AMREP CORP. - Annual Report: 2008 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ x ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended April 30, 2008
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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Commission File Number 1-4702
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AMREP CORPORATION
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(Exact name of registrant as specified in its Charter)
Oklahoma 59-0936128
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 Alexander Park, Suite 204
Princeton, New Jersey 08540
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 716-8200
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes No X
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Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Act").
Yes No X
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act.
Large accelerated filer Accelerated filer X
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Non-accelerated filer Smaller reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes No X
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As of October 31, 2007, which was the last business day of the Registrant's most
recently completed second fiscal quarter, the aggregate market value of the
Common Stock held by non-affiliates of the Registrant was $65,671,838. Such
aggregate market value was computed by reference to the closing sale price of
the Registrant's Common Stock as quoted on the New York Stock Exchange on such
date. For purposes of making this calculation only, the Registrant has defined
affiliates as including all directors and executive officers and certain persons
related to them. In making such calculation, the Registrant is not making a
determination of the affiliate or non-affiliate status of any holders of shares
of Common Stock.
As of July 11, 2008, there were 5,995,212 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this annual report on Form 10-K, portions of the
Registrant's definitive proxy statement to be filed within 120 days after the
end of the fiscal year covered by this annual report on Form 10-K are
incorporated herein by reference.
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PART I
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Item 1. Business
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GENERAL
The Company* was organized in 1961 and, through its subsidiaries, is primarily
engaged in three business segments: the Real Estate business operated by AMREP
Southwest Inc. and its subsidiaries (collectively, "AMREP Southwest"), and the
Fulfillment Services and Newsstand Distribution Services businesses operated by
Kable Media Services, Inc. and its subsidiaries (collectively, "Kable"). Data
concerning industry segments is set forth in Note 19 of the notes to the
consolidated financial statements. The Company's foreign sales and activities
are not significant.
REAL ESTATE OPERATIONS
The Company conducts its Real Estate business through AMREP Southwest, with
these activities occurring primarily in the City of Rio Rancho and certain
adjoining areas of Sandoval County, New Mexico. References below to Rio Rancho
include the City and such adjoining areas. As of July 1, 2008, AMREP Southwest
employed approximately 15 persons.
Properties - Rio Rancho
Rio Rancho consists of 91,049 contiguous acres in Sandoval County near
Albuquerque, of which approximately 73,750 acres have been platted into
approximately 114,600 home site and commercial lots, 16,470 acres are dedicated
to community facilities, roads and drainage and the remainder is unplatted land.
At April 30, 2008, approximately 90,630 of these residential and commercial lots
had been sold net of lot repurchases. The Company currently owns approximately
17,240 acres in Rio Rancho, of which approximately 4,500 acres are in contiguous
blocks, which are being developed or are suitable for development, and
approximately 1,990 acres are in areas with a high concentration of ownership,
where the Company owns more than 50% of the lots in the area. These areas are
suitable for special assessment districts or city redevelopment areas that may
allow for future development under the auspices of local government. The balance
of acres owned is in scattered lots, where the Company owns less than 50% of the
lots in the area, that may require the purchase of a sufficient number of
adjoining lots to create tracts suitable for development or that the Company may
attempt to sell individually or in small groups.
Development activities conducted or arranged by the Company include the
obtaining of necessary governmental approvals ("entitlements"), installation of
utilities and necessary storm drains, and building or improving of roads. At Rio
Rancho, the Company is developing both residential lots and sites for commercial
and industrial use as the demand warrants, and also is securing entitlements for
large development tracts for sale to homebuilders. The engineering work at Rio
Rancho is performed by both Company employees and outside firms, but development
work is performed by outside contractors. Company personnel market land at Rio
Rancho, both directly and through brokers. The Company competes with other
owners of land in the Rio Rancho and Albuquerque area that offer for sale
developed residential lots and sites for commercial and industrial use.
The City of Rio Rancho is the third largest city in New Mexico with a population
of approximately 75,000. It was named as the 56th best place to live by Money
magazine in 2006 for those cities in the United States with greater than 50,000
residents. The city's population growth rate for the period 2000-2006 was
approximately 40%, with a February 2008 unemployment rate of 3.7%. The city has
significant construction projects recently completed, ongoing or announced,
including: (i) a new central business district with a 6,500 seat events center
and a new city hall, (ii) a planned second high school, (iii) the planned
opening of the University of New Mexico West Campus, (iv) a 53 acre major motion
picture studio and (v) a new hospital. Major non-government employers currently
include Intel Corporation, US Cotton and customer care call centers of Bank of
America, JC Penney, Victoria's Secret and Sprint PCS.
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*As used herein, "Company" includes the Registrant and its subsidiaries unless
the context requires or indicates otherwise.
3
Since early 1977, the Company has sold no individual lots without homes at Rio
Rancho to consumers. A substantial number of lots without homes were sold prior
to 1977, and most of these remain in areas where utilities have not yet been
installed. However, under certain of the lot sale contracts, if utilities have
not reached a lot when the purchaser is ready to build a home, the Company is
obligated to exchange a lot in an area then serviced by water, telephone and
electric utilities for the lot of the purchaser, without cost to the purchaser.
The Company has not incurred significant costs related to such exchanges.
In Rio Rancho, the Company sells both developed and undeveloped lots to
national, regional and local homebuilders, commercial and industrial property
developers and others. In the last three fiscal years, land sales in Rio Rancho
have been as follows:
Acres Revenues
Sold Revenues Per Acre
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2008:
Developed
Residential 30 $ 9,542,000 $ 318,100
Commercial 39 8,651,000 221,800
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Total Developed 69 18,193,000 263,700
Undeveloped 337 9,709,000 28,800
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Total 406 $ 27,902,000 $ 68,700
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2007:
Developed
Residential 138 $ 39,407,000 $ 285,600
Commercial 56 15,728,000 280,900
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Total Developed 194 55,135,000 284,200
Undeveloped 857 40,690,000 47,500
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Total 1,051 $ 95,825,000 $ 91,200
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2006:
Developed
Residential 147 $ 31,920,000 $ 217,100
Commercial 22 6,376,000 289,800
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Total Developed 169 38,296,000 226,600
Undeveloped 746 19,514,000 26,200
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Total 915 $ 57,810,000 $ 63,200
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Other Properties
The Company also owns two tracts of land in Colorado, consisting of one
residential property of approximately 160 acres planned for approximately 350
homes that the Company intends to offer for sale upon obtaining all necessary
entitlements, and one property of approximately 10 acres zoned for commercial
use, which is being offered for sale.
FULFILLMENT SERVICES AND MAGAZINE DISTRIBUTION SERVICES OPERATIONS
The Company (i) through Kable and its Kable Fulfillment Services and Palm Coast
Data Holdco, Inc. ("Palm Coast") subsidiaries performs fulfillment and related
services for publishers and other customers and (ii) through Kable and its Kable
Distribution Services subsidiary distributes periodicals nationally and in
Canada and, to a small degree, in other foreign countries. As of July 1, 2008,
Kable employed approximately 2,000 persons, of whom approximately 1,850 were
involved in fulfillment activities and 150 in distribution activities.
Fulfillment Services
Kable's Fulfillment Services business performs a number of fulfillment and
fulfillment-related activities, principally magazine subscription fulfillment
services, list services and product fulfillment services, and it accounted for
91% of Kable's revenues in 2008.
In the magazine subscription fulfillment services operation, Kable processes new
orders, receives and accounts for payments, prepares and sends to each
publisher's printer labels or tapes containing the names and addresses of
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subscribers for mailing each issue, handles subscriber telephone inquiries and
correspondence, prepares renewal and statement notifications for mailing,
maintains subscriber lists and databases, generates marketing and statistical
reports, processes Internet orders and prints forms and promotional materials.
Kable performs all of these services for many clients, but some clients utilize
only certain of them. Although by far the largest number of magazine titles for
which Kable performs fulfillment services are consumer publications, Kable also
performs services for a number of membership organizations, trade (business)
publications and government agencies that utilize the broad capabilities of
Kable's extensive database systems.
Kable's lettershop and graphics departments prepare and mail statements and
renewal forms for its publisher clients to use in their subscriber mailings.
List services clients are also primarily publishers for whom Kable maintains
client customer lists, selects names for clients who rent their lists, merges
rented lists with a client's lists to eliminate duplication for the client's
promotional mailings, and sorts and sequences mailing labels to provide optimum
postal discounts. Kable also provides membership services to both publisher and
non-publisher clients including donation processing and membership fulfillment,
in addition to more standard magazine fulfillment services that are also used by
membership clients. Product fulfillment services are provided for Kable's
publisher clients and other direct marketers. In this activity Kable receives,
warehouses, processes and ships merchandise.
Kable performs fulfillment services for approximately 920 different magazine
titles for approximately 280 clients and maintains databases of over 76 million
active subscribers for its client publishers. In a typical month, Kable produces
approximately 90 million mailing labels for its client publishers and also
processes over 29 million pieces of outgoing mail for these clients.
There are a number of companies that perform fulfillment services for publishers
and with which Kable competes, including one that is larger than Kable. Since
publishers often utilize only a single fulfillment company for a particular
publication, there is intense competition to obtain fulfillment contracts with
publishers. Competition for non-publisher clients is also intense. Kable has a
sales staff whose primary task is to solicit fulfillment business.
Newsstand Distribution Services
In its Newsstand Distribution Services operation, Kable distributes magazines
for approximately 240 publishers. Among the titles are many special interest
magazines, including various puzzle, automotive, comics, romance and sports. In
a typical month, Kable distributes approximately 57 million copies of various
titles to wholesalers. Kable coordinates the movement of the publications from
its publisher clients to approximately 100 independent wholesalers. The
wholesalers in turn sell the publications to major retail chains and independent
retail outlets. All parties generally have full return rights for unsold copies.
The newsstand distribution business accounted for 9% of Kable's revenues in
2008.
While Kable may not handle all publications of an individual publisher client,
it usually is the exclusive distributor into the consumer marketplace for the
publications it distributes. Kable has a distribution sales and marketing force
that works with wholesalers and retailers to promote magazine sales and assist
in determining the appropriate number of copies of an individual magazine to be
delivered to each wholesaler and ultimately each retailer serviced by that
wholesaler. Kable generally does not physically handle any product. Kable
generates and delivers to each publisher's printer shipping instructions with
the addresses of the wholesalers and the number of copies of product to be
shipped to each. All magazines have a defined "off sale" date following which
the retailers return unsold copies to the wholesalers, who destroy them after
accounting for returned merchandise in a manner satisfactory to and auditable by
Kable.
Kable generally makes substantial cash advances to publishers against future
sales that publishers may use to help pay for printing, paper and production
costs prior to the product going on sale. Kable is usually not paid by
wholesalers for product until some time after the product has gone on sale, and
is therefore exposed to potential credit risks with both publishers and
wholesalers. Kable's ability to limit its credit risk is dependent in part on
its skill in estimating the number of copies of an issue that should be
distributed and which will be sold, and on limiting its advances to the
publisher accordingly.
Kable competes primarily with three other national distributors. Each of these
competitors is owned by or affiliated with a magazine publishing company. Such
companies publish a substantial portion of all magazines sold in the United
States, and the competition for the distribution rights to the remaining
publications is intense. In addition, there has been a major consolidation and
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reduction in the number of wholesalers to whom Kable distributes magazines
arising from changes within the magazine distribution industry in recent years.
As a result, three of these wholesalers accounted for approximately 66% of the
fiscal 2008 gross billings of the Newsstand Distribution Services operations,
which is common for the industry, and approximately 42% of Kable's consolidated
accounts receivable were due from these wholesalers at April 30, 2008.
Item 1A. Risk Factors
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The risks described below are among those that could materially and adversely
affect the Company's business, financial condition or results of operations.
These risks could cause actual results to differ materially from historical
experience and from results predicted by any forward-looking statements related
to conditions or events that may occur in the future. These risks are not the
only risks the Company faces, and other risks include factors not presently
known as well as those that are currently considered to be less significant.
Risks Related to the Company's Real Estate Operations
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The Company's real estate assets are concentrated in one market, Rio Rancho, New
Mexico, meaning the Company's results of operations and future growth may be
limited or affected by economic changes in that market.
Substantially all of the Company's real estate assets are located in Rio Rancho,
which is adjacent to Albuquerque, New Mexico. As a result of this geographic
concentration, the Company could be affected by changes in economic conditions
in this region from time to time, including economic contraction due to, among
other things, the failure or downturn of key industries and employers. The
Company's results of operations, future growth or both may be adversely affected
if the demand for residential or commercial real estate declines in the Rio
Rancho area as a result of changes in economic conditions.
A downturn in the business of Rio Rancho's largest employer could adversely
affect the Company's real estate development business there.
Intel Corporation, the largest employer in Rio Rancho with approximately 3,300
full-time employees at April 30, 2008, operates a large semiconductor
manufacturing facility there and has announced its plan to retool this facility.
Intel Corporation had approximately 4,700 full-time employees as of April 30,
2007 and the reduction in force reflects a May 3, 2007 announcement that a
workforce reduction would occur at that facility beginning in August 2007. If
Intel Corporation's presence in Rio Rancho were to continue to diminish for any
reason, such as in response to a downturn in its semiconductor manufacturing
business, the Rio Rancho real estate market and consequently the Company's land
development business located there could be adversely affected.
As Rio Rancho's population continues to grow, the Company's land development
activities in that market may be subject to greater limitations than they have
been historically.
When the Company acquired its core real estate inventory in Rio Rancho over
40 years ago, the area was not developed and had a low population. As of April
30, 2008, Rio Rancho was the third largest city in New Mexico and had a
population of approximately 75,000. As Rio Rancho's population continues to
grow, the Company may be unable to engage in development activities comparable
to those the Company has engaged in historically. Local community or political
groups may oppose the Company's development plans or require modification of
those plans, which could cause delays or increase the cost of the Company's
development projects. In addition, zoning density limitations, "slow growth"
provisions or other land use regulations implemented by state, city or local
governments could further restrict the Company's development activities or those
of its homebuilder customers, or could adversely affect financial returns from a
given project, which could adversely affect the Company's results of operations.
The Company's real estate assets are diminishing over time, meaning long-term
growth in the real estate business will require the acquisition of additional
real estate assets, possibly by expanding into new markets.
Substantially all of the Company's real estate revenues are derived from sales
of the Company's core inventory in Rio Rancho. This property was acquired more
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than 40 years ago, and each time the Company develops and sells real estate to
customers in Rio Rancho, the Company's real estate assets diminish. As of April
30, 2008, the Company owned approximately 17,240 acres in Rio Rancho out of an
original purchase of approximately 91,000 acres. The continuity and future
growth of the Company's real estate business will require that the Company
acquire new properties in or near Rio Rancho or expand to other markets to
provide sufficient assets to maintain the Company's current level of operations
and revenues. While the Company holds two properties in Colorado, it has not for
many years made any significant attempt to identify a development opportunity
similar to the one the Company has undertaken in Rio Rancho, and there can be no
assurance that the Company will identify such an opportunity in another market.
If the Company does not acquire new real estate assets, its real estate holdings
will continue to diminish, which will adversely affect the Company's ability to
continue its real estate operations at their current level.
The Company's remaining Rio Rancho real estate is not all in contiguous blocks,
which may adversely affect the Company's ability to sell lots at levels
comparable with the recent past.
Of the approximately 17,240 acres in Rio Rancho that the Company owned at
April 30, 2008, approximately 4,500 acres were in contiguous blocks that are
being developed or are suitable for development, and approximately 1,990 acres
were in areas with a high concentration of ownership, where the Company owns
more than 50% of the lots in the area, suitable for special assessment districts
or city redevelopment areas that may allow for future development under the
auspices of local government. The balance is in scattered lots, where the
Company owns less than 50% of the lots in the area, that may require the
purchase of a sufficient number of adjoining lots to create tracts suitable for
development or that the Company may attempt to sell individually or in small
groups. As the Company's land sales continue and the amount of the Company's
contiguous and highly concentrated lots diminishes, the Company's ability to
continue to sell lots and generate land sale revenues at the levels of the
recent past may be adversely affected, which would have an adverse effect on the
Company's results of operations.
The Company may not be able to acquire properties or develop them successfully.
If the Company is able to identify a development opportunity similar to the one
it has undertaken in Rio Rancho, the success of the Company's real estate
segment will still depend in large part upon its ability to acquire additional
properties on satisfactory terms and to develop them successfully. If the
Company is unable to do so, its results of operations could be adversely
affected.
The acquisition, ownership and development of real estate is subject to many
risks that may adversely affect the Company's results of operations, including
the risks that:
- the Company may not be able to acquire a desired property because of
competition from other real estate investors with greater capital than the
Company has;
- the Company may not be able to obtain financing on acceptable terms, or at
all;
- an adverse change in market conditions during the interval between
acquisition and sale of a property may result in a lower than originally
anticipated profit;
- the Company may underestimate the cost of development required to bring an
acquired property up to standards established for the market position
intended for that property;
- acquired properties may be located in new markets where the Company may
face risks associated with a lack of market knowledge or understanding of
the local economy, lack of business relationships in the area and
unfamiliarity with local governmental and permitting procedures; and
- the Company may be unable to quickly and efficiently integrate new
acquisitions, particularly acquisitions of portfolios of properties, into
its existing operations, and this could have an adverse effect on its
results of operations.
7
The Company's real estate development activities have been primarily limited to
a single market, and it may face substantially more experienced competition in
acquiring and developing real estate in new markets.
Since the Company's real estate acquisition and development activities have been
primarily limited to the Rio Rancho market, the Company does not have extensive
experience in acquiring real estate in other markets or engaging in development
activities in multiple markets simultaneously. Should the Company seek to
acquire additional real estate in new markets, competition from other potential
purchasers of real estate could adversely affect the Company's operations. Many
of these entities may have substantially greater experience than the Company has
in identifying, acquiring and developing real estate opportunities in other
markets and in managing real estate developments in multiple markets. These
entities may also have greater financial resources than the Company has and may
be able to pay more than the Company can or accept more risk than the Company is
willing to accept to acquire real estate. These entities also may be less
sensitive to risks with respect to the costs or the geographic concentration of
their investments. This competition may prevent the Company from acquiring the
real estate assets the Company seeks, or increase the cost of properties that
the Company does acquire. Competition may also reduce the number of suitable
investment opportunities available to the Company or may increase the bargaining
power of property owners seeking to sell.
The Company will likely compete for real estate investment opportunities with,
among others, insurance companies, pension and investment funds, partnerships,
real estate or housing developers, investment companies, real estate investment
trusts (REITs), and owner/occupants.
Properties that the Company acquires may have defects that are unknown to the
Company.
Although the Company generally performs due diligence on prospective properties
before they are acquired, and on a periodic basis after acquisition, any of the
properties the Company may acquire may have characteristics or deficiencies
unknown to the Company that could adversely affect the property's value or
revenue potential or, in the case of environmental or other factors, impose
liability on the Company, which could be significant.
The Company is subject to substantial legal, regulatory and other requirements
regarding the development of land and requires government approvals, which may
be denied, and thus the Company may encounter difficulties in obtaining
entitlements on a timely basis, which could limit its ability to sell land at
levels comparable with the recent past.
There are many legal, regulatory and other requirements regarding the
development of land, which may delay the start of planned development
activities, increase the Company's expenses or limit the Company's customers'
development activities. Development activities performed in connection with real
estate sales include obtaining necessary governmental approvals, acquiring
access to water supplies, installing utilities and necessary storm drains and
building or improving roads. Numerous local, state and federal statutes,
ordinances and rules and regulations, including those concerning zoning,
resource protection and environmental laws, regulate these tasks. These
regulations often provide broad discretion to the governmental authorities that
regulate these matters and from whom the Company must obtain necessary
approvals. The approval process can be lengthy and delays can increase the
Company's costs, as well as the costs for the primary customers of the Company's
real estate business (residential and commercial developers). Failure to obtain
necessary approvals could significantly adversely affect the Company's real
estate development activities and its results of operations.
