AMREP Corporation — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three months ended July 31, 2013, AMREP’s fiscal first quarter of 2014, compared with the three months ended July 31, 2012. AMREP operates Media Services businesses—subscription fulfillment, newsstand distribution, product packaging and fulfillment—and a real estate business in New Mexico and Colorado. FulCircle Media, acquired on December 31, 2012, contributed to Subscription Fulfillment Services during the current quarter.
Financial performance and condition
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $20.509 million | $19.596 million |
| Media Services revenue | $20.278 million | $19.588 million |
| Real estate land-sale revenue | $228,000 | — |
| Loss before taxes | $(1.089) million | $(959,000) |
| Income tax benefit | $402,000 | $351,000 |
| Net loss | $(687,000) | $(608,000) |
| Loss per share | $(0.11) | $(0.10) |
| EBITDA | $298,000 | $493,000 |
| Net cash used in operating activities | $(6.844) million | $(7.593) million |
Consolidated revenue increased 4.7%, but the net loss widened 13.0%. Net loss margin was approximately negative 3.4%, compared with negative 3.1% in the prior-year quarter. Media Services operating expenses rose to $17.728 million, or 87.4% of Media Services revenue, from 83.6% previously. Media Services general and administrative expense declined to $1.809 million from $2.089 million, partly because of an insurance reimbursement of approximately $320,000.
Cash and cash equivalents were $21.867 million at July 31, 2013, up from $13.714 million at April 30, 2013. The increase primarily reflected financing proceeds, not internally generated cash. Total assets were $207.070 million and shareholders’ equity was $79.000 million at quarter-end.
Total notes payable were $28.883 million at July 31, 2013, compared with $20.978 million at April 30, 2013. This included $8.586 million outstanding under the Media Services credit facility, $15.981 million of related-party real estate debt, and $4.316 million of other notes payable. The Media Services facility has a $15 million borrowing limit, $13.028 million of availability at quarter-end, and matures May 12, 2015. The real estate loan bears interest at 8.5% and matures December 1, 2017.
Material changes versus the prior comparable period
- Media Services revenue increased $690,000, primarily because FulCircle contributed $1.359 million; the other Media Services businesses declined by a combined $669,000.
- Excluding FulCircle, Subscription Fulfillment Services revenue decreased from $13.602 million to $12.634 million. Newsstand Distribution Services revenue decreased from $2.339 million to $1.985 million.
- Product Packaging and Fulfillment Services and Other revenue increased from $3.647 million to $4.300 million.
- Real estate recorded $228,000 of land-sale revenue and $190,000 of related cost, compared with no land-sale activity in the prior-year quarter. Gross profit on land sales was approximately 17%.
- The prior-year quarter included a $169,000 pre-tax impairment charge; no comparable impairment was recorded in the current quarter.
- Operating cash use improved by $749,000 year over year, although the company remained cash-flow negative.
- On July 3, 2013, AMREP completed a rights offering of 1,199,242 treasury shares at $6.25 per share, generating $7.146 million of net proceeds.
Liquidity, outlook, risks and unusual items
The most significant liquidity risk is the non-renewal of a major Newsstand Distribution Services customer contract expiring in June 2014. Media Services had negative working capital of approximately $16.9 million at July 31, 2013, including an estimated $13.151 million net payment obligation associated with that customer. Management stated that the business did not have sufficient capital to fund or refinance the obligation and may need additional debt, equity, or asset-sale proceeds. The contract represented approximately 8.1% of Newsstand revenue and less than 1% of consolidated revenue in the quarter.
A significant Subscription Fulfillment Services contract representing approximately 12.6% of that segment’s revenue and 8.6% of consolidated revenue was also not renewed and is scheduled to expire in February 2015. The loss of either contract could materially affect revenue, liquidity, financial condition and results.
On August 30, 2013, after the reporting date, AMREP entered into a settlement with the PBGC. It paid $3.243 million on September 4, 2013 and provided first-lien mortgages on property with an aggregate appraised value of $10.039 million. After credit for prior excess contributions, the remaining accelerated pension funding liability was $5.019 million. The settlement runs through August 30, 2018, subject to compliance with funding, collateral, reporting and other covenants. A default could permit the PBGC to foreclose on pledged properties.
Palm Coast remains exposed to a potential repayment of approximately $1.305 million under a Florida incentive award, with an additional $1.222 million of award monies and accrued interest remaining open. The filing does not provide assurance regarding the timing or amount of any repayment.
Management provided no quantitative earnings or revenue guidance. The filing highlights continued pressure on magazine publishing customers from new media competition, weak economic conditions, customer losses, contract renewals, limited real estate activity, pension obligations, covenant compliance and the availability of future financing.
Most important facts for investors to verify
- Whether AMREP can fund or refinance the approximately $13.151 million customer-related obligation due after the June 2014 contract expiration.
- The financial and operating impact of the Subscription Fulfillment contract expiring in February 2015.
- Compliance with the Media Services credit facility’s fixed-charge coverage and other covenants, including available borrowing capacity.
- Execution of the PBGC settlement, required pension contributions, property collateral valuations and any potential shortfall payments.
- The ultimate repayment exposure under the Florida incentive award.
- Whether Media Services can restore profitability as operating expenses increased faster than revenue and EBITDA declined.
- The collectability and timing of Media Services receivables, including substantial estimated magazine returns.