47.203 million. Accounts payable and accrued expenses declined to $74.636 million from $85.340 million.
Liquidity, Debt and Cash Flow
Operating cash flow was negative $6.572 million. Cash declined by $0.785 million during the year after investing cash outflows of $0.983 million and financing cash inflows of $6.770 million.
The Media Services revolving credit facility provides capacity of up to $15 million, subject to borrowing-base limitations. At April 30, 2014, availability was $12.841 million and borrowings were $1.059 million; the facility matured on May 12, 2015. The company stated that applicable borrowers were in compliance with debt covenants at year-end.
AMREP Southwest had $15.141 million outstanding under an 8.5% related-party real estate loan maturing December 1, 2017. Other notes included a $4.208 million warehouse mortgage and $0.196 million of asset-financing loans. Total contractual obligations were $26.143 million, including $20.604 million of notes payable.
Kable Distribution had negative working capital of approximately $26.804 million at year-end, reflecting its net payment obligations to publishers and other parties. Its business model also requires advances to publishers and exposes it to wholesaler and publisher credit risk.
Outlook, Risks and Unusual Items
- Management expected significant customer changes representing approximately 19% of consolidated fiscal 2014 revenue in fiscal 2015 and an additional approximately 4% in fiscal 2016. Expected revenue from new customers was stated to be materially less than the revenue expected to be lost.
- A significant newsstand wholesaler announced plans to discontinue operations in May 2014 and filed for bankruptcy in June 2014. Kable had approximately 77% of its gross newsstand receivables due from three wholesalers at April 30, 2014.
- Kable recorded a $1.300 million fourth-quarter charge related to the failed wholesaler and a $0.700 million third-quarter charge related to another sub-distributor. Fiscal 2014 wholesaler collection losses totaled $1.792 million after applicable reductions.
- In June 2014, AMREP entered into a settlement with Heinrich Bauer USA. The company issued 825,000 shares, approximately 10.3% of post-issuance shares, and expects to recognize an approximately $10 million gain in the quarter ended July 31, 2014. The settlement reduced Kable’s negative working capital by an estimated $12.077 million on a pro forma basis and extended Palm Coast’s fulfillment agreement with Bauer through at least December 31, 2018.
- Palm Coast may have to repay up to $2.527 million of incentives received from the State of Florida because certain performance requirements were not met.
- The PBGC settlement left an accelerated pension funding liability of $5.019 million secured by first-lien mortgages on real property. Failure to meet funding, covenant, appraisal or reporting requirements could permit the PBGC to foreclose on the mortgaged properties.
- Real estate operations remain dependent on property sales and financing availability. Additional lot development requires significant financing that may not be available, and further impairment charges remain possible.
- The company had no chief executive officer at the parent-company level; oversight was assigned to the board’s Executive Committee. Michael Duloc and Theodore Gaasche served as co-principal executive officers for filing purposes.
- The company reported an unresolved Anderson News antitrust and related litigation matter involving Kable. Damages were not quantified, and management could not predict the outcome or estimate a loss range.
- The company paid no cash dividends since fiscal 2008 and provided no assurance that future dividends would be declared.
Investor Verification Priorities
- Verify the June 2014 Bauer settlement, including the 825,000-share issuance, the projected approximately $10 million gain, and the effect on ongoing distribution and fulfillment economics.
- Assess the sustainability of liquidity after the Media Services credit facility maturity and the reduction or loss of wholesaler-related working capital.
- Review newsstand receivable concentrations, bankruptcy recoveries, return-rate estimates and the adequacy of doubtful-account reserves.
- Evaluate expected customer losses in fiscal 2015 and 2016 against replacement contract wins and the resulting revenue and margin impact.
- Monitor PBGC compliance, required pension contributions, collateral appraisals and potential additional accelerated funding obligations.
- Reassess the carrying value of Rio Rancho real estate and other long-lived assets given continuing market weakness and prior impairment charges.
- Review the Anderson News litigation and other contingencies because the filing does not provide a clear estimate of potential exposure.
- Confirm the company’s ability to fund operations, debt maturities, capital expenditures and any potential Florida incentive repayment while operating with recurring net losses and negative operating cash flow.