Increases in taxes or governmental fees would increase the Company's costs.
Also, adverse changes in tax laws could reduce customer demand for land for
commercial and residential development.
Increases in real estate taxes and other local governmental fees, such as fees
imposed on developers to fund schools, open space and road improvements or to
provide low and moderate income housing, would increase the Company's costs and
have an adverse effect on the Company's operations. In addition, increases in
local real estate taxes or changes in income tax laws that would reduce or
eliminate tax deductions or incentives could adversely affect homebuilders'
potential customer demand and could adversely affect future land sales by the
Company to those homebuilders.
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Unless the City of Rio Rancho supplements its current water supply, development
of the Company's remaining Rio Rancho land may be adversely affected.
All of the Company's future Rio Rancho land development will require water
service from the City of Rio Rancho or from another source. While the city has
not denied any development in the past due to a shortage of water supply, it has
recently expressed concerns that its current water supply cannot support growth
indefinitely. Although the city is currently pursuing various methods to
supplement its water supply, if it is unsuccessful, development of the Company's
remaining Rio Rancho land could be adversely affected.
The Company may be subject to environmental liability.
Various laws and regulations impose liability on real property owners and
operators for the costs of investigating, cleaning up and removing contamination
caused by hazardous or toxic substances at the property. In the Company's role
as a property owner or developer, the Company could be held liable for such
costs. This liability may be imposed without regard to the legality of the
original actions and without regard to whether the Company knew of, or was
responsible for, the presence of the hazardous or toxic substances. If the
Company fails to disclose environmental issues, it could also be liable to a
buyer or lessee of the property. In addition, some environmental laws create a
lien on the contaminated site in favor of the government for damages and costs
incurred in connection with the contamination. If the Company incurs any such
liability that is material, its results of operations would be adversely
affected.
Real estate is a cyclical industry, and the Company's results of operations
could be adversely affected during cyclical downturns in the industry.
During periods of economic expansion, the real estate industry typically
benefits from an increased demand for developable land. In contrast, during
periods of economic contraction, the real estate industry is typically adversely
affected by a decline in demand. For example, beginning in early 2007 increased
defaults under sub-prime mortgages led to significant losses for the companies
offering such mortgages and contributed to a severe downturn in the residential
housing market that is continuing. Further, real estate development projects
typically begin, and financial and other resources are committed, long before
the real estate project comes to market, which could be during a time when the
real estate market is depressed. There can be no assurance that an increase in
demand or an economic expansion will be sustained in the Rio Rancho market,
where the Company's core real estate business is based and operates, or in any
other new market into which the Company expands its real estate operations. Any
of the following (among other factors, including those mentioned elsewhere in
this report) could cause a general decline in the demand for residential or
commercial real estate which, in turn, could contribute to a severe downturn in
the real estate development industry that could have an adverse effect on the
Company's results of operations:
- changes in government regulation;
- periods of general economic slowdown or recession;
- rising interest rates and a decline in the general availability or
affordability of mortgage financing;
- adverse changes in local or regional economic conditions;
- shifts in population away from the markets that the Company serves;
- tax law changes, including potential limits on, or elimination of, the
deductibility of certain mortgage interest expense, real property taxes and
employee relocation expenses; and
- acts of God, including hurricanes, earthquakes and other natural disasters.
Changing market conditions may adversely affect companies in the real estate
industry, which rely upon credit in order to finance their purchases of land
from the Company.
Changes in interest rates and other economic factors can dramatically affect the
availability of capital for the Company's developer customers. Residential and
commercial developers to whom the Company frequently sells land typically rely
upon third party financing to provide the capital necessary for their
acquisition of land. Changes in economic and other external market conditions
9
may result in a developer's inability to obtain suitable financing, which could
adversely impact the Company's ability to sell land, or force the Company to
sell land at lower prices, which would adversely affect its results of
operations.
Changes in general economic, real estate development or other business
conditions could adversely affect the Company's business and its financial
results.
A significant percentage of the Company's real estate revenues are derived from
customers in the residential homebuilding business, which is particularly
sensitive to changes in economic conditions and factors such as the level of
employment, consumer confidence, consumer income, availability of mortgage
financing and interest rates. Adverse changes in any of these conditions could
decrease demand for homes generally and therefore affect the pricing of homes
and in turn the price of land sold to developers, which could adversely affect
the Company's results of operations.
A number of contracts for individual Rio Rancho home site sales made prior to
1977 require the Company to exchange land in an area that is serviced by
utilities for land in areas where utilities are not installed.
In connection with certain individual Rio Rancho home site sales made prior to
1977, if water, electric and telephone utilities have not reached the lot site
when a purchaser is ready to build a home, the Company is obligated to exchange
a lot in an area then serviced by such utilities for the lot of the purchaser,
without cost to the purchaser. Although this has not been the case in the past,
if the Company were to experience a large number of requests for such exchanges
in the future, the Company's results of operations could be adversely impacted.
If subcontractors are not available to assist in completing the Company's land
development projects, the Company may not be able to complete those projects on
a timely basis.
The development of land on a timely basis is critical to the Company's ability
to complete development projects in accordance with the Company's contractual
obligations. The availability of subcontractors in the markets in which the
Company operates can be affected by factors beyond the Company's control,
including the general demand for these subcontractors by other developers. If
subcontractors are not available when the Company requires their services, the
Company may experience delays or be forced to seek alternative suppliers, which
may increase costs or adversely affect the Company's ability to sell land on a
timely basis.
Land investments are generally illiquid, and the Company may not be able to sell
the Company's properties when it is economically or otherwise important to do
so.
Land investments generally cannot be sold quickly, and the Company's ability to
sell properties may be affected by market conditions. The Company may not be
able to diversify or vary its portfolio promptly in accordance with its
strategies or in response to economic or other conditions. The Company's ability
to pay down debt, reduce interest costs and acquire properties is dependent upon
its ability to sell the properties it has selected for disposition at the prices
and within the deadlines the Company has established for each property.
Risks Related to the Company's Media Service Operations
-------------------------------------------------------
The Company's media services operations could face increased costs and business
disruption from instability in the newsstand distribution channel.
The Company extends credit to various newsstand distribution services customers,
whose credit worthiness and financial position may be affected by changes in
economic or other external conditions. Financial instruments that may
potentially subject the Company to a significant concentration of risk primarily
consist of trade accounts receivable from wholesalers in the magazine
distribution industry. Due to industry consolidation, four major wholesaler
groups represent over 80% of the wholesale magazine distribution business, and
the insolvency of any of them could have a material adverse impact on the
Company's results of operations and financial condition. In addition, due to the
significant concentration, should there be a disruption in the wholesale
channel, it could impede the Company's ability to distribute magazines to the
retail marketplace.
10
Almost all of the Company's revenues in the Company's newsstand distribution
services business are derived from sales made on a fully returnable basis, and
an error in estimating expected returns could cause a misstatement of revenues
for the period affected.
As is customary in the magazine distribution industry, almost all of the
Company's revenues in its newsstand distribution services business segment are
derived from sales made on a fully returnable basis, meaning that customers may
return unsold copies of magazines for credit. During the Company's fiscal year
ended April 30, 2008, customers ultimately returned for credit approximately 68%
of the magazines initially distributed by the Company. The Company recognizes
revenues from the distribution of magazines at the time of delivery to the
wholesalers, less a reserve for estimated returns that is based on historical
experience and recent sales data on an issue-by-issue basis. Although the
Company has the contractual right to return these magazines for offsetting
credits from the publishers from whom the magazines are purchased, an error in
estimating the percentage of returns at the end of an accounting period could
have the effect of understating or overstating revenues in the period affected,
which misstatement would have to be adjusted in the subsequent period when the
actual return information became known.
The introduction and increased popularity of alternative technologies for the
distribution of news, entertainment and other information and the resulting
shift in consumer habits and advertising expenditures from print to other media
could adversely affect the Company's media services business segments.
Revenues in the Company's media services business segments are principally
derived from services the Company performs for traditional publishers.
Historically, a reduction in the demand for the Company's newsstand distribution
services due to lower sales of magazines at newsstands has often been at least
partially offset by an increase in demand for the Company's fulfillment services
as consumers affected by the reduction in newsstand distribution instead sought
publications through subscription. However, the distribution of news,
entertainment and other information via the Internet has become increasingly
popular, and consumers increasingly rely on personal computers, cellular phones
or other electronic devices for such information. The resulting shift of
advertising dollars from traditional print media to online media could adversely
affect the publishing industry in general and have a negative impact on both the
Company's fulfillment and newsstand distribution segments due to the shift in
consumer demand away from print media and toward digital downloading and other
delivery methods.
The Company's publisher customers face increased costs for paper, printing and
postal rates. This could have a negative affect on their operating income, and
this in turn could negatively affect the Company's media services operations.
The Company's publisher customers' principal raw material is paper. Paper and
printing prices have fluctuated over the past several years, and significant
unanticipated increases in paper prices could adversely affect a publisher
customer's operating income. Postage for magazine distribution and direct
solicitation is another significant operating expense of the Company's publisher
customers, which primarily use the U.S. Postal Service to distribute their
products. The U.S. Postal Service implemented a postal rate increase effective
May 12, 2008. Any significant increases in paper costs, printing costs or postal
rates that publishers are not able to offset could have a negative affect on
their operating income, and this in turn could negatively affect the Company's
media services operations.
Competitive pressures may result in a decrease in the Company's revenues and
profitability.
The fulfillment and newsstand distribution services businesses are highly
competitive, and some of the Company's competitors have financial resources that
are substantially greater than the Company's. The Company experiences
significant price competition in the markets in which it competes. Competition
in the Company's media services businesses may come not only from other service
providers, but also from the Company's customers, who may choose to develop
their own internal fulfillment or distribution operations, thereby reducing
demand for the Company's services. Competitive pressures could cause the
Company's media services businesses to lose market share or result in
significant price erosion that could have an adverse effect on the Company's
results of operations.
11
The Company's operating results depend in part on successful research,
development and marketing of new or improved services and data processing
capabilities and could suffer if the Company is not able to continue to
successfully implement new technologies.
The Company operates in highly competitive markets that are subject to rapid
change, and must therefore continue to invest in developing technologies and to
improve various existing systems in order to remain competitive. There are
substantial uncertainties associated with the Company's efforts to develop new
technologies and services for the magazine fulfillment and distribution markets
the Company serves. The Company makes significant investments in new information
processing technologies and services that may or may not prove to be profitable.
Even if these developments are profitable, the operating margins resulting from
their application would not necessarily result in an improvement over the
Company's historical margins.
The Company may not be able to successfully introduce new services and data
processing capabilities on a timely and cost-effective basis.
The success of new and improved services depends on their initial and continued
acceptance by the publishers and other customers with whom the Company conducts
business. The Company's media services businesses are affected, to varying
degrees, by technological change and shifts in customer demand. These changes
result in the transition of services provided and increase the importance of
being "first to market" with new services and information processing
innovations. Difficulties or delays in the development, production or marketing
of new services and information processing capabilities may be experienced, and
may adversely affect the Company's results of operations. These difficulties and
delays could also prevent the Company from realizing a reasonable return on the
investment required to bring new services and information processing
capabilities to market on a timely and cost effective basis.
The Company's operations could be disrupted if its information systems fail,
causing increased expenses and loss of sales.
The Company's business depends on the efficient and uninterrupted operation of
its systems and communications capabilities, including the maintenance of
customer databases for billing and label processing, and the Company's magazine
distribution order regulation system. If a key system were to fail or experience
unscheduled downtime for any reason, even if only for a short period, the
Company's operations and financial results could be adversely affected. The
Company's systems could be damaged or interrupted by a security breach, fire,
flood, power loss, telecommunications failure or similar events. The Company has
a formal disaster recovery plan in place, but this plan may not entirely prevent
delays or other complications that could arise from an information systems
failure. The Company's business interruption insurance may not adequately
compensate the Company for losses that may occur.
The Company depends on the Internet to deliver some services, which may expose
the Company to various risks.
Many of the Company's operations and services, including order taking on behalf
of customers and communications with customers and suppliers, involve the use of
the Internet. The Company is therefore subject to factors that adversely affect
Internet usage, including the reliability of Internet service providers that,
from time to time, have operational problems and experience service outages.
Additionally, as the Company continues to increase the services it provides
using the Internet, the Company is increasingly subject to risks related to the
secure transmission of confidential information over public networks. Failure to
prevent security breaches of the Company's networks or those of its customers,
or a security breach affecting the Internet in general could adversely affect
the Company's results of operations.
The Company is subject to extensive rules and regulations of credit card
associations.
The Company processes a large number of credit card transactions on behalf of
its fulfillment services customers and is thus subject to the extensive rules
and regulations of the leading credit card associations. The card associations
modify their rules and regulations from time to time and the Company's inability
to anticipate changes in rules, regulations or the interpretation or application
thereof may result in substantial disruption to its business. In the event that
the card associations or the sponsoring banks determine that the manner in which
the Company processes certain card transactions is not in compliance with
existing rules and regulations, or if the card associations adopt new rules or
regulations that prohibit or restrict the manner in which the Company processes
12
card transactions, the Company may be forced to modify the manner in which it
operates, which may increase costs, or cease processing certain types of
transactions altogether, either of which could have a negative impact on its
business. As an example of the card associations amending their regulations,
Kable is now required to comply with the Payment Card Industry (PCI) Data
Security Standard. The Company continues to implement its plans at its
fulfillment services locations where credit card transactions are processed in
order to meet the compliance requirements of the PCI Data Security Standard. The
Company may be subject to substantial penalties and fines if it is determined
that its plans or performance do not meet the compliance requirements of the PCI
Data Security Standard.
A failure to successfully migrate customers at the Company's Colorado
fulfillment services location from an outsourced data processing system to an
internal system may burden the Company with continued additional costs.
During fiscal 2003, Kable acquired the Colorado-based fulfillment services
business of Electronic Data Systems Corporation ("EDS"). Since that time Kable
has outsourced to EDS a substantial portion of the data processing required to
service that business and during fiscal 2008 has migrated much of that activity
to its own systems. However, under the outsourcing contract, the full
outsourcing charge remains payable so long as any outsourcing services are
provided. The Company anticipates completing this migration process by September
2008. The migration process is technically complex, however, and the Company
continues to address issues that have delayed the complete migration. Should the
Company encounter unanticipated problems that will further delay the complete
migration, it may continue to be burdened with the outsourcing of this business.
If the Company cannot efficiently integrate the constituents of its fulfillment
business, it may not realize the expected benefits of the acquisition of Palm
Coast, and the resources and attention required for successful integration may
interrupt the existing fulfillment business.
In January 2007, the Company acquired Palm Coast, which is, like Kable, a
leading United States provider of fulfillment services to the magazine
publishing industry. An important objective of the Company is to integrate the
Company's two fulfillment businesses and thereby reduce costly duplications.
There is a significant degree of difficulty involved in this process. The
maintenance of ongoing operations of each business while integrating the
businesses will depend on the Company's ability to retain key officers and
personnel while it simultaneously proceeds to expand its operational and
financial systems. This increase in operating complexities may have a negative
near and long-term effect on the Company's anticipated benefits resulting from
the acquisition.
Other Business Risks
--------------------
The Company may be unable to obtain financing on acceptable terms, which could
preclude it from continuing operations at their current levels, or from making
future acquisitions.
The Company's operations depend on its ability to obtain financing for the
development of land in the real estate business, for working capital and capital
expenditure requirements in the media services business, and for making future
acquisitions. If the Company is not able to obtain suitable financing, its costs
could increase and its revenues could decrease, or the Company could be
precluded from continuing its operations at current or desired levels, or from
making future acquisitions. Increases in interest rates can make it more
difficult and expensive to obtain the funds needed to operate the Company's
businesses. The applicable interest rates on the revolving bank credit
facilities that the Company has in place fluctuate based on changes in
short-term interest rates. Increases in interest rates would increase the
Company's interest expense and adversely affect the Company's results of
operations and its ability to make acquisitions.
The Company may engage in future acquisitions and may encounter difficulties in
integrating the acquired businesses, and, therefore, may not realize the
anticipated benefits of the acquisitions in the time frames anticipated, or at
all.
From time to time, the Company may seek to grow through strategic acquisitions
intended to complement or expand one or more of its business segments, such as
the acquisition of Palm Coast in January 2007, or to enable the Company to enter
a new business. The success of these transactions will depend in part on the
Company's ability to integrate the systems and personnel acquired in these
13
transactions into its existing business without substantial costs, delays or
other operational or financial problems. The Company may encounter difficulties
in integrating acquisitions with the Company's operations or in separately
managing a new business. Furthermore, the Company may not realize the degree of
benefits that the Company anticipates when first entering into a transaction, or
the Company may realize benefits more slowly than it anticipates. Any of these
problems or delays could adversely affect the Company's results of operations.
The Company's current management and internal systems may not be adequate to
handle the Company's growth.
To manage the Company's future growth, the Company's management must continue to
improve operational and financial systems and to expand, train, retain and
manage the Company's employee base. As the Company continues to grow, it will
also likely need to recruit and retain additional qualified management
personnel, and its ability to do so will depend upon a number of factors,
including the Company's results of operations and prospects and the level of
competition then prevailing in the market for qualified personnel. At the same
time, the Company will likely be required to manage an increasing number of
relationships with various customers and other parties. If the Company's
management personnel, systems, procedures and controls are inadequate to support
its operations, expansion could be slowed or halted and the opportunity to gain
significant additional market share could be impaired or lost. Any inability on
the part of the Company's management to manage the Company's growth effectively
may adversely affect its results of operations.
The Company's business could be seriously harmed if the Company's accounting
controls and procedures are circumvented or otherwise fail to achieve their
intended purposes.
Although the Company evaluates its internal controls over financial reporting
and the Company's disclosure controls and procedures at the end of each quarter,
any system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of the
controls and procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on the Company's
results of operations.
In addition, there can be no assurance that the Company's internal control
systems and procedures, or the integration of its fulfillment businesses or any
other future acquisitions and their respective internal control systems and
procedures, will not result in or lead to a future material weakness in the
Company's internal controls, or that the Company or its independent registered
public accounting firm will not identify a material weakness in the Company's
internal controls in the future. If the Company's internal controls over
financial reporting are not considered adequate, the Company may experience a
loss of public confidence, which could have an adverse effect on the Company's
business and the price of the Company's common stock.
Further, deficiencies or weaknesses that are not yet identified by the Company
could emerge and the identification and correction of those deficiencies or
weaknesses could have an adverse effect on the Company's results of operations.
The Company's pension plan, which the Company froze in 2004, is currently
underfunded and may require additional cash contributions.
The Company's pension plan was underfunded on a generally accepted accounting
principles basis by approximately $2.0 million at April 30, 2008. The Company
froze the pension plan effective March 1, 2004 so that from that date there
would be no new participants in the plan and the existing participants' future
compensation would not affect their pension benefits. A key assumption
underlying the actuarial calculations upon which the Company's accounting and
reporting obligations for the pension plan are based is an assumed investment
rate of return of eight percent. If the pension plan assets do not realize the
expected rate of return, or if any other assumptions are incorrect or are
modified, the Company could be required to make contributions to the pension
plan until the plan is fully funded, which could limit the Company's financial
flexibility.
14
The Company's quarterly and annual operating results can fluctuate
significantly.
The Company has experienced, and is likely to continue to experience,
significant fluctuations in its quarterly and annual operating results, which
may adversely affect the Company's stock price. Future quarterly and annual
operating results may not align with past trends as a result of numerous
factors, including many factors that result from the unpredictability of the
nature and timing of real estate land sales, the variability in gross profit
margins and competitive pressures.
Changes in the Company's income tax estimates could affect profitability.
