Palm Coast Data Parent’s Headaches: Diving Revenue and $22.5 Million Loan Due
FlaglerLive | December 13, 2010
Palm Coast Data parent Amrep Corp. last week reported a modest profit of $233,000 for the six months ending on Oct. 31, a sharp reversal from the $2 million loss in the same period the previous year. But revenue at the company continues to plummet. In the three months ending Oct. 31, revenue fell 20 percent, from $32.3 million in the same period last year to $25.8 million this year. In the six months ending Oct. 31, revenue fell $13.9 million, or 21.4 percent–from $64.8 million in the same period last year to $50.9 million this year.
Much of that drop was led by Palm Coast Data itself, which is now by far the largest operation in the Amrep portfolio. And Amrep’s most immediate headache isn’t its falling revenue, but a $22.5 million loan by one of its subsidiary that’s due to be repaid, in one lump sum, on Dec. 16. The company prepared investors in its financial reports for the possibility that it would not be able to repay the loan short of refinancing the agreement or selling assets. As of Dec. 9, when it last referred to the loan in its latest financial report, no refinancing had occurred.
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Amrep has three subsidiaries: a land-sale company in New Mexico called Rio Rancho, which once dominated the company’s portfolio (Rio Rancho is like Palm Coast: a company town developed in the middle of nowhere with real estate sales as its driving force), a newsstand distribution service, and Palm Coast Data, a subscription fulfillment service. The newsstand and Palm Coast Data operations are under the banner of a subsidiary company called Kable Media Services.
The subscription service generated revenue of $6 million in the first six months of the new fiscal year, down from $6.8 million last year.
At Palm Coast Data, revenue declined $10.9 million in the six months ending Oct. 31, a 22 percent decline from the same period last year (from $49.36 million to $38.42 million). In the last three months, which is technically the second quarter of 2011 in the company’s books, revenue fell from $30.6 million in the comparable period last year to $25.3 million this year, or $5.3 million (a 17 percent decline).
But operating expenses fell significantly, too, in Kable’s operations, “primarily,” the company reported, “due to lower payroll and benefits and other variable costs associated with the decreased revenues as well as from efficiencies achieved in the company’s consolidation of its Subscription Fulfillment Services business from three locations in Colorado, Florida and Illinois into one existing location” in Palm Coast. That operation was completed Oct. 31. Those operating expenses decreased substantially–by $14 million in the six months to Oct. 31, according to the company. Much of that decrease was made possible by layoffs.
The Rio Rancho part of Amrep’s operations, meanwhile, generated revenue of just $1.3 million in the first six months of the current fiscal year, down from $3.15 million in the same period last year.
By the end of April, Amrep reports, the company had spent $14 million toward its consolidation of facilities in Colorado and Illinois with the Palm Coast facility, now its only subscription fulfillment facility. Of that, $6.3 million was for capital costs, and $8 million for other one-time costs.
The company cashed in on $548,000 in local and state government incentives when it consolidated its operations in Palm Coast, which offset some of its losses due to restructuring those two years. The company still reported a net charge of $7.4 million in 2009 and 2010 due to the consolidation. The losses may not be over. “In June 2009, the company received $3 million pursuant to an agreement with the state of Florida,” the company’s annual report states, ” as part of the incentives made available to the company in connection with the consolidation project. The award agreement requires the company to achieve certain objectives in terms of job retention, job creation and capital investment through December 21, 2011.” Palm Coast Data, in sum, is required to have some 1,700 jobs locally to qualify for those incentives. It has between 1,100 and 1,200.
“If the objectives are not met,” the report continues, “the company may need to return a portion, or all, of the $3 million.” Palm Coast Data is, for now, assuming that the objectives won’t be met, as there is no mention in the report of the company’s ability or forecast to hire 500 or 600 more employees locally: “Accordingly, the $3 million has been recorded as a long-term liability until the company is irrevocably entitled to retain the award, at which time the award will be amortized into income over the life of the assets acquired with the grant monies received.”
The company still expects to spend $300,000 on severance costs in 2011. Amrep is also facing another potential financial hit this week. The company’s New Mexico subsidiary, Amrep reports, has a loan agreement with a bank that matures on December 16. The subsidiary, according to the company, “is in discussions with the bank regarding renewal of this arrangement, but there can be no assurance that this facility can be renewed on acceptable terms. If AMREP Southwest is unable to renew this facility, it would not have sufficient funds to satisfy its obligation to the bank, and the company would be forced to seek either replacement financing or other sources of capital, such as by selling assets or issuing equity, which replacement financing or other sources of capital might not be available on acceptable terms.”
As of April 30, the outstanding principal of the loan in question is $22.5 million, according to the company’s latest annual report. That full amount is due in one lump sum on Thursday (Dec. 16). The collateral on that loan is “a mortgage on certain real property.”
The company doesn’t clarify what that replacement financing might amount to, though at this point its biggest assets, other than real estate in New Mexico, are in Palm Coast.
Kable also has a revolving loan of $20 million. That loan doesn’t mature until May 2013.