AMREP Corporation — Form 10-Q Summary
Business Context and Reporting Period
AMREP operates Media Services businesses, including subscription fulfillment, newsstand distribution, product packaging and fulfillment, and a New Mexico real estate business. This report covers the three and six months ended October 31, 2013, corresponding to the company’s fiscal second quarter and first six months of fiscal 2014. Financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended October 31 | Six Months Ended October 31 |
|---|---|---|
| Revenue | $22.763 million, versus $21.317 million | $43.272 million, versus $40.913 million |
| Net income (loss) | $52,000, versus $276,000 | $(635,000), versus $(332,000) |
| Basic and diluted EPS | $0.01, versus $0.05 | $(0.09), versus $(0.06) |
| Income (loss) before taxes | $137,000, versus $548,000 | $(952,000), versus $(411,000) |
| Media Services EBITDA | $1.935 million, versus $2.284 million | $2.690 million, versus $3.466 million |
| Consolidated EBITDA | $1.514 million, versus $1.774 million | $1.812 million, versus $2.267 million |
Revenue increased approximately 6.8% for the quarter and 5.8% for the six-month period. Net margin was approximately 0.2% for the quarter and negative 1.5% for the six months. Media Services operating expenses rose to 82.5% of segment revenue in the quarter and 84.9% for the six months, compared with 80.1% and 81.8%, respectively, in the prior-year periods.
- Cash and cash equivalents were $27.704 million at October 31, 2013, compared with $13.714 million at April 30, 2013.
- Net cash provided by operating activities was $2.221 million for the first six months, compared with $16.885 million of cash used in the prior-year period.
- Capital expenditures were $204,000, compared with $292,000.
- Total notes payable were $25.807 million, compared with $20.978 million at April 30, 2013. Total liabilities were $121.605 million and shareholders’ equity was $79.050 million.
- The Media Services credit facility provided up to $15 million of revolving credit and had $5.872 million outstanding and $14.859 million of reported borrowing availability at October 31, 2013. The facility matures May 12, 2015, and borrowings carried an interest rate of 3.17% at period-end.
- AMREP Southwest had $15.655 million outstanding under an 8.5% related-party real estate loan maturing December 1, 2017.
Material Changes Versus the Prior Comparable Period
- Media Services revenue increased because FulCircle, acquired on December 31, 2012, contributed $1.862 million in the quarter and $3.221 million for the six months. Excluding FulCircle, Media Services revenue declined by $1.573 million for the quarter and $2.242 million for the six months.
- Subscription Fulfillment Services revenue excluding FulCircle declined to $13.151 million for the quarter and $25.785 million for the six months, primarily reflecting customer losses and weaker magazine-industry conditions. Newsstand Distribution Services revenue declined to $1.871 million and $3.856 million, respectively.
- Real estate land-sale revenue was $1.196 million for the quarter and $1.424 million for the six months, compared with none in the prior-year periods. The reported average gross profit percentage on land sales was 16.5%.
- Interest expense increased to $462,000 for the quarter and $927,000 for the six months, primarily because of the higher interest rate on the AMREP Southwest facility.
- The quarter benefited from a $300,000 reduction in a doubtful-account reserve related to a magazine wholesaler, contributing approximately $189,000 after tax. The prior-year six-month period included a $169,000 non-cash real estate impairment charge.
- In July 2013, the company issued 1,199,242 treasury shares in a rights offering at $6.25 per share, generating $7.144 million net proceeds. A portion of the proceeds funded a $3.243 million pension contribution.
Outlook, Risks, Contingencies and Unusual Items
- The most significant liquidity risk is the non-renewal of a major Newsstand Distribution Services customer contract expiring in June 2014. The related net payment obligation was approximately $17.155 million at October 31, 2013, and the business stated that it did not have sufficient capital or borrowing capacity to fund the obligation in full without additional financing, equity, or asset sales.
- The expiring customer contract represented approximately 8.3% of Newsstand Distribution Services revenue for the quarter and 8.2% for the six months. Management also expects the loss of the associated revenue to adversely affect that business.
- A significant Subscription Fulfillment Services customer contract representing approximately 11.9% of that segment’s six-month revenue, or 7.9% of consolidated revenue, will not be renewed when it expires in February 2015.
- The company may be required to repay approximately $2.527 million of Florida incentive award monies, including $1.305 million demanded for 2010–2012 and approximately $1.222 million relating to 2013–2014.
- Under an August 2013 settlement with the PBGC, the remaining accelerated pension funding liability was $5.019 million after a $3.243 million cash contribution and a $426,000 credit. Certain real property with an aggregate appraised value of $10.039 million was mortgaged to the PBGC. Failure to comply with the settlement could permit the PBGC to foreclose on the mortgaged properties.
- The company’s media businesses operate with negative working capital of approximately $18.028 million, largely supported by customer-contract funding. Credit-facility covenant violations could restrict payments to the parent and permit the lender to terminate the facility and demand repayment.
- The company changed its compensated-absences policy effective January 1, 2014. Potential future non-cash income from reversing forfeitable accrued liabilities cannot be reasonably estimated.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the company’s ability to fund or refinance the approximately $17.155 million customer-related obligation due after the June 2014 contract expiration.
- Track the impact of the June 2014 Newsstand contract loss and the February 2015 Subscription Fulfillment contract loss on revenue, working capital and borrowing availability.
- Review credit-facility covenants, collateral requirements, availability calculations and maturity dates.
- Confirm the timing and final amount of any Florida incentive repayment and required pension contributions or collateral payments.
- Assess whether real estate sales can generate sufficient cash while satisfying the requirement to apply 25% of defined net proceeds to the AMREP Southwest loan.
- Reconcile the rights-offering proceeds, treasury-stock accounting effects and the change in weighted-average shares outstanding.