In preparing the Company's consolidated financial statements, significant
management judgment is required to estimate the Company's income taxes. The
Company's estimates are based on its interpretation of federal and state tax
laws and regulations. The Company estimates actual current tax due and assesses
temporary differences resulting from differing treatment of items for tax and
accounting purposes. The temporary differences result in deferred tax assets and
liabilities, which are included in the Company's consolidated balance sheet.
Adjustments may be required by a change in assessment of the Company's deferred
tax assets and liabilities, changes due to audit adjustments by federal and
state tax authorities, and changes in tax laws. To the extent adjustments are
required in any given period, the Company will include the adjustments in the
tax provision in its financial statements. These adjustments could have an
adverse effect on the Company's financial position, cash flows and results of
operations.
The price of the Company's common stock over the past two years has been
volatile. This volatility may make it difficult for shareholders to sell the
Company's common stock, and the sale of substantial amounts of the Company's
common stock could adversely affect the price of the Company's common stock.
The market price for the Company's common stock varied between a high of $149.99
and a low of $26.17 per share during the two years ended April 30, 2008. This
volatility may make it difficult for a shareholder to sell the Company's common
stock, and the sale of substantial amounts of the Company's common stock could
adversely affect the price of the common stock. The Company's stock price is
likely to continue to be volatile and subject to significant price fluctuations
in response to market and other factors, including the other factors discussed
in "Risk Factors," and:
- variations in the Company's quarterly and annual operating results, which
could be significant;
- material announcements by the Company or the Company's competitors;
- sales of a substantial number of shares of the Company's common stock; and
- adverse changes in general market conditions or economic trends.
In addition to the factors discussed above, the Company's common stock is
relatively thinly traded, which means that large transactions in the Company's
common stock may be difficult to conduct in a short time frame and may cause
significant fluctuations in the price of the Company's common stock. The average
daily trading volume in the Company's common stock on the New York Stock
Exchange over the ten-day trading period ending on April 30, 2008 was
approximately 58,400 shares per day. Further, there have been, from time to
time, significant "short" positions in the Company's common stock, consisting of
borrowed shares sold, or shares sold for future delivery, which may not have
been borrowed. The Company does not know whether any of these short positions
are covered by "long" positions owned by the short sellers. The short interest
in the Company's common stock, as reported by the New York Stock Exchange on May
30, 2008, was approximately 316,000 shares, or approximately 5.3% of the
Company's outstanding shares. Any attempt by the short sellers to liquidate
their positions over a short period of time could cause significant volatility
in the price of the Company's common stock.
In the past, following periods of volatility in the market price of their stock,
many companies have been the subject of securities class action litigation. If
the Company becomes involved in securities class action litigation in the
future, it could result in substantial costs and diversion of the Company's
management's attention and resources and could harm the Company's stock price,
business, prospects, results of operations and financial condition. In addition,
the broader stock market has experienced significant price and volume
15
fluctuations in recent years. This volatility has affected the market prices of
securities issued by many companies for reasons unrelated to their operating
performance and may adversely affect the price of the Company's common stock.
The Company has a principal shareholder whose interests may conflict with other
investors.
The Company has a principal shareholder, Nicholas G. Karabots, who, together
with certain of his affiliates, currently owns approximately 61% of the
Company's outstanding common stock. As a result, this principal shareholder
exercises significant influence over the Company's major decisions, including
through his ability to vote for the members of the Company's Board of Directors.
Because of this voting power, the principal shareholder could influence the
Company to make decisions that might run counter to the wishes of the Company's
other investors generally. In addition, publishing companies owned or controlled
by the Company's principal shareholder are also significant customers of the
Company's distribution business, as well as customers of its fulfillment
services business, and, as a result, the shareholder may have business interests
with respect to the Company that differ from or conflict with those of other
holders of the Company's common stock.
Although the Company has paid dividends in the preceding fiscal years, the
Company has no regular dividend policy and offers no assurance of any future
dividends. Any short-term return on an investment in the Company's stock will
depend on its market price.
The Company has paid special cash dividends on its common stock during the five
fiscal years 2004 through 2008 of $0.25, $0.40, $0.55, $0.85 and $1.00 per
share, and also paid an additional special cash dividend of $3.50 per share in
January 2006. The Board of Directors has stated that it may consider special
dividends from time-to-time in the future in light of conditions then existing,
including earnings, financial condition, cash position, and capital requirements
and other needs. Notwithstanding such statement and the status of such future
conditions, no assurance is given that there will be any such future dividends
declared or that future dividend declarations, if any, will be commensurate in
amount or frequency with past dividends.
The Company is currently a "controlled company" within the meaning of the New
York Stock Exchange rules. As a result, the Company is exempt from certain
corporate governance requirements and will not need to fully comply with those
requirements until one year after the Company is no longer a "controlled
company."
Because Nicholas G. Karabots and certain of his affiliates together currently
own more than 50% of the voting power of the Company's common stock, the Company
is considered a "controlled company" for the purposes of the rules and
regulations of the New York Stock Exchange. As such, the Company is permitted,
and has elected, to opt out of the New York Stock Exchange requirements that
would otherwise require its compensation and human resources committee to
consist entirely of independent directors. The Company has also opted not to
have a nominating/corporate governance committee as required by the New York
Stock Exchange for non-controlled companies. At such time, if any, as the
Company is no longer considered a "controlled company" for purposes of the rules
and regulations of the New York Stock Exchange, those rules and regulations
provide for a twelve month transition period during which the Company will not
need to fully comply with the otherwise applicable requirements. The Company
will not be required to have entirely independent compensation and human
resources and nominating/corporate governance committees until twelve months
following the date on which it ceases to be a controlled company, although the
Company will need to phase in independent members for each of these committees
starting on the date that it ceases to be a controlled company. While the
Company remains a controlled company and during any transition period following
the Company's ceasing to be a controlled company, shareholders may not have the
same protections afforded to shareholders of companies that are subject to all
of the New York Stock Exchange corporate governance requirements.
Oklahoma law and the Company's charter documents may impede or discourage a
takeover, which could cause the market price of the Company's common stock to
decline.
The Company is an Oklahoma corporation, and the anti-takeover provisions of
Oklahoma law impose various impediments to the ability of a third party to
acquire control of the Company, even if a change in control would be beneficial
to the Company's existing shareholders. The Company's amended certificate of
16
incorporation generally prohibits the Company from engaging in "business
combinations" with an "interested shareholder" unless the holders of at least
two-thirds of the Company's then outstanding common stock approve the
transaction.
In addition to this restriction, some other provisions of the Company's amended
certificate of incorporation and of its by-laws may discourage certain acts
involving a fundamental change of the Company. For example, the Company's
amended certificate of incorporation and its by-laws contain certain provisions
that:
- classify the Company's Board of Directors into three classes, each of which
serves for a term of three years, with one class being elected each year;
and
- prohibit shareholders from calling a special meeting of shareholders.
Because the Company's Board of Directors is classified and the Company's amended
certificate of incorporation and by-laws do not otherwise provide, Section 1027
of the Oklahoma General Corporation Act permits the removal of any member of the
board of directors only for cause. These provisions could impede a merger,
takeover or other business combination involving the Company or discourage a
potential acquirer from making a tender offer for the Company's common stock,
which, under certain circumstances, could reduce the market price of the
Company's common stock.
Item 1B. Unresolved Staff Comments
-------- -------------------------
Not applicable.
Item 2. Properties
------- ----------
The Company's executive offices are located in approximately 2,000 square feet
of leased space in an office building in Princeton, New Jersey. Real Estate
operations are based in approximately 5,400 square feet of leased space in an
office building in Rio Rancho, New Mexico. In addition, other real estate
inventory and investment properties are described in Item 1. Kable's executive
offices are based in New York City, and these offices together with the
production, administration, sales and other facilities for its Fulfillment
Services and Newsstand Distribution Services businesses are located in sixteen
owned or leased facilities which, in the aggregate, comprise approximately
800,000 square feet of space with the principal locations in Mt. Morris,
Illinois; Palm Coast, Florida; Louisville, Colorado and New York City. The
Company believes its facilities are adequate for its current requirements.
Item 3. Legal Proceedings
------- -----------------
A. A subsidiary of Kable was one of a number of defendants in a lawsuit in which
the plaintiff, a former wholesaler no longer in business, alleged that the
Company and other national magazine distributors and wholesalers engaged in
violations of the Robinson-Patman Act (which generally prohibits discriminatory
pricing) that caused it to go out of business. The plaintiff sought damages from
the Kable defendant of approximately $15.2 million; any damages awarded would be
trebled. In September 2005, the Court granted the motion for summary judgment of
the defendants, including Kable, and judgment in favor of the defendants,
including Kable, was entered. The plaintiff filed an appeal of the judgment and
on March 25, 2008 the appellate court denied the appeal. All time periods for
the plaintiff to seek further review of the summary judgment in favor of the
defendants have expired and plaintiff's case is over.
B. In June 2008 a lawsuit was brought against the Company's Kable News Company,
Inc. subsidiary by the owner of a warehouse building leased by the subsidiary
that was totally destroyed in a fire in December 2007. An employment agency that
provided the subsidiary with a temporary employee who is alleged to have had a
role in starting the fire is also named as a defendant. Plaintiff charges the
subsidiary with negligence and willful and wanton misconduct and seeks damages
in excess of $50,000. The Company's liability insurance provides coverage for
the negligence claim up to the policy limit, which may or may not be more than
the full amount of plaintiff's claimed damages, which is unknown at this time.
Additionally, the insurance carrier has indicated it intends to deny coverage of
the willful and wanton misconduct claim. The Company believes it has good
defenses to the charges and assertable claims against the other parties for
their conduct in the matter, and intends vigorously to defend the lawsuit.
However, the proceeding is in its very earliest stage and the Company is not in
a position to offer a prediction as to its outcome.
17
C. The Company and its subsidiaries are involved in various other claims and
legal actions arising in the normal course of business. While the ultimate
results of these matters cannot be predicted with certainty, management believes
that they will not have a material adverse effect on the Company's consolidated
financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2008.
Executive Officers of the Registrant
Set forth below is certain information concerning persons who are the current
executive officers of the Company.
Name Office Held / Principal Occupation for Past Five Years Age
---- ------------------------------------------------------ ---
James Wall Senior Vice President of the Company since 1991; 71
Chairman, President and Chief Executive Officer of
AMREP Southwest Inc. since 1991.
Peter M. Pizza Vice President and Chief Financial Officer of the 57
Company since 2001; Vice President and Controller
of the Company from 1997 to 2001.
Irving Needleman Vice President, General Counsel and Secretary of the 70
Company since November 2006; Of counsel to the law
firm of McElroy, Deutsch, Mulvaney & Carpenter, LLP
from September 2005 to October 2006. Partner in the
law firm of Jacobs Persinger & Parker for more than
four years prior to September 2005.
Michael P. Duloc President and Chief Executive Officer of Kable 51
Media Services since June 1, 2007; President of
Kable's Newsstand Distribution Services business
since 1996 and Chief Operating Officer of that business
until June 2007; President and Chief Operating Officer
of Kable's Fulfillment Services business from 2000 until
January 2007.
John Meneough Executive Vice President, Fulfillment Services of 60
Kable Media Services, Inc. and President and Chief
Operating Officer of the Company's Fulfillment Services
business since January 2007. President of Palm Coast
Data Holdco, Inc. and Palm Coast Data LLC since 2002
and President of their predecessor companies since 1996.
The executive officers are elected or appointed by the Board of Directors of the
Company or its appropriate subsidiary to serve until the appointment or election
and qualification of their successors or their earlier death, resignation or
removal.
18
PART II
-------
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
------- ------------------------------------------------------------------------
Issuer Purchases of Equity
--------------------------
The Company's common stock is traded on the New York Stock Exchange under the
symbol "AXR". On July 1, 2008, there were approximately 900 holders of record of
the common stock. The range of high and low sales prices for the last two fiscal
years by quarter is presented below:
FIRST SECOND THIRD FOURTH
------------------- ------------------- ---------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- --------- -------- --------- --------
2008 $ 69.31 $ 40.75 $ 41.54 $ 26.17 $ 46.34 $ 27.94 $ 58.25 $ 34.47
2007 $ 65.00 $ 34.55 $ 73.70 $ 35.84 $ 149.99 $ 57.14 $ 111.75 $ 59.00
Dividend Policy
The Company paid special cash dividends on its common stock of $1.00 and $0.85
per share during 2008 and 2007 following the end of the preceding fiscal years.
The Board of Directors has stated that it may consider special dividends from
time-to-time in the future in light of conditions then existing, including
earnings, financial condition, cash position, and capital requirements and other
needs. Notwithstanding such statement and the status of such future conditions,
no assurance is given that there will be any such future dividends declared or
that future dividend declarations, if any, will be commensurate in amount or
frequency with past dividends.
Performance Graph
The following graph compares the cumulative total shareholder return on the
Company's common stock with the cumulative total return of the Standard & Poor's
500 Index ("S&P 500 Index") and with an index comprised of the stock (or
comparable equity interest) of 27 companies with market capitalizations similar
to that of the Company ("Similar Cap Issuers"), for the five years ended April
30, 2008 (assuming the investment of $100 in the stock of the Company, the S&P
500 Index and the Similar Cap Issuers at the close of trading on April 30, 2003
and the reinvestment of all dividends). The Company cannot identify an index of
issuers engaged in operations similar to those in which it is currently engaged
and therefore has determined to use the Similar Cap Issuers for purposes of
comparison.
19
Company Name / Index 2003 2004 2005 2006 2007 2008
-----------------------------------------------------------------------------------------------------
AMREP CORP 100 187.86 269.27 599.07 789.75 703.81
S&P 500 INDEX 100 122.88 130.67 150.81 173.79 165.66
SIMILAR CAP ISSUERS 100 258.59 293.77 400.95 402.50 275.44
The Similar Cap Issuers are: Array Biopharma Inc., ATP Oil & Gas Corporation,
Avigen, Inc., Bar Harbor Bankshares, Blue Coat Systems, Inc., California Coastal
Communities, Inc., Capital Senior Living Corporation, Charles & Colvard, Ltd.,
ChipMOS Technologies (Bermuda) Ltd., Communications Systems, Inc., Consolidated
Water Co. Ltd., Dynamex Inc., Heska Corporation, Interleukin Genetics, Inc.,
Ladish Co., Inc., Landec Corporation, LCA-Vision Inc., Mesabi Trust, Network
Engines, Inc., Peoples Community Bancorp, Inc., Performance Technologies,
Incorporated, Pioneer Drilling Company, Poniard Pharmaceuticals, Inc., Sparton
Corporation, Tandy Brands Accessories, Inc., USA Mobility, Inc., Vist Financial
Corp.
As a result of changes in market capitalizations from year to year, none of the
companies comprising the Similar Cap Issuer index in the Company's 2007 Form
10-K met the criteria for inclusion in the Similar Cap Issuer index in this Form
10-K. The companies comprising the Similar Cap Issuer index in the Company's
2007 Form 10-K were: Alvarion Ltd., American Bank Incorporated, Auburn National
Bancorporation, Inc., Bioenvision, Inc., Continental Materials Corporation,
Criticare Systems, Inc., Empire Resorts, Inc., Fauquier Bankshares, Inc., Focus
Enhancements, Inc., Franklin Covey Co., Hi-Tech Pharmacal Co., Inc., Investors
Title Company, Loud Technologies Inc., Medtox Scientific, Inc., Misonix, Inc.,
Mocon, Inc., Novadel Pharma Inc., NTN Buzztime, Inc., Olympic Steel, Inc.,
Peerless Mfg. Co., Premier Financial Bancorp, Inc., RCM Technologies, Inc., Sun
Hydraulics Corporation, Tele Norte Cellular Holding Company, Telecommunication
Systems, Inc., Tutogen Medical, Inc., and XETA Technologies, Inc.
Equity Compensation Plan Information
See Item 12 of Part III of this annual report on Form 10-K that incorporates
such information by reference from the Company's Proxy Statement for its 2008
Annual Meeting of Shareholders.
20
Item 6. Selected Financial Data
------- -----------------------
The selected consolidated financial data presented below for, and as of the end
of, each of the last five fiscal years has been derived from and is qualified by
reference to the consolidated financial statements. The consolidated financial
statements have been audited by McGladrey & Pullen, LLP, independent registered
public accounting firm. The information should be read in conjunction with the
consolidated financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
is Item 7 of Part II of this annual report on Form 10-K. These historical
results are not necessarily indicative of the results to be expected in the
future.
Year Ended April 30,
-------------------------------------------------------------------------------
2008 2007 2006 2005 2004
-------------- --------------- --------------- --------------- -------------
(In thousands, except per share amounts)
Financial Summary:
Revenues $ 172,061 $ 204,839 $ 148,296 $ 134,506 $ 129,291
Income from Continuing
Operations $ 13,762 $ 46,697 $ 22,494 $ 15,588 $ 11,297
Income (loss) from
Discontinued Operations,
net of tax $ (57) $ (1,591) $ 3,556 $ (63) $ 380
Net Income $ 13,705 $ 45,106 $ 26,050 $ 15,525 $ 11,677
Total Assets $ 284,951 $ 292,659 $ 189,041 $ 194,309 $ 171,165
Capitalization:
Shareholders' Equity $ 145,056 $ 160,004 $ 118,970 $ 117,405 $ 105,522
Notes Payable $ 25,980 $ 32,299 $ 6,016 $ 12,054 $ 12,643
Per Share:
Earnings from Continuing
Operations $ 2.20 $ 7.02 $ 3.39 $ 2.36 $ 1.71
Income (loss) from
Discontinued Operations $ (0.01) $ (0.24) $ 0.54 $ (0.01) $ 0.06
Earnings Per Share-
Basic and Diluted $ 2.19 $ 6.78 $ 3.93 $ 2.35 $ 1.77
Book Value $ 24.20 $ 24.05 $ 17.91 $ 17.72 $ 15.97
Cash Dividends $ 1.00 $ 0.85 $ 4.05 $ 0.40 $ 0.25
Shares Outstanding 5,995 6,654 6,644 6,626 6,606
Item 7. Management's Discussion and Analysis of Financial Condition and Results
------- ------------------------------------------------------------------------
of Operations
-------------
INTRODUCTION
------------
For a description of the Company's business, refer to Item 1 of Part I of this
annual report on Form 10-K.
As indicated in Item 1, the Company is primarily engaged in three business
segments: the Real Estate business operated by AMREP Southwest and the
Fulfillment Services and Newsstand Distribution Services businesses operated by
Kable. Data concerning industry segments is set forth in Note 19 of the notes to
the consolidated financial statements. 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
consolidated financial statements and accompanying notes. All references in this
Item 7 to 2008, 2007 and 2006 mean the fiscal years ended April 30, 2008, 2007
and 2006.
21
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. The Company
discloses its significant accounting policies in the notes to its audited
consolidated financial statements.
The preparation of such financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
those financial statements as well as the reported amounts of revenues and
expenses during the reporting periods. Areas that require significant judgments
and estimates to be made include: (i) the determination of revenue recognition
for the Newsstand Distribution Services business, which is based on estimates of
allowances for magazine returns to the Company from wholesalers and the
offsetting return of magazines by the Company to publishers for credit; (ii)
allowances for doubtful accounts; (iii) real estate cost of sales calculations,
which are based on land development budgets and estimates of costs to complete;
(iv) the determination of revenue recognition under the percentage-of-completion
method for certain development contracts, which is determined based on the
percentage of total costs incurred to date in proportion to total estimated
costs to complete the project; (v) cash flow and valuation assumptions in
performing asset impairment tests of long-lived assets, goodwill impairment and
assets held for sale; (vi) actuarially determined benefit obligations for
pension plan accounting; and (vii) legal contingencies. Actual results could
differ from those estimates.
There are numerous critical assumptions that may influence accounting estimates
in these and other areas. Management bases its critical assumptions on
historical experience, third-party data and various other estimates that it
believes to be reasonable under the circumstances. The most critical assumptions
made in arriving at these accounting estimates include the following: (i)
Newsstand Distribution Services revenues represent commissions earned from the
distribution of publications for client publishers, which are recorded by the
Company at the time the publications go on sale in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right
of Return Exists". The publications generally are sold on a fully returnable
basis, which is in accordance with prevailing trade practice. Accordingly, the
Company provides for estimated returns by charges to income that are determined
on an issue-by-issue basis utilizing historical experience and current sales
information. The financial impact to the Company of a change in the sales
estimate for magazine returns to it from its wholesalers is substantially offset
by the simultaneous change in the Company's estimate of its cost of purchases
since it passes on the returns to publishers for credit. As a result, the effect
of a difference between the actual and estimated return rates on the Company's
commission revenues is the amount of the commission attributable to the
difference. The effect of an increase or decrease in the Company's estimated
rate of returns of 1% during any period would be dependent upon the mix of
magazines involved and the related selling prices and commission rates, but
would generally result in a change in that period's net commission revenues of
approximately $125,000; (ii) management determines the allowance for doubtful
accounts by attempting to identify troubled accounts by analyzing the credit
risk of specific customers and by using historical experience applied to the
aging of accounts and, where appropriate within the real estate business, by
reviewing any collateral which may secure a receivable; (iii) real estate
development costs are incurred throughout the life of a project, and the costs
of initial sales from a project frequently must include a portion of costs that
have been budgeted based on engineering estimates or other studies, but not yet
incurred; (iv) percentage-of-completion revenue recognition for certain
development contracts is based on the percentage of total costs incurred to date
in proportion to total estimated costs to complete the contract. Total estimated
costs, and thus contract income, are impacted by several factors including, but
not limited to, changes in the costs of subcontractors, materials and equipment,
productivity and scheduling; (v) asset impairment determinations (including that
of goodwill, which is based on the fair value of reporting units) are based upon
the intended use of assets and expected future cash flows; (vi) benefit
obligations and other pension plan accounting and disclosure is based upon
numerous assumptions and estimates, including the expected rate of investment
return on retirement plan assets, the discount rate used to determine the
present value of liabilities, and certain employee-related factors such as
turnover, retirement age and mortality. As of April 30, 2008, the effect of
every 0.25% change in the investment rate of return on retirement plan assets
would increase or decrease the pension expense by approximately $65,000 per
year, and the effect of every 0.25% change in the discount rate would increase
or decrease the subsequent year's pension cost of approximately $38,000; and
(vii) the Company is currently involved in legal proceedings which are described
in Item 3 of this annual report on Form 10-K. It is possible that the
consolidated financial position or results of operations for any particular
quarterly or annual period could be materially affected by an outcome of
litigation that is significantly different from the Company's assumptions.
22
Year Ended April 30, 2008 Compared to Year Ended April 30, 2007
---------------------------------------------------------------
Results of Operations
Net income in 2008 was $13,705,000, or $2.19 per share, compared to 2007 net
income of $45,106,000, or $6.78 per share. Results for 2008 consisted of net
income from continuing operations of $13,762,000, or $2.20 per share, and a net
loss from discontinued operations of $57,000, or $0.01 per share, compared to
the 2007 results which consisted of net income from continuing operations of
$46,697,000, or $7.02 per share, and a net loss from discontinued operations of
$1,591,000, or $0.24 per share. 2008 consolidated revenues were $172,061,000, a
decrease of $32,778,000 from 2007 consolidated revenues of $204,839,000. The
decrease in consolidated revenues was attributable to reduced land sales
revenues from the Company's Real Estate operations, offset in part by the
increased Fulfillment Services revenues from the inclusion of Palm Coast's
revenues for all of 2008 as compared with three and a half months in 2007. The
decrease in net income from continuing operations was principally due to the
reduced land sales.
The net loss from discontinued operations in 2008 was attributable to $57,000 of
costs incurred in connection with the settlement of all litigation related to
the Company's El Dorado, New Mexico water utility subsidiary that were in
addition to costs estimated and accrued for this matter in the fourth quarter of
2007 when in June 2007, the Company settled all existing litigation involving
this subsidiary. The 2007 amount accrued for the settlements, including legal
fees, was $1,591,000, net of tax, and was also accounted for as a discontinued
operation.
Revenues from real estate land sales at AMREP Southwest decreased $67,923,000
from $95,825,000 in 2007 to $27,902,000 in 2008. This substantial revenue
decrease was due to substantially lower land sales in the Company's principal
market of Rio Rancho, New Mexico, reflecting the severe decline that occurred in
this market in 2008 compared to 2007 and earlier years. As previously reported,
the number of permits for new home construction was down significantly for
calendar 2007 compared to 2006, with Rio Rancho showing a decrease of nearly
50%. The Company believes that this decline was generally consistent with the
well-publicized problems of the national home building industry, including fewer
sales of both new and existing homes, the increasing number of mortgage
delinquencies and foreclosures and a tightening of mortgage availability. Faced
with these adverse conditions, builders slowed the pace of building on land
previously purchased from the Company in Rio Rancho and, in some cases, delayed
or cancelled the purchase of additional land. These factors are also believed to
have contributed to a sharp decline in sales of undeveloped land to both
builders and investors. Revenues from sales of developed lots to homebuilders
decreased from $39,407,000 in 2007 to $9,542,000 in 2008, principally due to a
reduction in the number of lots sold. Revenues from sales of undeveloped builder
lots decreased from $40,690,000 in 2007 to $9,709,000 in 2008, principally due
to a reduction in the number of lots sold and, to a lesser extent, a lower
average price per lot due to a greater number of lots sold from locations in Rio
Rancho that are further removed from developed areas. Revenues from sales of
commercial and industrial properties decreased in 2008 to $8,651,000 from
$15,728,000 in 2007 as a result of fewer and smaller transactions. The average
gross profit percentage on land sales decreased from 68% in 2007 to 65% for
2008, and is principally attributable to lower selling prices for commercial and
undeveloped lots in the latter period.
The average selling price of land sold by the Company in Rio Rancho in recent
years has fluctuated, from $63,200 per acre in 2006 to $91,200 per acre in 2007
and $68,700 per acre in 2008, reflecting differences in the mix of the types of
properties sold in each period and the effects of a strong regional market in
2006 and 2007 in Rio Rancho and a much softer market in 2008. As a result of
these and other factors, including the nature and timing of specific
transactions, revenues and related gross profits from real estate land sales can
vary significantly from period to period and prior results are not necessarily a
good indication of what may occur in future periods.
Revenues from Kable's Fulfillment Services and Newsstand Distribution Services
businesses (collectively, "Media Services") increased $38,191,000 from
$100,505,000 in 2007 to $138,696,000 in 2008, principally attributable to the
January 16, 2007 acquisition of Palm Coast. Fulfillment Services revenues
increased by $39,659,000 from $86,121,000 in 2007 to $125,780,000 in 2008 due to
the contribution from Palm Coast. The increase in revenues from the Palm Coast
acquisition was partially offset by decreases in other parts of Kable's
Fulfillment Services business that resulted from continued competitive market
pressures and customer losses. Pricing pressure from customers also had a
negative effect on Fulfillment Services revenues. Newsstand Distribution
23
Services revenues decreased by $1,468,000 from $14,384,000 in 2007 to
$12,916,000 in 2008. The decrease in Newsstand Distribution Services revenues
was due to reduced billings and lower commission rates, as well as the inclusion
of certain revenues in the prior year that did not recur in 2008. Media Services
operating expenses increased by $34,759,000 in 2008 compared to 2007, primarily
attributable to the addition of operating expenses of Palm Coast, which were
offset in part by decreased payroll and benefit expenses resulting from lower
revenue in other parts of Kable's Fulfillment Services business.
Although there are multiple revenue streams in the Fulfillment Services
business, including revenues from the maintenance of customer computer files and
the performance of other fulfillment-related activities, including telephone
call center support and graphic arts and lettershop services, a customer
generally contracts for and utilizes all available services as a total package,
and the Company would not provide its ancillary services to a customer unless it
was also providing the core service of maintaining a database of subscriber
names. Thus, variations in Fulfillment Services revenues are the result of
fluctuations in the number and sizes of customers rather than in the demand for
a particular service. This is also true in the Newsstand Distribution Services
business where there is only one primary service provided, which results in one
revenue source, the commissions earned on the distribution of magazines. The
Company competes with other companies, including three much larger companies in
the Newsstand Distribution Services business and one larger company in the
Fulfillment Services business, and the competition for new customers is intense
in both segments, which results in a price sensitive industry that may restrict
the Company's ability to increase its prices.
During fiscal 2003, Kable acquired the Colorado-based fulfillment services
business of Electronic Data Systems Corporation ("EDS"). Since that time Kable
has outsourced to EDS a substantial portion of the data processing required to
service that business but during fiscal 2008 has migrated much of that activity
to its own systems. However, under the outsourcing contract, the full
outsourcing charge remains payable so long as any outsourcing services are
provided. The Company anticipates completing this migration process by September
2008. The migration process is technically complex, however, and the Company
continues to address issues that have delayed the complete migration. Should the
Company encounter unanticipated problems that will further delay the complete
migration, it may continue to be burdened with the outsourcing of this business.
The Company has announced a project to integrate certain other aspects of the
Kable and Palm Coast fulfillment operations in order to improve operating
efficiencies and customer service and also to reduce costs. To date, this
project has resulted in (i) one significant workforce reduction that occurred in
the first quarter of 2008, (ii) an announced plan in the second quarter of 2008
to redistribute the fulfillment services work performed at the Marion, Ohio
facility of its Fulfillment Services business and the scheduled closing of that
facility and (iii) the consolidation of the fulfillment operations customer call
center. Approximately $650,000 in severance-related costs is projected to be
paid in connection with the Ohio facility closure, which is being recorded as
positions are eliminated during the transitional period scheduled to end in
September 2008. As of April 30, 2008, severance-related costs charged to
operations totaled $486,000. Following the closure of the Ohio facility, the
Company anticipates realizing annual cost savings of approximately $5,300,000
from the three actions noted above. The Company incurred costs directly related
to the integration project of $1,159,000 in 2008, principally for severance and
other consulting costs related to the integration, and these costs are included
in the Restructuring and fire recovery costs in the Company's consolidated
statement of income.
On December 5, 2007 a warehouse of approximately 38,000 square feet leased by
the Company in Oregon, Illinois was totally destroyed by an accidental fire. The
warehouse was used principally to store back issues of magazines published by
certain customers for whom the Company fills back-issue orders as part of its
services. The Company has submitted preliminary claims to its insurance provider
for its property loss and for a business interruption claim consisting of its
lost revenues offset by reduced expenses through April 30, 2008. While the
Company has been advanced $500,000 for replacement of lost property, no
insurance proceeds have been received on the business interruption claim as of
April 30, 2008. In addition, the Company was required to provide insurance for
certain of those customers whose property was destroyed in the warehouse fire.
The Company does not believe that the net effect of the outcome of claims
related to materials of certain publishers for whom it was required to provide
insurance, together with any proceeds received from its property and business
interruption claims, will have any material effect on its financial position,
results of operations and cash flows. Due to the fire, gross assets were written
down by $470,000, along with related accumulated depreciation on those assets of
24
about $440,000, resulting in a charge to operations of approximately $30,000. In
addition, the Company has recorded other charges to operations of $324,000
related to fire recovery costs for the year ended April 30, 2008, principally
due to legal and other costs that are not covered by insurance and these costs
are included in the Restructuring and fire recovery costs in the Company's
consolidated statement of income.
Real estate commissions and selling expenses decreased $673,000 (48%) in 2008
compared to 2007 principally attributable to the reduced volume of land sales.
Other operating expenses decreased $536,000 (39%) in 2008 compared to 2007
principally due to a favorable adjustment of approximately $550,000 in the third
quarter of 2008 for real estate tax expense resulting from the finalization of a
property tax valuation appeal by AMREP Southwest. Media Services general and
administrative expenses increased $2,818,000 (31%) in 2008 compared to 2007 as
the addition of the Palm Coast expenses was only partially offset by lower costs
in other Fulfillment Services operations. Real estate operations and corporate
general and administrative expenses decreased $488,000 (10%) in 2008 compared to
2007 principally as a result of lower professional and consulting services
costs.
Interest and other revenues decreased by $3,046,000 in 2008 compared to 2007.
The decrease was partly attributable to lower cash balances to invest in 2008.
In addition, during 2008, the Company sold a commercial rental property at AMREP
Southwest that resulted in a pre-tax gain of $1,873,000, and it also recognized
pre-tax income of $927,000 from the forfeiture of deposits for the purchase of
land by homebuilders who did not exercise purchase options. During the first
quarter of 2007, the Company sold certain of AMREP Southwest's investment
assets, including the Company's office building in Rio Rancho, which in the
aggregate contributed a pre-tax gain of $4,107,000.
The Company's effective tax rate from continuing operations was 36.2% in 2008
compared to 33.9% in 2007. The decrease from the statutory rate in both years
was primarily due to tax benefits associated with charitable contributions of
land and tax exempt interest income.
Year Ended April 30, 2007 Compared to Year Ended April 30, 2006
----------------------------------------------------------------
Results of Operations
Net income in 2007 was $45,106,000, or $6.78 per share, compared to 2006 net
income of $26,050,000, or $3.93 per share. Results for 2007 consisted of net
income from continuing operations of $46,697,000, or $7.02 per share, and a net
loss from discontinued operations of $1,591,000, or $0.24 per share, compared to
the 2006 results which consisted of net income from continuing operations of
$22,494,000, or $3.39 per share, and net income from discontinued operations of
$3,556,000, or $0.54 per share. 2007 consolidated revenues were $204,839,000, an
increase of $56,543,000 over 2006 consolidated revenues of $148,296,000. The
increase in consolidated revenues was attributable to continued revenue growth
achieved by the Company's real estate operations, and, to a lesser extent, the
acquisition of Palm Coast by the Company's Kable Media Services, Inc.
subsidiary. The increase in net income from continuing operations was
attributable to higher gross profits associated with the increased real estate
land sales.
Net income from discontinued operations in 2006 reflected the gain from the
disposition of the primary assets of the Company's El Dorado, New Mexico water
utility subsidiary, which were taken through condemnation proceedings during
2006. In June 2007, the Company settled all existing litigation involving this
subsidiary and accrued for the estimated amount of the settlements, including
legal fees, of approximately $1,591,000, net of tax, which was accounted for as
a loss from discontinued operations in 2007.
Revenues from real estate land sales at AMREP Southwest increased $38,015,000
(66%) from $57,810,000 for 2006 to $95,825,000 in 2007. This substantial revenue
increase was due to higher average selling prices and increased sales of both
developed and undeveloped lots as well as commercial and industrial properties
in the Company's principal market of Rio Rancho, New Mexico. An increase in
revenues from additional sales in all categories of residential and commercial
lots in 2007 compared to 2006 resulted from the strength of the Rio Rancho
market, particularly in the first six months of the year. Revenues from sales of
developed lots to homebuilders increased from $31,920,000 in 2006 to $39,407,000
in 2007. Revenues from sales of undeveloped builder lots increased from
$19,514,000 in 2006 to $40,690,000, principally due to higher prices for
scattered builder lots, and revenues from sales of commercial and industrial
properties increased in 2007 to $15,728,000 from $6,376,000 in 2006 as a result
of an increased number of and size of transactions. The average gross profit
percentage on land sales increased from 54% in 2006 to 68% for 2007, reflecting
higher average selling prices in 2007 and the mix of developed and undeveloped
residential lots sold in each of the periods.
25
The average selling price of land sold by the Company in Rio Rancho increased
from $63,200 per acre in 2006 to $91,200 per acre in 2007. This increase was due
to a number of factors, including differences in the mix of the types of
properties sold in each period and the effects of a strong regional market which
resulted in three consecutive years of a record number of single-family
residential housing starts in Rio Rancho, reaching a total in excess of 3,000
starts during the twelve months ending April 30, 2006. The real estate market in
Rio Rancho softened during 2007, however, and there was a 55% decline in the
number of housing starts in fiscal 2007 compared to fiscal 2006. In addition, in
May 2007 Rio Rancho's largest employer, Intel Corporation, announced a workforce
reduction starting in August 2007 of at least 1,000 jobs in Rio Rancho, which
could reduce the demand for the Company's land inventory. As a result of these
and other factors, including the nature and timing of specific transactions,
revenues and related gross profits from real estate land sales can vary
significantly from period to period and prior results are not necessarily a good
indication of what may occur in future periods.
Revenues from Kable's Fulfillment Services and Newsstand Distribution Services
businesses (collectively, "Media Services") increased $12,042,000 from
$88,463,000 in 2006 to $100,505,000 in 2007. This increase in revenues was
primarily attributable to the January 16, 2007 acquisition of Palm Coast.
Newsstand Distribution Services revenues increased by $1,253,000 from
$13,131,000 in 2006 to $14,384,000 in 2007, principally due to a 6% increase in
revenues from new business. Fulfillment Services revenues increased by
$10,789,000 from $75,332,000 in 2006 to $86,121,000 in 2007 due to the addition
of Palm Coast. The increase in revenues from the Palm Coast acquisition was
partially offset by decreases in core and ancillary services of customer
telephone, lettershop and list services of other parts of Kable's Fulfillment
Services business. The revenue decreases in core and ancillary services resulted
from continued competitive market pressures and customer losses. Pricing
pressure from customers due to the competitive environment for Fulfillment
Services business also had a negative effect on Fulfillment Services revenues
and profitability in the fourth quarter of 2007. Media Services operating
expenses increased by $11,306,000 in 2007 compared to 2006, primarily
attributable to (i) the addition of operating expenses of Palm Coast and (ii) an
increase in Newsstand Distribution Services operating expenses, principally
payroll, associated with the revenue growth of that business, offset in part by
decreased payroll and benefit expenses in other parts of Kable's Fulfillment
Services businesses. Media Services general and administrative expenses
increased $1,549,000 in 2007 compared to 2006 as the addition of Palm Coast was
only partially offset by lower costs in other Fulfillment Services businesses.
Real estate commissions and selling expenses remained generally unchanged in
2007 compared to 2006 despite the increase in land sales, primarily due to
decreases in variable commissions and selling expenses. Such costs generally
vary depending upon the terms of specific land sale transactions. Real estate
and corporate general and administrative expenses increased $728,000 (17%) in
2007 compared to the prior year due to increased legal, real estate consulting
and other consulting fees associated with Sarbanes-Oxley Act requirements.
Interest and other revenues increased by $6,486,000 in 2007 compared to the
prior year, primarily as a result of increased interest income on invested cash
balances as well as from the first quarter sale of certain real estate
investment assets, including the Company's office building in Rio Rancho, New
Mexico, which in the aggregate contributed a pre-tax gain of $4,107,000.
The Company's effective tax rate from continuing operations was 33.9% in 2007
compared to 31.3% in 2006. The decrease from the statutory rate in both years
was primarily due to tax benefits associated with charitable contributions of
land.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company finances its operations from internally generated funds from real
estate sales and magazine operations and from borrowings under its various loan
agreements.
Cash Flows From Financing Activities
------------------------------------
In January 2007, AMREP Southwest entered into a loan agreement that replaced a
prior loan agreement entered into in September 2006. The new loan agreement
added a $14,180,000 term loan facility to the unsecured $25,000,000 revolving
credit facility provided in the September 2006 agreement and was originally
scheduled to mature in September 2008. During September 2007, the maturity date
of the revolving credit facility was extended to September 2009, with all other
terms remaining unchanged.
26
The revolving credit facility is used to support real estate development in New
Mexico. Borrowings bear annual interest at the borrower's option at (i) the
prime rate (5.0% at April 30, 2008) less 1.00%, or (ii) the 30-day LIBOR rate
(2.80% at April 30, 2008) plus 1.65% for borrowings of less than $10,000,000, or
plus 1.50% for borrowings of $10,000,000 or more. At April 30, 2008, the
outstanding balance of the revolving credit facility was $18,000,000 with a
weighted average interest rate of 4.38%. The term loan facility bears annual
interest on borrowings at the 30-day LIBOR rate plus 1.75%, matures December 15,
2008 and is secured by certain of the borrower's notes receivable from real
estate sales. The term loan requires prepayment in an amount equal to
collections on the notes receivable held as collateral and the amount of any
that have experienced payment defaults. At April 30, 2008, the outstanding
balance of the term loan was $2,774,000. The loan agreement contains a number of
restrictive covenants, including one that requires the borrower to maintain a
minimum tangible net worth, and AMREP Southwest was in compliance with these
covenants at April 30, 2008.
In connection with the completion of the acquisition of Palm Coast in January
2007, Kable and certain of its direct and indirect subsidiaries entered into a
Second Amended and Restated Loan and Security Agreement with a bank (the "Credit
Agreement"). During January 2008, Kable entered into a First Modification to the
Credit Agreement ("First Modification"). The First Modification modified the
Credit Agreement by, among other things, (a) increasing the amount that may be
borrowed for capital expenditures, (b) allowing the borrowers the right to
re-borrow the amounts of capital expenditure loans that have been repaid, (c)
modifying the interest rate options the borrowers may select and (d) adding
Kable Products Services, Inc., a recently organized member of the Kable Media
Services group, as a borrower.
The credit facilities available to Kable with the execution of the First
Modification consist of: (i) a revolving credit loan and letter of credit
facility in an aggregate principal amount of up to $35,000,000 ("Facility A");
(ii) a secured term loan of approximately $3,000,000 that combined a number of
separate borrowings for capital expenditures under the Credit Agreement
("Facility B"); (iii) a capital expenditure line of credit in an amount of up to
$4,500,000 to finance new equipment ("Facility C"); and (iv) a second revolving
credit loan facility of $10,000,000 ("Facility D") that may be used exclusively
for the payment of accounts payable under a distribution agreement with a
customer of Kable's Distribution Services business. The borrowers' obligations
under the First Modification continue to be secured by substantially all of
their assets other than (i) real property and (ii) any borrower's interest in
the capital securities of any other borrower or any subsidiary of any borrower.
The Facility A, C and D loans mature in May 2010 and bear annual interest at
fluctuating rates that, at the borrowers' option, may be either (i) reserve
adjusted LIBOR rates (2.66% at April 30, 2008) plus a margin established
quarterly from 1.5% to 2.5% dependent on the borrowers' funded debt to EBITDA
ratio, as defined in the Credit Agreement, or (ii) the Lender's prime rate
(5.00% at April 30, 2008). As of April 30, 2008, there was no outstanding
balance under Facilities A or D and the outstanding balance for Facility C was
$2,895,000. The Facility B loan matures December 2009 and bears annual interest
at a rate of 6.4% and had an outstanding balance of $1,687,000 at April 30,
2008.
The Credit Agreement requires the borrowers to maintain certain financial ratios
and contains customary covenants and restrictions, the most significant of which
limit the ability of the borrowers to declare or pay dividends or make other
distributions to the Company unless certain conditions are satisfied, and that
limit the annual amount of indebtedness the borrowers may incur for capital
expenditures and other purposes. The borrowers were in compliance with these
covenants at April 30, 2008.
Other notes payable consist of equipment financing loans with a weighted average
interest rate of 5.71% at April 30, 2008.
Consolidated notes payable outstanding at April 30, 2008 was $25,980,000
compared to $32,299,000 at April 30, 2007.
Cash Flows From Operating Activities
------------------------------------
Real estate inventory amounted to $70,252,000 at April 30, 2008 compared to
$46,584,000 at April 30, 2007. Inventory in the Company's core real estate
market of Rio Rancho increased from $39,770,000 at April 30, 2007 to $63,215,000
at April 30, 2008 primarily reflecting the net effect of development spending
27
and land sales. The increase in inventory is primarily the result of the
start-up costs of development in several new project sites in Rio Rancho where
the Company is required to perform initial development work prior to the ability
to sell land. In addition, the Company reclassified approximately $3,900,000 to
real estate inventory from receivables during the quarter ended January 31, 2008
resulting from the receipt of a deed in lieu of foreclosure related to a
delinquent mortgage receivable. The balance of inventory principally consisted
of properties in Colorado in both years.
Receivables from real estate operations decreased from $25,117,000 at April 30,
2007 to $13,124,000 at April 30, 2008, principally resulting from the net effect
of payments received on mortgage notes and the reclassification of approximately
$3,900,000 to real estate inventory from receivables discussed above offset in
part by mortgage notes received by AMREP Southwest in connection with real
estate sales that closed during 2008 .
Intangible and other assets decreased from $34,014,000 at April 30, 2007 to
$29,913,000 at April 30, 2008, primarily reflecting normal amortization of these
assets. Property, plant and equipment decreased from $30,518,000 at April 30,
2007 to $28,914,000 at April 30, 2008.
Accounts payable and accrued expenses increased from $83,557,000 at April 30,
2007 to $98,533,000 at April 30, 2008, primarily as a result of an increase in
the amounts due publishers.
The unfunded pension liability of the Company's defined benefit retirement plan
increased from $1,243,000 at April 30, 2007 to $2,045,000 at April 30, 2008,
principally due to a decrease in the fair market value of the plan assets during
the year resulting from a combination of net realized and unrealized losses from
investment assets. The Company recorded comprehensive income (loss) of
($660,000) in 2008 and $1,210,000 in 2007, reflecting the change in the unfunded
pension liability in each year net of the related deferred tax and unrecognized
prepaid pension amounts.
Cash Flows From Investing Activities
------------------------------------
Capital expenditures for property, plant and equipment amounted to approximately
$5,169,000 and $1,797,000 in 2008 and 2007 and consisted principally of
expenditures for computer hardware and software for Kable's Fulfillment Services
segment. In addition, capital expenditures for investment assets were $1,208,000
in 2008 and $2,870,000 in 2007 for the purchase of additional scattered lots in
Rio Rancho in order to increase the Company's ownership in certain areas. The
Company believes that it has adequate financing capability to provide for
anticipated capital expenditures.
During January 2007, the Company, through a newly-created subsidiary of Kable,
acquired Palm Coast for approximately $95,400,000. The acquisition was financed
with existing cash and borrowings.
Future Payments Under Contractual Obligations
---------------------------------------------
The table below summarizes significant contractual cash obligations as of April
30, 2008 for the items indicated (in thousands):
Contractual Less than 1-3 3-5 More than
Obligations Total 1 year years years 5 years
----------- ----------- ------------ ----------- ------------ -------------
Notes payable $ 25,980 $ 4,815 $ 20,548 $ 617 $ -
Operating leases and other 30,536 7,925 11,719 6,434 4,458
----------- ------------ ----------- ------------ -------------
Total $ 56,516 $ 12,740 $ 32,267 $ 7,051 $ 4,458
=========== ============ =========== ============ =============
Operating leases and other includes $2,793,000 of unrecognized tax benefits and
related interest accrued in accordance with FIN 48. Refer to Notes 9, 16 and 17
to the consolidated financial statements included in this 2008 Form 10-K for
additional information on long-term debt and commitments and contingencies.
Discretionary Stock Repurchase Program
--------------------------------------
The Company announced on October 8, 2007 that its Board of Directors had
authorized the repurchase of up to 500,000 shares of the Company's common stock,
which was in addition to the previously announced 500,000 share repurchase
program that was completed in early October 2007. The purchases may be made from
time-to-time either in the open market or through negotiated private
28
transactions with non-affiliates of the Company. For the year ended April 30,
2008, the Company purchased a total of 658,400 shares under both announced
programs, all in open market transactions, for a total purchase price, including
commissions, of $21,363,000, or an average of $32.45 per share. The Company now
has 5,995,212 shares of common stock outstanding, and the 658,400 shares
repurchased equaled approximately 9.9% of the shares that were outstanding at
April 30, 2007.
All repurchases were funded from cash on hand and borrowings, and the Company
expects to fund any future purchases from internally generated cash or
borrowings.
NEW AND EMERGING ACCOUNTING STANDARDS
-------------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements", which defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. SFAS No. 157 applies under accounting pronouncements that require
or permit fair value measurements and, accordingly, does not require any new
fair value measurements. SFAS No. 157, as it relates to financial assets and
financial liabilities, is effective for fiscal years beginning after November
15, 2007. On February 12, 2008, the FASB issued FASB Staff Position No. FAS
157-2 "Effective Date of FASB Statement No. 157," which delays the effective
date of SFAS No. 157 for one year for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on at least an annual basis. The Company does not expect
the adoption of SFAS No. 157 to have a material impact on its financial
position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115", which provides all entities with an option to report
selected financial assets and liabilities at fair value. The objective of SFAS
No. 159 is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in earnings caused by measuring related
assets and liabilities differently without having to apply the complex
provisions of hedge accounting. Certain specified items are eligible for the
irrevocable fair value measurement option as established by SFAS No. 159. SFAS
No. 159 is effective as of the beginning of an entity's first fiscal year
beginning after November 15, 2007. The Company does not expect the adoption of
SFAS No. 159 to have a material impact on its financial position, results of
operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51", which provides
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the retained interest and gain or loss when a subsidiary is
deconsolidated. This statement is effective for financial statements issued for
fiscal years beginning on or after December 15, 2008. The adoption of SFAS No.
160 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In December 2007, the FASB also issued SFAS No. 141(R), "Business Combinations
(Revised)", which requires the use of the acquisition method of accounting,
defines the acquirer, establishes the acquisition date and broadens the scope to
all transactions and other events in which one entity obtains control over one
or more businesses. The statement is effective for business combinations or
transactions entered into for fiscal years beginning on or after December 15,
2008. The adoption of SFAS No. 141(R) will affect the Company's accounting for
future business combinations after the effective date and therefore has no
impact on its current financial position, results of operations or cash flows.
The Company will monitor these emerging issues to assess any potential future
impact on its consolidated financial statements.
SEGMENT INFORMATION
-------------------
Information by industry segment is presented in Note 19 to the consolidated
financial statements. This information has been prepared in accordance with SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Disclosures",
which requires that industry segment information be prepared in a manner
consistent with the manner in which financial information is prepared and
evaluated by management for making operating decisions. A number of assumptions
and estimations are required to be made in the determination of segment data,
29
including the need to make certain allocations of common costs and expenses
among segments. On an annual basis, management has evaluated the basis upon
which costs are allocated, and has periodically made revisions to these methods
of allocation. Accordingly, the determination of "income from continuing
operations before income taxes" of each segment as summarized in Note 19 to the
consolidated financial statements is presented for informational purposes, and
is not necessarily the amount that would be reported if the segment were an
independent company.
IMPACT OF INFLATION
-------------------
Operations of the Company can be impacted by inflation. Within the industries in
which the Company operates, inflation can cause increases in the cost of
materials, services, interest and labor. Unless such increased costs are
recovered through increased sales prices or improved operating efficiencies,
operating margins will decrease. Within the land development industry, the
Company encounters particular risks. A large part of the Company's real estate
sales are to homebuilders who face their own inflationary concerns that rising
housing costs, including interest costs, may substantially outpace increases in
the income of potential purchasers and make it difficult for them to finance the
purchase of a new home or sell their existing home. If this situation were to
exist, the demand for the Company's land by these homebuilder customers could
decrease. In general, in recent years interest rates have been at historically
low levels and other price increases have been commensurate with the general
rate of inflation in the Company's markets, and as a result the Company has not
found the inflation risk to be a significant problem in its real estate or media
services operations businesses.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
-------------------------------------------
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 and in
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 Company. Words such as "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates", "projects", "forecasts", "may",
"should", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and contingencies
that are difficult to predict. These risks and uncertainties include, but are
not limited to, those set forth in Item 1A above under the heading "Risk
Factors". Many of the factors that will determine the Company's future results
are beyond the ability of management to control or predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in or suggested by such forward-looking statements. The Company undertakes no
obligation to revise or update any forward-looking statements, or to make any
other forward-looking statements, whether as a result of new information, future
events or otherwise.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------- ----------------------------------------------------------
The primary market risk facing the Company is interest rate risk on its
long-term debt and fixed rate receivables. The Company does not hedge interest
rate risk using financial instruments. The Company is also subject to foreign
currency risk, but this risk is not material. The following table sets forth as
of April 30, 2008 the Company's long-term debt obligations and receivables
(excluding trade accounts) by scheduled maturity, weighted average interest rate
and estimated Fair Market Value ("FMV") (dollar amounts in thousands):
There- FMV @
2009 2010 2011 2012 2013 after Total 4/30/08
---- ---- ---- ---- ---- ----- ----- -------
Fixed rate
receivables $ 11,530 $ 1,130 $ - $ - $ - $ - $ 12,660 $ 11,878
Weighted average
interest rate 9.22% 9.50% - - - - 9.24%
Fixed rate debt $ 1,271 $ 912 $ 95 $ 33 $ - $ - $ 2,311 $ 2,358
Weighted average
interest rate 6.35% 6.33% 6.54% 7.30% - - 6.37%
Variable rate
debt $ 3,544 $ 18,771 $ 771 $ 583 $ - $ - $ 23,669 $ 23,669
Weighted average
interest rate 4.67% 4.41% 5.08% 5.17% - - 4.49%
31
Item 8. Financial Statements and Supplementary Data
------- -------------------------------------------
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended. Internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles in the United States of America.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of human error and the circumvention or
overriding of controls, material misstatements may not be prevented or detected
on a timely basis. Accordingly, even internal controls determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Furthermore, projections of any
evaluation of the effectiveness to future periods are subject to the risk that
such controls may become inadequate due to changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of internal control over financial
reporting as of April 30, 2008 based upon the criteria set forth in a report
entitled "Internal Control - Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on its assessment,
management has concluded that, as of April 30, 2008, internal control over
financial reporting was effective. The independent registered public accounting
firm that audited the financial statements included in the annual report has
issued an audit report on the effectiveness of the Company's internal control
over financial reporting.
32
Report of Independent Registered Public Accounting Firm
To the Board of Directors
AMREP Corporation
Princeton, New Jersey
We have audited AMREP Corporation and Subsidiaries internal control over
financial reporting as of April 30, 2008, based on "Criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)." AMREP Corporation's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting including the accompanying Management's Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing other
such procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, AMREP Corporation and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of April 30,
2008, based on "Criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)."
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
AMREP Corporation and Subsidiaries as of April 30, 2008 and 2007, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended April 30, 2008 and our report
dated July 11, 2008 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
July 14, 2008
33
Report of Independent Registered Public Accounting Firm
To the Board of Directors
AMREP Corporation
Princeton, New Jersey
We have audited the consolidated balance sheets of AMREP Corporation and
Subsidiaries as of April 30, 2008 and 2007, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended April 30, 2008. Our audits also included the financial
statement schedule of AMREP Corporation listed in item 15(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AMREP Corporation
and Subsidiaries as of April 30, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), AMREP Corporation's and
Subsidiaries' internal control over financial reporting as of April 30, 2008,
based on "Criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)"
and our report dated July 11, 2008 expressed an unqualified opinion on the
effectiveness of AMREP Corporation's internal control over financial reporting.
/s/ McGladrey & Pullen, LLP
July 14, 2008
34
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2008 AND 2007
(Dollar amounts in thousands)
ASSETS 2008 2007
------ ---------------- -----------------
CASH AND CASH EQUIVALENTS $ 32,608 $ 42,102
RECEIVABLES, net:
Real estate operations 13,124 25,117
Media services operations 45,701 47,825
---------------- -----------------
58,825 72,942
REAL ESTATE INVENTORY 70,252 46,584
INVESTMENT ASSETS, net 10,300 12,165
PROPERTY, PLANT AND EQUIPMENT, net 28,914 30,518
INTANGIBLE AND OTHER ASSETS, net 29,913 34,014
GOODWILL 54,139 54,334
---------------- -----------------
TOTAL ASSETS $ 284,951 $ 292,659
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 98,532 $ 83,557
DEFERRED REVENUE - 4,352
NOTES PAYABLE:
Amounts due within one year 4,816 5,297
Amounts subsequently due 21,164 27,002
---------------- -----------------
25,980 32,299
TAXES PAYABLE 980 55
DEFERRED INCOME TAXES 12,358 11,149
ACCRUED PENSION COST 2,045 1,243
---------------- -----------------
TOTAL LIABILITIES 139,895 132,655
---------------- -----------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
shares authorized - 20,000,000; shares issued - 7,419,704 at
April 30, 2008 and 2007 742 742
Capital contributed in excess of par value 46,085 46,085
Retained earnings 128,408 121,333
Accumulated other comprehensive loss, net (3,522) (2,862)
Treasury stock, 1,424,492 shares at April 30, 2008 and
766,092 shares at April 30, 2007, at cost (26,657) (5,294)
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 145,056 160,004
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 284,951 $ 292,659
================ =================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
35
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended April 30,
-------------------------------------------------------
2008 2007 2006
--------------- --------------- ----------------
REVENUES:
Real estate land sales $ 27,902 $ 95,825 $ 57,810
Media services operations 138,696 100,505 88,463
Interest and other 5,463 8,509 2,023
--------------- --------------- ----------------
172,061 204,839 148,296
--------------- --------------- ----------------
COSTS AND EXPENSES:
Real estate land sales 9,760 31,154 26,732
Operating expenses:
Media services operations 120,021 85,262 73,956
Real estate commissions and selling 731 1,404 1,427
Restructuring and fire recovery costs 1,513 - -
Other 840 1,376 1,114
General and administrative:
Media services operations 12,053 9,235 7,686
Real estate operations and corporate 4,550 5,038 4,310
Interest expense, net of capitalized amounts 1,012 702 344
--------------- --------------- ----------------
150,480 134,171 115,569
--------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 21,581 70,668 32,727
PROVISION FOR INCOME TAXES FROM
CONTINUING OPERATIONS 7,819 23,971 10,233
--------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS 13,762 46,697 22,494
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESS (NET OF
INCOME TAXES) (57) (1,591) 3,556
--------------- --------------- ----------------
NET INCOME $ 13,705 $ 45,106 $ 26,050
=============== =============== ================
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS
$ 2.20 $ 7.02 $ 3.39
EARNINGS (LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS (0.01) (0.24) .54
--------------- --------------- ----------------
EARNINGS PER SHARE - BASIC AND DILUTED $ 2.19 $ 6.78 $ 3.93
=============== =============== ================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,248 6,650 6,633
=============== =============== ================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
36
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
Capital Accumulated Treasury
Common Stock Contributed in Other Stock,
------------------- Excess of Retained Comprehensive at
Shares Amount Par Value Earnings Loss Cost Total
------- -------- --------------- ---------- ------------- ---------- -----------
BALANCE, April 30, 2005 7,415 $ 741 $ 45,395 $ 82,695 $ (5,976) $ (5,450) $ 117,405
Net income - - - 26,050 - - 26,050
Other comprehensive
income - - - - 1,904 - 1,904
-----------
Total comprehensive
income 27,954
-----------
Cash dividend, $4.05 per
share - - - (26,870) - - (26,870)
Issuance of stock under
Directors' Plan - 1 336 - - 104 441
Exercise of stock options 2 - 40 - - - 40
------- -------- --------------- ---------- ------------- ---------- -----------
BALANCE, April 30, 2006 7,417 742 45,771 81,875 (4,072) (5,346) 118,970
Net income - - - 45,106 - - 45,106
Other comprehensive
income - - - - 1,210 - 1,210
-----------
Total comprehensive
income 46,316
-----------
Cash dividend, $0.85 per
share - - - (5,648) - - (5,648)
Issuance of stock under
Directors' Plan - - 287 - - 52 339
Exercise of stock options 3 - 27 - - - 27
------- -------- --------------- ---------- ------------- ---------- -----------
BALANCE, April 30, 2007 7,420 742 46,085 121,333 (2,862) (5,294) 160,004
Net income - - - 13,705 - - 13,705
Other comprehensive
income (loss) - - - - (660) - (660)
-----------
Total comprehensive
income 13,045
-----------
Cash dividend, $1.00 per
share - - - (6,630) - - (6,630)
Acquisition of treasury
stock, 658,400 shares - - - - - (21,363) (21,363)
------- -------- --------------- ---------- ------------- ---------- -----------
BALANCE, April 30, 2008 7,420 $ 742 $ 46,085 $ 128,408 $ (3,522) $ (26,657) $ 145,056
======= ======== =============== ========== ============= ========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
37
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended April 30,
---------------------------------------------------
2008 2007 2006
-------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,705 $ 45,106 $ 26,050
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation and amortization 10,524 7,319 5,568
Non-cash credits and charges:
Gain on disposition of assets (1,679) (4,115) (5,345)
Provision for doubtful accounts (676) (227) (104)
Pension accrual (967) 26 627
Stock based compensation - Directors' Plan - 339 441
Changes in assets and liabilities, excluding the effect of acquisitions:
Receivables 10,901 (10,901) 4,202
Real estate inventory (19,696) 1,064 6,942
Other assets 272 (1,852) (4,027)
Accounts payable and accrued expenses, and deferred revenue 11,328 33,156 3,400
Taxes payable 925 (4,493) 2,328
Deferred income taxes 1,614 3,267 1,764
-------------- -------------- ---------------
Net cash provided by operating activities 26,251 68,689 41,846
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant, and equipment (5,169) (1,797) (3,683)
Capital expenditures - investment assets (1,208) (2,870) (213)
Proceeds from disposition of assets 4,749 6,173 4,057
Acquisition, net of cash acquired 195 (95,636) -
-------------- -------------- ---------------
Net cash provided by (used in) investing activities (1,433) (94,130) 161
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 86,860 81,255 29,162
Principal debt payments (93,179) (54,973) (35,200)
Exercise of stock options - 27 40
Acquisition of treasury stock (21,363) - -
Cash dividends (6,630) (5,648) (26,870)
-------------- -------------- ---------------
Net cash provided by (used in) financing activities (34,312) 20,661 (32,868)
-------------- -------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,494) (4,780) 9,139
CASH AND CASH EQUIVALENTS, beginning of year 42,102 46,882 37,743
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 32,608 $ 42,102 $ 46,882
============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 1,085 $ 735 $ 377
============== ============== ===============
Income taxes paid - net of refunds $ 2,453 $ 24,261 $ 8,230
============== ============== ===============
Non-cash transactions:
Foreclosure on land sale contract $ 3,892 $ - $ 1,795
Transfer of development costs from inventory to investment assets $ - $ - $ 262
============== ============== ===============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
38
AMREP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES:
-------------------------------------------------------------------
Organization and principles of consolidation
--------------------------------------------
The consolidated financial statements include the accounts of AMREP Corporation,
an Oklahoma corporation, and its subsidiaries (individually and collectively, as
the context requires, the "Company"). The Company, through its principal
subsidiaries, is primarily engaged in three business segments. AMREP Southwest
Inc. ("AMREP Southwest") operates in the real estate industry, principally in
New Mexico, and Kable Media Services, Inc. ("Kable") operates in the fulfillment
services and magazine distribution services businesses (collectively, "media
services operations"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The consolidated balance sheets are presented in an unclassified format since
the Company has substantial operations in the real estate industry and its
operating cycle is greater than one year.
Fiscal Year
-----------
The Company's fiscal year ends on April 30. All references to 2008, 2007 and
2006 mean the fiscal years ended April 30, 2008, 2007 and 2006 unless the
context otherwise indicates.
Revenue recognition
-------------------
Real Estate - Land sales are recognized when all elements of Statement of
Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real
Estate", are met, including when the parties are bound by the terms of the
contract, all consideration (including adequate cash) has been exchanged, title
and other attributes of ownership have been conveyed to the buyer by means of a
closing and the Company is not obligated to perform further significant
development of the specific property sold. Profit is recorded either in its
entirety or on the installment method depending upon, among other things, the
ability to estimate the collectibility of the unpaid sales price. In the event
the buyer defaults on the obligation, the property is taken back and recorded as
inventory at the unpaid receivable balance, net of any deferred profit, but not
in excess of fair market value less estimated costs to sell.
Cost of land sales includes all direct acquisition costs and other costs
specifically identified with the property, including pre-acquisition costs and
capitalized real estate taxes and interest, and an allocation of certain common
development costs associated with the entire project. Common development costs
include the installation of utilities and roads, and may be based upon estimates
of cost to complete. The allocation of costs is based on the relative fair value
of the property before development. Estimates and cost allocations are reviewed
on a regular basis until a project is substantially completed, and are revised
and reallocated as necessary on the basis of current estimates.
When the Company enters into certain sales that require the Company to complete
specified development work subsequent to closing, sales are recorded under the
percentage-of-completion method. Revenues and cost of sales are recorded as
development work is performed based on the percentage that incurred costs to
date bear to the Company's estimates of total costs and contract value. Cost
estimates include direct and indirect costs such as labor, materials and
overhead. If a contract extends over an extended period, revisions in cost
estimates during the progress of work would have the effect of adjusting
earnings applicable to performance in prior periods in the current period. When
the current contract estimate indicates a loss, provision is made for the total
anticipated loss in the current period. Consideration received in excess of
amounts recognized as land sale revenues is accounted for as deferred revenue.
Media Services - Revenues from media services operations include revenues from
the distribution of periodicals and subscription fulfillment and other
activities. Revenues from subscription fulfillment activities represent fees
earned from the maintenance of computer files for customers, which are billed
and earned monthly, and other fulfillment activities including customer
telephone support, product fulfillment, and graphic arts and lettershop
services, all of which are billed and earned as the services are provided. In
accordance with Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent", certain reimbursed postage
39
costs are accounted for on a net basis. Newsstand Distribution Services revenues
principally represent commissions earned from the distribution of publications
for client publishers and are recorded by the Company at the time the
publications go on sale at the retail level, in accordance with SFAS No. 48,
"Revenue Recognition When Right of Return Exists". Because the publications are
sold throughout the distribution chain on a fully-returnable basis in accordance
with prevailing industry practice, the Company provides for estimated returns
from wholesalers at the time the publications go on sale by charges to income
that are based on historical experience and most recent sales data for
publications on an issue-by-issue basis, and then simultaneously provides for
estimated credits from publishers for the related returns. Accordingly, revenues
represent the difference between the Company's estimates of its net sales to
independent wholesalers and its net purchases from publisher clients. Estimates
are continually reevaluated throughout the sales process, and final settlement
is typically made 90 days after a magazine's "off-sale" date.
Cash and cash equivalents
-------------------------
Cash equivalents consist of short-term, highly liquid investments that have an
original maturity of ninety days or less and are readily convertible into cash.
Receivables
-----------
Receivables are carried at original invoice or closing statement amount less
estimates made for doubtful receivables and, in the case of Newsstand
Distribution Services receivables, return allowances. Management determines the
allowances for doubtful accounts by reviewing and identifying troubled accounts
and by using historical experience applied to an aging of accounts. A receivable
is considered to be past due if any portion of the receivable balance is
outstanding for more than 90 days. Receivables are written off when deemed
uncollectible. Recoveries of receivables previously written off are recorded
when received.
Revenue recognition and related receivables for the Newsstand Distribution
Services business is based on estimates of allowances for magazine returns to
the Company from wholesalers and the offsetting return of magazines by the
Company to publishers for credit and is determined on an issue-by-issue basis
utilizing historical experience and current sales information.
Real estate inventory
---------------------
Land and improvements on land held for future development or sale are stated at
the lower of accumulated cost (except in certain instances where property is
repossessed as discussed above under "Revenue recognition"), which includes the
development cost, certain amenities, capitalized interest and capitalized real
estate taxes, or fair market value less estimated costs to sell.
Investment assets
-----------------
Investment assets consist of investment land and commercial rental properties.
Investment land represents vacant, undeveloped land not held for development or
sale in the normal course of business and which is stated at the lower of cost
or fair market value less the estimated costs to sell. Commercial rental
properties are recorded at cost less accumulated depreciation. Depreciation of
commercial rental properties is provided by the straight-line basis over the
estimated useful lives, which generally are 10 years or less for leasehold
improvements and 25 years for buildings.
Property, plant and equipment
-----------------------------
Items capitalized as part of property, plant and equipment are recorded at cost.
Expenditures for maintenance and repair and minor renewals are charged to
expense as incurred, while those expenditures that improve or extend the useful
life of existing assets are capitalized. Upon sale or other disposition of
assets, their cost and the related accumulated depreciation or amortization are
removed from the accounts and the resulting gain or loss, if any, is reflected
in operations.
Depreciation and amortization of property, plant and equipment are provided
principally by the straight-line method at various rates calculated to amortize
the book values of the respective assets over their estimated useful lives,
which generally are 10 years or less for furniture and fixtures (including
equipment) and 25 to 40 years for buildings and improvements.
40
Goodwill
--------
Goodwill is the excess of amounts paid for business acquisitions over the net
fair value of the assets acquired and liabilities assumed. Goodwill arose in
connection with the acquisitions of Kable News Company, Inc. in 1969 and Palm
Coast Data Holdco, Inc. ("Palm Coast") in 2007 (see Note 10).
Goodwill is not amortized, but is reviewed at the reporting unit level for
impairment annually or more frequently if indications of impairment exist under
the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". An
impairment charge is generally recognized when the estimated fair value of a
reporting unit, including goodwill, is less than its carrying amount. Based on a
review completed in April 2008, the Company believes that no goodwill impairment
existed at April 30, 2008.
Long-lived assets
-----------------
Long-lived assets, including real estate inventory, investment assets and
property, plant and equipment, are evaluated in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", and reviewed
for impairment when events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. Provisions for impairment are recorded
when undiscounted cash flows estimated to be generated by those assets are less
than the carrying amount of the assets. The amount of impairment would be equal
to the difference between the carrying value of an asset and its discounted cash
flows.
Income taxes
------------
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured by
using currently enacted tax rates expected to apply to taxable income in the
years in which those differences are expected to reverse.
Earnings per share
------------------
Basic earnings per share is based on the weighted average number of common
shares outstanding during each year. Diluted earnings per share is computed
assuming the issuance of common shares for all dilutive stock options
outstanding (using the treasury stock method) during the reporting period.
Stock options
-------------
The Company adopted SFAS No. 123(R), "Share-Based Payment", effective May 1,
2006. SFAS No. 123(R) requires the Company to recognize expense related to the
fair value of share-based compensation awards, including employee and director
stock grants and options.
The Company had issued stock options to non-employee directors under the
Non-Employee Directors Option Plan that was terminated in 2006 (see Note 11).
Stock options granted prior to the adoption of SFAS No. 123(R) were issued with
an exercise price at the fair market value of the Company's stock at the date of
grant. Accordingly, no compensation expense has been recognized with respect to
the stock option plan in the years 2006 and prior. In addition, under SFAS No.
123(R) the compensation expense was not material to the results of operations
for 2008 and 2007.
Pension plan
------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans", an amendment of FASB Statement Nos. 87, 88, 106 and 132R.
SFAS No. 158 requires the recognition of the over-funded or under-funded status
of a defined benefit postretirement plan as an asset or liability in the
statement of financial position and changes in that funded status in the year in
which the changes occur through comprehensive income. SFAS No. 158 also requires
the funded status of a plan be measured as of the date of its year-end statement
of financial position. The Company adopted the recognition, disclosure and
measurement provisions of SFAS No 158 as of April 30, 2007, which did not have
a material effect on the Company's consolidated financial position, results of
operations or cash flows.
41
Comprehensive income (loss)
---------------------------
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events from non-owner sources. Comprehensive income
(loss) is the total of net income and other comprehensive income (loss) that,
for the Company, is comprised entirely of the minimum pension liability net of
the related deferred income taxes.
Management's estimates and assumptions
--------------------------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The significant estimates that
affect the financial statements include, but are not limited to, real estate
inventory valuation and related revenue recognition, allowances for magazine
returns and doubtful accounts, the recoverability of long-term assets and
amortization periods, goodwill impairment, pension plan assumptions for
determination of pension expense and benefit obligations, and legal
contingencies. The Company bases its significant estimates on historical
experience and on various other assumptions that management believes are
reasonable under the circumstances. Actual results could differ from these
estimates; however, there have been no material changes made to the Company's
accounting estimates in the past three years.
New and Emerging Accounting Standards
-------------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which defines fair value, establishes a framework for measuring fair value and
expands disclosure of fair value measurements. SFAS No. 157 applies under
accounting pronouncements that require or permit fair value measurements and,
accordingly, does not require any new fair value measurements. SFAS No. 157, as
it relates to financial assets and financial liabilities, is effective for
fiscal years beginning after November 15, 2007. On February 12, 2008, the FASB
issued FASB Staff Position No. FAS 157-2 "Effective Date of FASB Statement No.
157," which delays the effective date of SFAS No. 157 for one year for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least an
annual basis. The Company does not expect the adoption of SFAS No. 157 to have a
material impact on its financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115", which provides all entities with an option to report
selected financial assets and liabilities at fair value. The objective of SFAS
No. 159 is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in earnings caused by measuring related
assets and liabilities differently without having to apply the complex
provisions of hedge accounting. Certain specified items are eligible for the
irrevocable fair value measurement option as established by SFAS No. 159. SFAS
No. 159 is effective as of the beginning of an entity's first fiscal year
beginning after November 15, 2007. The Company does not expect the adoption of
SFAS No. 159 to have a material impact on its financial position, results of
operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51", which provides
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the retained interest and gain or loss when a subsidiary is
deconsolidated. This statement is effective for financial statements issued for
fiscal years beginning on or after December 15, 2008. The adoption of SFAS No.
160 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In December 2007, the FASB also issued SFAS No. 141(R), "Business Combinations
(Revised)", which, among other provisions, requires the use of the acquisition
method of accounting, defines the acquirer, establishes the acquisition date and
broadens the scope to all transactions and other events in which one entity
obtains control over one or more businesses. The statement is effective for
business combinations or transactions entered into for fiscal years beginning on
or after December 15, 2008. The adoption of SFAS No. 141(R) will affect the
Company's accounting for future business combinations after the effective date
and therefore has no impact on its current financial position, results of
operations or cash flows.
The Company will monitor these emerging issues to assess any potential future
impact on its consolidated financial statements.
42
(2) ADOPTION OF FIN 48
------------------
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109"
("FIN 48"), as of May 1, 2007. Previously, the Company had accounted for tax
contingencies in accordance with FASB Statement No. 5, "Accounting for
Contingencies". As required by FIN 48, the Company recognizes the financial
statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that management
believes has a greater than 50 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority. Unrecognized tax benefits
are tax benefits claimed in the Company's tax returns that do not meet these
recognition and measurement standards.
At the adoption date, the Company applied FIN 48 to all tax positions for which
the statute of limitations remained open. The adoption of FIN 48 had no impact
on the Company's financial statements. The Company's deferred income taxes and
other long-term liabilities include an unrecognized tax benefit that would
impact the effective tax rate was $1,354,000 at May 1, 2007, which had been
previously recorded under FASB Statement No. 5 or FASB Statement No. 109. The
Company's unrecognized tax benefit at April 30, 2008 was $2,076,000 that, if
recognized, would have an impact on the effective tax rate.
The Company is subject to U.S. Federal income taxes, and also to various state,
local and foreign income taxes. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. The Company is not currently under
examination by any tax authorities with respect to its income tax returns. In
nearly all jurisdictions, the tax years through the fiscal year ended April 30,
2004 are no longer subject to examination.
The total amount of unrecognized tax positions ("UTP") could increase or
decrease within the next twelve months for a number of reasons, including the
expiration of statutes of limitations, audit settlements, tax examinations and
the recognition and measurement considerations under FIN 48. At this time, the
Company estimates that it is reasonably possible that the liability for UTP will
decrease by up to approximately $600,000 in the next twelve months due to either
the expiration of statutes of limitations or the recognition and measurement
considerations under FIN 48 related to the value of land contributions.
The Company has elected to retain its existing accounting policy with respect to
the treatment of interest and penalties attributable to income taxes in
accordance with FIN 48, and continues to reflect interest and penalties
attributable to income taxes, to the extent they arise, as a component of its
income tax provision or benefit as well as its outstanding income tax assets and
liabilities. The total amount of interest payable recognized in the accompanying
consolidated balance sheets was $717,000 at April 30, 2008 and $395,000 at May
1, 2007 (date of adoption). No amount has been accrued for penalties.
(3) RECEIVABLES:
------------
Receivables consist of: April 30,
-------------------------------------
2008 2007
---------------- -----------------
(Thousands)
Real estate operations:
Mortgage and other receivables $ 13,236 $ 25,165
Allowance for doubtful accounts (112) (48)
---------------- -----------------
$ 13,124 $ 25,117
================ =================
Media services operations (maturing within one year):
Fulfillment services $ 28,348 $ 29,606
Newsstand Distribution Services, net of estimated returns 18,008 19,550
---------------- -----------------
46,356 49,156
Allowance for doubtful accounts (655) (1,331)
---------------- -----------------
$ 45,701 $ 47,825
================ =================
The Company extends credit to various companies in its real estate and media
services businesses that may be affected by changes in economic or other
external conditions. Financial instruments that may potentially subject the
43
Company to a significant concentration of credit risk primarily consist of trade
accounts receivable from wholesalers in the magazine distribution industry.
Approximately 42% and 43% of media services net accounts receivable were due
from three wholesalers at April 30, 2008 and 2007. As a result of the
concentration of accounts receivable in three wholesalers, the Company could be
adversely affected by adverse changes in their financial condition or other
factors negatively affecting these companies. As industry practices allow, the
Company's policy is to manage its exposure to credit risk through credit
approvals and limits and, on occasion (particularly in connection with real
estate land sales), the taking of collateral. The Company also provides an
allowance for doubtful accounts for potential losses based upon factors
surrounding the credit risk of specific customers, historical trends and other
financial and non-financial information.
Real estate mortgage receivables bear interest at rates ranging from 8.0% to
12.0% and result primarily from land sales. Real estate mortgage receivables of
$2,774,000 collateralize the AMREP Southwest term loan (see Note 9). Maturities
of principal on real estate receivables at April 30, 2008 were as follows: 2009
- $12,106,000; 2010 - $1,130,000; 2011 and thereafter - none.
Because the publications distributed by Kable are sold throughout the
distribution chain on a fully-returnable basis in accordance with prevailing
industry practice, the Company provides for estimated returns from wholesalers
at the time the publications go on sale by charges to income that are based on
historical experience and most recent sales data for publications on an
issue-by-issue basis, and then simultaneously provides for estimated credits
from publishers for the related returns. The financial impact to the Company of
a change in the sales estimate for magazine returns to it from its wholesalers
is substantially offset by the simultaneous change in the Company's estimate of
its cost of purchases since it passes on the returns to publishers for credit.
Newsstand Distribution Services accounts receivable are net of estimated
magazine returns of $55,930,000 in 2008 and $52,275,000 in 2007. In addition,
pursuant to an arrangement with one publisher customer of the Newsstand
Distribution Services business, the publisher bears the ultimate credit risk of
non-collection of amounts due from the customers to which the Company
distributed the publisher's magazines under this arrangement. Accounts
receivable subject to this arrangement were netted ($22,703,000 and $21,106,000
were netted at April 30, 2008 and 2007) against the related accounts payable due
the publisher on the accompanying balance sheets. Media services operations
receivables collateralize line-of-credit arrangements utilized for the Newsstand
Distribution and Fulfillment Services operations (see Note 9).
Media Services operations provide services to publishing companies owned or
controlled by a major shareholder and member of the Board of Directors.
Commissions and other revenues earned on these transactions represented
approximately 1% of consolidated revenues in 2008 and 2007 and 2% of
consolidated revenues in 2006.
(4) REAL ESTATE INVENTORY:
----------------------
Real estate inventory consists of land and improvements held for sale or
development. Accumulated capitalized interest costs included in real estate
inventory at April 30, 2008 and 2007 were $3,224,000 and $2,293,000. Interest
costs capitalized during 2008, 2007 and 2006 were $1,300,000, $469,000 and
$21,000. Accumulated capitalized real estate taxes included in the inventory of
land and improvements at April 30, 2008 and 2007 were $1,820,000 and $1,887,000.
Real estate taxes capitalized during 2008, 2007 and 2006 were $41,000, $18,000
and $16,000. Previously capitalized interest costs and real estate taxes charged
to real estate cost of sales were $108,000, $357,000 and $662,000 in 2008, 2007
and 2006.
Substantially all of the Company's real estate assets are located in or adjacent
to Rio Rancho, New Mexico. As a result of this geographic concentration, the
Company could be affected by changes in economic conditions in that region.
44
(5) INVESTMENT ASSETS:
------------------
Investment assets consist of:
April 30,
---------------------------------
2008 2007
-------------- ---------------
(Thousands)
Land held for long-term investment $ 9,771 $ 9,039
-------------- ---------------
Commercial rental properties:
Land, buildings and improvements 754 3,535
Furniture and fixtures 40 42
-------------- ---------------
794 3,577
Less accumulated depreciation (265) (451)
-------------- ---------------
529 3,126
-------------- ---------------
$ 10,300 $ 12,165
============== ===============
Land held for long-term investment represents property located in areas that are
not planned to be developed in the near term and thus has not been offered for
sale. During 2008, the Company sold a commercial rental property in its real
estate business with a net book value of $2,876,000.
Depreciation of investment assets charged to operations amounted to $117,000,
$179,000 and $209,000 in 2008, 2007 and 2006.
(6) PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment consist of:
April 30,
---------------------------------
2008 2007
-------------- ---------------
(Thousands)
Land, buildings and improvements $ 17,875 $ 17,217
Furniture and equipment 45,241 41,778
Other 59 75
-------------- ---------------
63,175 59,070
Less accumulated depreciation (34,261) (28,552)
-------------- ---------------
$ 28,914 $ 30,518
============== ===============
Depreciation of property, plant and equipment charged to operations amounted to
$6,578,000, $4,983,000 and $4,222,000 in 2008, 2007 and 2006.
(7) INTANGIBLE AND OTHER ASSETS:
----------------------------
Intangible and other assets consist of:
April 30, 2008 April 30, 2007
------------------------------------ -----------------------------------
(Thousands)
Accumulated Accumulated
Cost Amortization Cost Amortization
-------------- ---------------- ------------- ----------------
Software development costs $ 10,017 $ 3,780 $ 9,461 $ 1,758
Deferred order entry costs 5,681 - 5,837 -
Prepaid expenses 3,047 - 3,302 -
Customer contracts and relationships 15,000 1,613 15,000 364
Other 2,430 869 5,118 2,582
-------------- ---------------- ------------- ----------------
$ 36,175 $ 6,262 $ 38,718 $ 4,704
============== ================ ============= ================
Software development costs include internal and external costs of the
development of new or enhanced software programs and are generally amortized
over five years. Deferred order entry costs represent costs incurred in
45
connection with the data entry of customer subscription information to database
files and are charged directly to operations over a 12-month period. Customer
contracts and relationships are amortized over 12 years.
Amortization related to deferred charges was $3,829,000, $2,157,000 and
$1,137,000 in 2008, 2007 and 2006. Amortization of intangible and other assets
for each of the next five years is estimated to be as follows: 2009 -
$3,658,000; 2010 - $3,591,000; 2011 - $3,150,000; 2012 - $2,568,000; and 2013 -
$1,552,000.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
--------------------------------------
Accounts payable and accrued expenses consist of:
April 30,
---------------------------------
2008 2007
---------------- -------------
(Thousands)
Publisher payables, net $ 77,003 $ 63,759
Accrued expenses 5,000 6,803
Trade payables 5,753 3,701
Other 10,776 9,294
-------------- --------------
$ 98,532 $ 83,557
============== ==============
Pursuant to an arrangement with one publisher customer of the Newsstand
Distribution Services business, the Company has netted $22,703,000 and
$21,106,000 of accounts receivable against the related accounts payable at April
30, 2008 and 2007 (See Note 3).
(9) NOTES PAYABLE:
--------------
Notes payable consist of:
April 30,
--------------------------------
2008 2007
------------ --------------
(Thousands)
Line-of-credit arrangements:
Real estate operations $ 18,000 $ 6,000
Media services operations 4,582 14,604
Real estate operations term loan 2,774 10,559
Other notes payable 624 1,136
------------ --------------
$ 25,980 $ 32,299
============ ==============
Maturities of principal on notes outstanding at April 30, 2008 were as follows:
2009 - $4,815,000; 2010 - $19,683,000; 2011 - $865,000; 2012 - $617,000; and
2013 and thereafter - none.
Lines-of-credit and other arrangements
--------------------------------------
Real Estate - In January 2007, AMREP Southwest entered into a loan agreement
that replaced a prior loan agreement entered into in September 2006. The new
loan agreement added a $14,180,000 term loan facility to the unsecured
$25,000,000 revolving credit facility provided in the September 2006 agreement
and was originally scheduled to mature in September 2008. During September 2007,
the maturity date of the revolving credit facility was extended to September
2009, with all other terms remaining unchanged.
The revolving credit facility is used to support real estate development in New
Mexico. Borrowings bear annual interest at the borrower's option at (i) the
prime rate (5.0% at April 30, 2008) less 1.00%, or (ii) the 30-day LIBOR rate
(2.80% at April 30, 2008) plus 1.65% for borrowings of less than $10,000,000, or
plus 1.50% for borrowings of $10,000,000 or more. At April 30, 2008, the
outstanding balance of the revolving credit facility was $18,000,000 with a
weighted average interest rate of 4.38%. The term loan facility bears annual
interest on borrowings at the 30-day LIBOR rate plus 1.75%, matures December 15,
2008 and is secured by certain of the borrower's notes receivable from real
estate sales. The term loan requires prepayment in an amount equal to
collections on the notes receivable held as collateral and the amount of any
that have experienced payment defaults. At April 30, 2008, the outstanding
balance of the term loan was $2,774,000. The loan agreement contains a number of
restrictive covenants, including one that requires the borrower to maintain a
minimum tangible net worth, and AMREP Southwest was in compliance with these
covenants at April 30, 2008.
46
Media Services - In connection with the completion of the acquisition of Palm
Coast in January 2007 (see Note 10), Kable and certain of its direct and
indirect subsidiaries entered into a Second Amended and Restated Loan and
Security Agreement with a bank (the "Credit Agreement"). During January 2008,
Kable entered into a First Modification to the Credit Agreement ("First
Modification"). The First Modification modified the Credit Agreement by, among
other things, (a) increasing the amount that may be borrowed for capital
expenditures, (b) allowing the borrowers the right to re-borrow the amounts of
capital expenditure loans that have been repaid, (c) modifying the interest rate
options the borrowers may select and (d) adding Kable Products Services, Inc., a
recently organized member of the Kable Media Services group, as a borrower.
The credit facilities available to Kable with the execution of the First
Modification consist of: (i) a revolving credit loan and letter of credit
facility in an aggregate principal amount of up to $35,000,000 ("Facility A");
(ii) a secured term loan of approximately $3,000,000 that combined a number of
separate borrowings for capital expenditures under the Credit Agreement
("Facility B"); (iii) a capital expenditure line of credit in an amount of up to
$4,500,000 to finance new equipment ("Facility C"); and (iv) a second revolving
credit loan facility of $10,000,000 ("Facility D") that may be used exclusively
for the payment of accounts payable under a distribution agreement with a
customer of Kable's Distribution Services business. The borrowers' obligations
under the First Modification continue to be secured by substantially all of
their assets other than (i) real property and (ii) any borrower's interest in
the capital securities of any other borrower or any subsidiary of any borrower.
The Facility A, C and D loans mature in May 2010 and bear annual interest at
fluctuating rates that, at the borrowers' option, may be either (i) reserve
adjusted LIBOR rates (2.66% at April 30, 2008) plus a margin established
quarterly from 1.5% to 2.5% dependent on the borrowers' funded debt to EBITDA
ratio, as defined in the Credit Agreement, or (ii) the Lender's prime rate
(5.00% at April 30, 2008). As of April 30, 2008, there was no outstanding
balance under Facilities A or D and the outstanding balance for Facility C was
$2,895,000. The Facility B loan matures December 2009 and bears annual interest
at a rate of 6.4% and had an outstanding balance of $1,687,000 at April 30,
2008.
The Credit Agreement requires the borrowers to maintain certain financial ratios
and contains customary covenants and restrictions, the most significant of which
limit the ability of the borrowers to declare or pay dividends or make other
distributions to the Company unless certain conditions are satisfied, and that
limit the annual amount of indebtedness the borrowers may incur for capital
expenditures and other purposes. The borrowers were in compliance with these
covenants at April 30, 2008.
Other notes payable consist of equipment financing loans with a weighted average
interest rate of 5.71% at April 30, 2008.
(10) ACQUISITION:
------------
During January 2007, the Company, through its Kable Media Services, Inc.
subsidiary, completed the acquisition of 100% of the stock of Palm Coast, which,
through its subsidiary, Palm Coast Data LLC, is a major provider of fulfillment
services for magazine publishers and others. The acquisition has complemented
and added service capability to the Company's fulfillment services business. The
merger consideration was financed with existing cash and borrowings and totaled
approximately $95,400,000. The transaction has been accounted for as a purchase,
and the results of operations of Palm Coast have been included in the
consolidated financial statements since the date of acquisition.
47
The allocation of the purchase price of Palm Coast to net tangible and
identifiable intangible assets was based on their estimated fair values as of
January 16, 2007, determined using valuations and other studies. The excess of
the purchase price plus estimated fees and expenses related to the acquisition
over the net tangible and identifiable intangible assets was allocated to
goodwill. The purchase price allocation reflects a post-closing price adjustment
of $195,000 during 2008 in accordance with FASB Statement No. 141, "Business
Combinations" and was as follows (in thousands):
Receivables $ 10,082
Property, plant and equipment 22,886
Deferred taxes, net 2,075
Deferred order entry costs 1,636
Customer contracts and relationships 15,000
Goodwill 48,948
Accounts payable and accrued expenses (7,631)
Other assets 2,445
-----------
$ 95,441
===========
The useful lives of the intangible assets acquired are as follows: deferred
order entry costs - one year; customer contracts and relationships - 12 years;
and goodwill - indefinite. The goodwill recognition of $48,948,000 is primarily
related to the anticipated future earnings and cash flows of Palm Coast.
(11) BENEFIT PLANS:
--------------
Retirement plan
---------------
The Company has a retirement plan for which accumulated benefits were frozen and
future service credits were curtailed as of March 1, 2004. Prior to that date it
had covered substantially all full-time employees and provided benefits based
upon a percentage of the employee's annual salary. The following tables
summarize the balance sheet impact as well as the benefit obligations, assets,
funded status and assumptions associated with the retirement plan.
Net periodic pension cost (benefit) for 2008, 2007 and 2006 was comprised of the
following components:
Year Ended April 30,
-----------------------------------------------------
2008 2007 2006
--------------- ---------------- ---------------
(Thousands)
Interest cost on projected
benefit obligation $ 1,736 $ 1,789 $ 1,780
Expected return on assets (2,310) (2,224) (1,994)
Plan expenses 146 180 212
Recognized net actuarial loss 164 325 629
--------------- ---------------- ---------------
Total cost (benefit) recognized in pretax income (264) 70 627
Cost (benefit) recognized in pretax other
comprehensive income 1,065 (2,017) (3,173)
--------------- ---------------- ---------------
$ 801 $ (1,947) $ (2,546)
=============== ================ ===============
The estimated net loss, transition obligation and prior service cost for the
plan that will be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next fiscal year are $291,000, $0 and $0,
respectively.
48
Assumptions used in determining net periodic pension cost and the benefit
obligations were:
Year Ended April 30,
-----------------------------------------------------
2008 2007 2006
-------------- --------------- ---------------
Discount rate used to determine net
periodic pension cost 5.75% 5.75% 5.75%
Discount rate used to determine pension
benefit obligation 6.42% 5.75% 5.75%
Expected long-term rate of return
on assets 8.0% 8.0% 8.0%
The following table sets forth changes in the plan's benefit obligations and
assets, and summarizes components of amounts recognized in the Company's
consolidated balance sheets:
April 30,
---------------------------------------------------
2008 2007 2006
------------- ------------- --------------
(Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 31,283 $ 32,159 $ 31,808
Interest cost 1,736 1,789 1,780
Actuarial (gain) loss (1,616) (757) 418
Benefits paid (2,133) (1,908) (1,847)
------------- ------------- --------------
Benefit obligation at end of year $ 29,270 $ 31,283 $ 32,159
------------- ------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 30,040 $ 28,925 $ 26,028
Contributions - 44 -
Actual return on plan assets (507) 3,125 4,924
Benefits paid (2,133) (1,908) (1,847)
Plan expenses (175) (146) (180)
------------- ------------- --------------
Fair value of plan assets at end of year $ 27,225 $ 30,040 $ 28,925
------------- ------------- --------------
Funded status:
Benefit obligation in excess of plan assets $ (2,045) $ (1,243) $ (3,234)
Unrecognized net actuarial loss 5,836 4,771 6,788
------------- ------------- --------------
Net asset (liability) recognized in the balance sheets $ (3,791) $ (3,528) $ 3,554
============= ============= ==============
Amounts recognized on the balance sheets:
Accrued pension costs $ (2,045) $ (1,243) $ (3,234)
Pre-tax accumulated comprehensive loss 5,836 4,771 6,788
------------- ------------- --------------
$ (3,791) $ (3,528) $ 3,554
============= ============= ==============
Due to the adoption of SFAS No. 158 as of April 30, 2007, the funded status of
the plan is equal to the net liability recognized in the consolidated balance
sheet. As a result of applying SFAS No. 158, there was minimal incremental
affect on individual line items in the accompanying balance sheet, and no
adjustments of retained earnings and accumulated comprehensive income (loss) was
required.
The average asset allocation for the retirement plan by asset category was as
follows:
April 30,
-------------------------------
2008 2007
-------------- -------------
Equity securities 74% 79%
Fixed income securities 23 19
Other (principally cash and cash equivalents) 3 2
-------------- -------------
Total 100% 100%
============== =============
The Company recorded other comprehensive income (loss), net of tax, of
$(660,000) in 2008, $1,210,000 in 2007 and $1,904,000 in 2006 to account for the
net effect of changes to the unfunded pension liability.
49
The investment mix between equity securities and fixed income securities is
based upon achieving a desired return by balancing more volatile equity
securities and less volatile fixed income securities. Plan assets are invested
in portfolios of diversified public-market equity and fixed income securities.
Investment allocations are made across a range of markets, industry sectors,
capitalization sizes and, in the case of fixed income securities, maturities and
credit quality. The plan holds no securities of the Company.
The expected return on assets for the retirement plan is based on management's
expectation of long-term average rates of return to be achieved by the
underlying investment portfolios. In establishing this assumption, management
considers historical and expected returns for the asset classes in which the
plan is invested, as well as current economic and market conditions.
The Company funds the retirement plan according to IRS funding limitations. The
Company made contributions to the plan for 2008, 2007 and 2006 as follows: none,
$44,000 and none. No mandatory contributions are expected to be made by the
Company to the retirement plan in fiscal 2009.
The amount of future annual benefit payments is expected to be between $2.2
million and $2.4 million in 2008 through 2012, and an aggregate of approximately
$11.5 million is expected to be paid in the five-year period 2013 through 2017.
Savings and salary deferral plans
----------------------------------
The Company has a Savings and Salary Deferral Plan, commonly referred to as a
401(k) plan, in which all full-time employees (other than Palm Coast employees)
with more than one year of service are eligible to participate and contribute to
through salary deductions. The Company may make discretionary matching
contributions, subject to the approval of its Board of Directors. For each of
the three years ended April 30, 2008, the Company matched 66.67% of eligible
employee contributions not in excess of 6% of such employee compensation.
The Company also has a 401(k) plan in which all Palm Coast employees with more
than six months of service are eligible to participate and contribute to through
salary deductions. Employees may defer 1% to 20% of pretax wages to the allowed
federal maximum each calendar year. The Company currently matches 50% of the
employee contributions not in excess of 6% of eligible compensation.
The Company's contributions to the plans amounted to approximately $1,263,000,
$981,000 and $832,000 in 2008, 2007 and 2006.
Directors' stock plan
---------------------
During 2003, the Company adopted the AMREP Corporation 2002 Non-Employee
Directors' Stock Plan and reserved 65,000 shares of common stock for issuance to
non-employee directors. Under the plan, each non-employee director received
1,250 shares of stock on each March 15 and September 15 as partial payment for
services rendered. The expense recorded based upon the fair market value of the
stock at time of issuance under this plan was $339,000 and $441,000 in 2007 and
2006 (7,500 shares issued in 2007 and 15,000 shares issued in each of 2006).
This plan was terminated in December 2006 and, as a result, no shares were
issued or expense recorded in fiscal 2008.
Equity compensation plan
------------------------
The Company adopted the 2006 Equity Compensation Plan (the "Plan") in September
2006 that provides for the issuance of up to 400,000 shares of common stock of
the Company pursuant to options, grants or other awards made under the Plan. As
of April 30, 2008, the Company issued no options, grants or other awards under
the Plan.
50
Stock option plan
-----------------
The Company had in effect a stock option plan that provided for the automatic
issuance of an option to purchase 500 shares of common stock to each
non-employee director annually at the fair market value at the date of grant.
The options are exercisable in one year and expire five years after the date of
grant. The Board of Directors terminated the plan following the annual grants
that were made in September 2005. Options exercised resulted in the issuance of
new shares of common stock.
A summary of activity in the Company's stock option plan is as follows:
Year Ended April 30,
-----------------------------------------------------------------------
2008 2007 2006
-------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding at
beginning of year 4,500 $ 20.28 7,000 $ 18.56 7,000 $ 14.92
Granted - - - - 3,000 24.88
Exercised - - (2,500) 15.47 (2,500) 16.13
Expired or canceled - - - - (500) 17.56
----------------- ----------------- ---------------
Options outstanding at
end of year 4,500 $ 20.28 4,500 $ 20.28 7,000 $ 18.56
================= ================= ===============
Available for grant at
end of year - - -
================= ================= ===============
Options exercisable at
end of year 4,500 4,500 4,000
================= ================= ===============
Range of exercise prices
for options exercisable
at end of year $15.19 to $24.88 $15.19 to $24.88 $3.95 to $24.88
================= ================= ===============
Options outstanding at April 30, 2008 were exercisable over a four-year period
beginning one year from date of grant. The weighted average remaining
contractual lives of options outstanding at April 30, 2008, 2007 and 2006 were
1.6, 3.2 and 3.9 years. The weighted average fair value per option share of
options granted in 2006 was $8.07. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 2006: dividend
yield 2.2%; expected volatility of 42%; risk-free interest rate of 5.0%; and
expected life of 4 years.
The intrinsic value (the difference between the price of the underlying shares
and the exercise price) of options exercisable at April 30, 2008 was $143,400.
The total intrinsic value of options exercised during the years ended April 30,
2007 and 2006 was $122,000 and $25,000. There were no options exercised in 2008.
Stock options granted were issued with an exercise price at the fair market
value of the Company's stock at the date of grant. Accordingly, no compensation
expense was recognized with respect to the stock option plan in 2006. In
addition, under SFAS No. 123(R) the compensation expense was not material to the
results of operations for 2008.
51
(12) INCOME TAXES:
-------------
The provision for income taxes consists of the following:
Year Ended April 30,
-------------------------------------------------------
2008 2007 2006
---------------- --------------- ---------------
(Thousands)
Current:
Federal $ 5,511 $ 18,228 $ 9,735
State and local (812) 1,540 823
---------------- --------------- ---------------
$ 4,699 19,768 10,558
---------------- --------------- ---------------
Deferred:
Federal $ 2,777 2,940 1,587
State and local 309 328 176
---------------- --------------- ---------------
3,086 3,268 1,763
---------------- --------------- ---------------
Total provision for income taxes $ 7,785 $ 23,036 $ 12,321
================ =============== ===============
The provision for income taxes has been allocated as follows:
Year Ended April 30,
-------------------------------------------------------
2008 2007 2006
---------------- --------------- ---------------
(Thousands)
Continuing operations $ 7,819 $ 23,971 $ 10,233
Discontinued operations (34) (935) 2,088
---------------- --------------- ---------------
Total provision for income taxes $ 7,785 $ 23,036 $ 12,321
================ =============== ===============
The components of the net deferred income tax liability are as follows:
April 30,
-------------------------------------
2008 2007
--------------- ----------------
(Thousands)
Deferred income tax assets:
State tax loss carryforwards $ 3,679 $ 3,359
Accrued pension costs 785 450
Federal NOL carryforward 1,752 2,895
Vacation accrual 1,236 1,236
Other (285) 1,097
--------------- ----------------
Total deferred income tax assets $ 7,167 9,037
--------------- ----------------
Deferred income tax liabilities:
Real estate basis differences $ (1,527) (2,181)
Reserve for periodical returns (2,210) (1,888)
Depreciable assets (2,532) (4,680)
Deferred gains on investment assets (7,019) (5,150)
Capitalized costs for financial reporting
purposes, expensed for tax (3,572) (3,624)
--------------- ----------------
Total deferred income tax liabilities (16,860) (17,523)
--------------- ----------------
Valuation allowance for realization of state tax
loss carry forwards (2,665) (2,663)
--------------- ----------------
Net deferred income tax liability $ (12,358) $ (11,149)
=============== ================
52
The following table reconciles taxes computed at the U.S. federal statutory
income tax rate from continuing operations to the Company's actual tax
provision:
Year Ended April 30,
--------------------------------------------------------
2008 2007 2006
----------------- --------------- ---------------
(Thousands)
Computed tax provision at
statutory rate $ 7,554 $ 24,734 $ 11,455
Increase (reduction) in tax resulting from:
State income taxes, net of federal
income tax effect (325) 1,296 552
Real estate charitable land contribution (481) (1,419) (1,543)
Other 1,071 (640) (231)
----------------- --------------- ----------------
Actual tax provision $ 7,819 $ 23,971 $ 10,233
================= =============== ================
Other in 2008 principally includes additions related to unrecognized tax
benefits and related interest from tax positions of prior years.
The Company has a federal net operating loss carryforward of approximately
$5,000,000 resulting from the purchase price allocation of Palm Coast, which
will begin to expire in the fiscal year ending April 30, 2024. In addition,
$23,483,000 of goodwill associated with the Palm Coast acquisition (see Note 10)
is amortizable for tax purposes.
A valuation allowance is provided when it is considered more likely than not
that certain deferred tax assets will not be realized. The valuation allowance
relates entirely to net operating loss carryforwards in states where the Company
has no current operations. These net operating loss carryforwards will expire
beginning in the fiscal year ending April 30, 2010 through April 30, 2029. The
deferred tax asset of $3,679,000 related to the state net operating loss
carryforwards expires as follows: 2010 - $42,000; 2011 - $17,000; 2012 -
$32,000; 2013 - $304,000; 2014 - $208,000; and thereafter - $3,076,000.
The Company adopted the provisions of FIN 48 effective May 1, 2007 (see Note 2).
The implementation of FIN 48 did not have an impact on the Company's financial
statements. A reconciliation of the beginning and ending amount of unrecognized
tax benefits, excluding interest, is as follows (in thousands):
Gross unrecognized tax benefits at May 1, 2007 $ 4,289
Gross increases:
Additions based on tax positions related to current year 54
Additions based on tax positions of prior years 880
-----------
Gross unrecognized tax benefits at April 30, 2008 $ 5,223
===========
(13) SHAREHOLDERS' EQUITY:
---------------------
The Company recorded other comprehensive income (loss) of ($660,000) in 2008,
$1,210,000 in 2007 and $1,904,000 in 2006 to account for the net effect of
changes to the unfunded pension liability (see Note 11).
The Company from time to time reacquired its shares to be held as treasury stock
as part of a stock repurchase program. During 2008, the Board of Directors
authorized the repurchase of up to 1,000,000 shares. As a result, the Company
reacquired 658,400 shares, all in open market transactions, for a total purchase
price, including commissions, of $21,363,000. There were no treasury stock
repurchases in 2007 or 2006.
(14) DISCONTINUED OPERATIONS:
------------------------
Income from discontinued operations in 2006 of $3,556,000, net of tax, reflects
the gain from the disposition of the primary assets of the Company's El Dorado,
New Mexico water utility subsidiary, which were taken through condemnation
proceedings during 2006. In June 2007, the Company settled all existing
litigation involving this subsidiary and accrued the estimated costs of
settlement of $1,591,000, net of tax, in the fourth quarter of 2007. In 2008,
additional costs of $57,000, net of tax, were incurred.
53
(15) RESTRUCTURING AND FIRE RECOVERY COSTS:
--------------------------------------
The Company has announced a project to integrate certain aspects of the Kable
and Palm Coast fulfillment services operations in order to improve operating
efficiencies and customer service and also to reduce costs. This project has
resulted in one significant workforce reduction that occurred in the first
quarter of 2008 together with an announced plan in the second quarter to
redistribute the fulfillment services work performed at the Marion, Ohio
facility. The Company incurred costs directly related to the integration project
of $1,159,000 for the year ended April 30, 2008, principally related to
severance and other consulting costs related to the integration.
On December 5, 2007 a warehouse of approximately 38,000 square feet leased by
the Company in Oregon, Illinois was totally destroyed by an accidental fire. The
warehouse was used principally to store back issues of magazines published by
certain customers for whom the Company fills back-issue orders as part of its
services.
The Company has submitted preliminary claims to its insurance provider for its
property and for a business interruption claim principally consisting of its
lost revenues offset by reduced expenses through April 30, 2008. While the
Company has been advanced $500,000 for replacement of lost property, no
insurance proceeds have been received on the business interruption claim as of
April 30, 2008. In addition, the Company was required to provide insurance for
certain of those customers whose property was destroyed in the warehouse fire.
The Company does not believe the net effect of the outcome of claims related to
materials of certain publishers for whom it was required to provide insurance,
together with any proceeds received from its property and business interruption
claims, will have any material effect on its financial position, results of
operations and cash flows. Due to the fire, gross assets were written down by
$470,000, along with associated accumulated depreciation on those assets of
about $440,000, resulting in a charge to operations of approximately $30,000. In
addition, the Company has recorded other charges to operations of $324,000
related to fire recovery costs for the year ended April 30, 2008, principally
related to legal and other costs that are not covered by insurance.
(16) COMMITMENTS AND CONTINGENCIES:
------------------------------
Land sale contracts
-------------------
From time-to-time, the Company has obligations to complete development work
under certain sales that are accounted for under the percentage-of-completion
method (see Note 1). At April 30, 2008, there were no revenues deferred pending
completion of development work.
Non-cancelable leases
---------------------
The Company is obligated under long-term, non-cancelable leases for equipment
and various real estate properties. Certain real estate leases provide that the
Company will pay for taxes, maintenance and insurance costs and include renewal
options. Rental expense for 2008, 2007 and 2006 was approximately $9,087,000,
$8,295,000 and $8,596,000.
The total minimum rental commitments for years subsequent to April 30, 2008 of
$27,743,000 are due as follows: 2009 - $7,925,000; 2010 - $5,378,000; 2011 -
$3,548,000; 2012 - $3,388,000; 2013 - $3,046,000; and thereafter - $4,458,000.
Lot exchanges
-------------
In connection with certain individual home site sales made prior to 1977 at Rio
Rancho, New Mexico, if water, electric and telephone utilities have not reached
the lot site when a purchaser is ready to build a home, the Company is obligated
to exchange a lot in an area then serviced by such utilities for the lot of the
purchaser, without cost to the purchaser. The Company has not incurred
significant costs related to the exchange of lots.
54
(17) LITIGATION:
-----------
A subsidiary of Kable was one of a number of defendants in a lawsuit in which
the plaintiff, a former wholesaler no longer in business, alleged that the
Company and other national magazine distributors and wholesalers engaged in
violations of the Robinson-Patman Act (which generally prohibits discriminatory
pricing) that caused it to go out of business. The plaintiff sought damages from
the Kable defendant of approximately $15.2 million; any damages awarded would be
trebled. In September 2005, the Court granted the motion for summary judgment of
the defendants, including Kable, and judgment in favor of the defendants,
including Kable, was entered. The plaintiff filed an appeal of the judgment and
on March 25, 2008 the appellate court denied the appeal. All time periods for
the plaintiff to seek further review of the summary judgment in favor of the
defendants have expired and plaintiff's case is over.
In June 2008 a lawsuit was brought against the Company's Kable News Company,
Inc. subsidiary by the owner of a warehouse building leased by the subsidiary
that was totally destroyed in a fire in December 2007. An employment agency that
provided the subsidiary with a temporary employee who is alleged to have had a
role in starting the fire is also named as a defendant. Plaintiff charges the
subsidiary with negligence and willful and wanton misconduct and seeks damages
in excess of $50,000. The Company's liability insurance provides coverage for
the negligence claim up to the policy limit, which may or may not be more than
the full amount of plaintiff's claimed damages, which is unknown at this time.
Additionally, the insurance carrier has indicated it intends to deny coverage of
the willful and wanton misconduct claim. The Company believes it has good
defenses to the charges and assertable claims against the other parties for
their conduct in the matter, and intends vigorously to defend the lawsuit.
However, the proceeding is in its very earliest stage and the Company is not in
a position to offer a prediction as to its outcome.
The Company and its subsidiaries are involved in various other claims and legal
actions incident to their operations which, in the opinion of management based
in part upon advice of counsel, will not materially affect the consolidated
financial position or results of operations of the Company and its subsidiaries.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The estimated fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The carrying
amounts of cash and cash equivalents, media services trade receivables and trade
payables approximate fair value because of the short maturity of these financial
instruments. Debt that bears variable interest rates indexed to prime or LIBOR
also approximates fair value as it reprices when market interest rates change.
The estimated fair value of the Company's long-term, fixed-rate mortgage
receivables was $11,878,000 and $24,420,000 versus carrying amounts of
$12,660,000 and $24,711,000 at April 30, 2008 and April 30, 2007. The estimated
fair value of the Company's long-term, fixed-rate notes payable was $2,358,000
and $3,834,000 versus carrying amounts of $2,311,000 and $3,835,000 at April 30,
2008 and April 30, 2007.
(19) INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT
-------------------------------------------------------
INDUSTRY SEGMENTS:
------------------
The Company has identified three reportable segments in which it currently has
business operations. Real Estate operations primarily include land sales
activities, which involve the obtaining of approvals and development of large
tracts of land for sales to homebuilders, commercial users and others, as well
as investments in commercial and investment properties. The Company's Media
Services subsidiary has two identified segments, Newsstand Distribution Services
and Fulfillment Services. Fulfillment Services operations involve the
performance of subscription and product fulfillment and other related activities
on behalf of various publishers and other clients, and Newsstand Distribution
Services operations involve the national and, to a small degree, international
distribution and sale of periodicals to wholesalers. Certain common expenses as
well as identifiable assets are allocated among industry segments based upon
management's estimate of each segment's absorption. Corporate revenues and
expenses not identifiable with a specific segment are shown as a separate
segment in this presentation.
The accounting policies of the segments are the same as those described in Note
1. Summarized data relative to the industry segments in which the Company has
continuing operations is as follows (amounts in thousands):
55
Newsstand
Real Estate Fulfillment Distribution
Operations Services Services Corporate Consolidated
------------- ------------ ------------ ------------ -------------
Year ended April 30, 2008 (a):
Revenues $ 33,073 $ 125,780 $ 12,916 $ 292 $ 172,061
Income from continuing operations 12,187 (1,413) 1,293 1,695 13,762
Provision (benefit) for income taxes
from continuing operations 6,932 (755) 812 830 7,819
Interest expense (income), net (b) - 5,041 (1,571) (2,458) 1,012
Depreciation and amortization 135 9,511 872 6 10,524
------------- ------------ ------------ ------------ -------------
EBITDA (c) $ 19,254 $ 12,384 $ 1,406 $ 73 $ 33,117
------------- ------------ ------------ ------------ -------------
Goodwill $ - $ 50,246 $ 3,893 $ - $ 54,139
Total assets $ 94,610 $ 135,335 $ 51,297 $ 3,709 $ 284,951
Capital expenditures $ 1,312 $ 4,888 $ 174 $ 3 $ 6,377
----------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2007 (a):
Revenues $ 102,848 $ 86,121 $ 14,384 $ 1,486 $ 204,839
Income from continuing operations 43,190 154 2,009 1,344 46,697
Provision (benefit) for income taxes
from continuing operations 22,688 138 1,226 (81) 23,971
Interest expense (income), net (b) - 2,202 (716) (784) 702
Depreciation and amortization 201 6,160 953 5 7,319
------------- ------------ ------------ ------------ -------------
EBITDA (c) $ 66,079 $ 8,654 $ 3,472 $ 484 $ 78,689
------------- ------------ ------------ ------------ -------------
Goodwill $ - $ 50,441 $ 3,893 $ - $ 54,334
Total assets $ 88,756 $ 142,563 $ 39,214 $ 22,126 $ 292,659
Capital expenditures $ 2,871 $ 1,779 $ - $ 17 $ 4,667
----------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2006 (a):
Revenues $ 59,169 $ 75,332 $ 13,131 $ 664 $ 148,296
Income from continuing operations 18,856 2,289 1,113 236 22,494
Provision (benefit) for income taxes
from continuing operations 8,412 1,388 692 (259) 10,233
Interest expense (income), net (b) - 452 (108) - 344
Depreciation and amortization 235 4,552 749 32 5,568
------------- ------------ ------------ ------------ -------------
EBITDA (c) $ 27,503 $ 8,681 $ 2,446 $ 9 $ 38,639
------------- ------------ ------------ ------------ -------------
Goodwill $ - $ 1,298 $ 3,893 $ - $ 5,191
Total assets $ 80,456 $ 44,359 $ 32,631 $ 31,595 $ 189,041
Capital expenditures $ 252 $ 3,500 $ 140 $ 4 $ 3,896
(a) Segment information reported above does not include net income (loss)
from discontinued operations of ($57,000) in 2008, ($1,591,000) in
2007 and $3,556,000 in 2006.
(b) Interest expense, net includes inter-segment interest income that is
eliminated in consolidation.
(c) The Company uses EBITDA (which AMREP Corporation defines as income
from continuing operations before interest expense, net, income taxes
and depreciation and amortization) in addition to income as key
measures of profit or loss for segment performance and evaluation
purposes.
56
(20) SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
----------------------------------------------
(In thousands of dollars, except per share amounts)
Quarter Ended
---------------------------------------------------------------
Year ended April 30, 2008: July 31, October 31, January 31, April 30,
2007 2007 2008 2008
-------------- --------------- -------------- --------------
Revenues $ 51,359 $ 42,090 $ 43,435 $ 35,177
Gross profit 15,057 9,829 10,529 4,893
Income from continuing operations 6,320 3,467 3,446 529
Loss from operations of discontinued business,
net of taxes (57) - - -
-------------- --------------- -------------- --------------
Net income $ 6,263 $ 3,467 $ 3,446 $ 529
============== =============== ============== ==============
Earnings per share - Basic and Diluted: (a)
Continuing operations $ .95 $ .55 $ .57 $ .09
Discontinued operations (.01) - - -
-------------- --------------- -------------- --------------
Total $ .94 $ .55 $ .57 $ .09
============== =============== ============== ==============
Year ended April 30, 2007: July 31, October 31, January 31, April 30,
2006 2006 2007 2007
-------------- --------------- -------------- --------------
Revenues $ 58,269 $ 56,055 $ 42,189 $ 48,326
Gross Profit 28,313 29,150 14,948 14,636
Income from continuing operations 15,804 16,062 6,930 7,901
-------------- --------------- -------------- --------------
Income(loss) from operations of discontinued
business, net of taxes - - - (1,591)
-------------- --------------- -------------- --------------
Net income $ 15,804 $ 16,062 $ 6,930 $ 6,310
============== =============== ============== ==============
Earnings per share - Basic and Diluted: (a)
Continuing operations $ 2.38 $ 2.42 $ 1.04 $ 1.19
Discontinued operations - - - (0.24)
-------------- --------------- -------------- --------------
Total $ 2.38 $ 2.42 $ 1.04 $ 0.95
============== =============== ============== ==============
(a) The sum of the quarters does not equal the full year earnings per share due
to the change in outstanding shares throughout the year in 2008 and due to
rounding in 2007.
57
Item 9. Changes in and Disagreements with Accountants on Accounting and
------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None
Item 9A. Controls and Procedures
-------- -----------------------
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief
financial officer and the other executive officers whose certifications
accompany this annual report, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. As a result of such evaluation, the chief financial officer and such
other executive officers have concluded that such disclosure controls and
procedures are effective to provide reasonable assurance that the information
required to be disclosed in the reports the Company files or submits under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and (ii) accumulated and communicated to
management, including the Company's principal executive and principal financial
officers or persons performing such functions, as appropriate, to allow timely
decisions regarding disclosure. The Company believes that a control system, no
matter how well designed and operated, cannot provide absolute assurance that
the objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
The report called for by Item 308(a) of Regulation S-K is incorporated herein by
reference to Report of Management on Internal Control Over Financial Reporting,
included in Part II, "Item 8. Financial Statements and Supplementary Data" of
this report. The attestation report called for by Item 308(b) of Regulation S-K
is incorporated herein by reference to Report of Independent Public Accounting
Firm on Internal Control Over Financial Reporting, included in Part II, "Item 8.
Financial Statements and Supplementary Data" of this report.
No change in the Company's system of internal control over financial reporting
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
Item 9B. Other Information
-------- -----------------
None
PART III
--------
Item 10. Directors, Executive Officers and Corporate Governance
-------- ------------------------------------------------------
The information set forth under the headings "Election of Directors", "The Board
of Directors and its Committees" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 2008 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
(the "2008 Proxy Statement") is incorporated herein by reference. In addition,
information concerning the Company's executive officers is included in Part I
above under the caption "Executive Officers of the Registrant".
Item 11. Executive Compensation
-------- ----------------------
The information set forth under the headings "Compensation of Executive
Officers" and "Compensation of Directors" and the subheadings "Report of the
Compensation and Human Resources Committee" and "Compensation Committee
Interlocks and Insider Participation" in the 2008 Proxy Statement is
incorporated herein by reference.
58
Item 12. Security Ownership of Certain Beneficial Owners and Management and
-------- ----------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information set forth under the headings "Common Stock Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information" in
the 2008 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director
--------- ---------------------------------------------------------------------
Independence
------------
The information set forth under the headings "The Board of Directors and its
Committees" and "Certain Transactions" and the subheading "Compensation
Committee Interlocks and Insider Participation" in the 2008 Proxy Statement is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
-------- --------------------------------------
The information set forth under the subheadings "Audit Fees" and "Pre-Approval
Policies and Procedures" in the 2008 Proxy Statement is incorporated herein by
reference.
59
PART IV
Item 15. Exhibits and Financial Statement Schedules
-------- ------------------------------------------
(a) 1. Financial Statements. The following consolidated financial statements and
---------------------
supplementary financial information are filed as part of this report:
AMREP Corporation and Subsidiaries:
- Management's Report on Internal Control Over Financial Reporting
- Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting dated July 14, 2008 - McGladrey & Pullen, LLP
- Report of Independent Registered Public Accounting Firm dated July 14, 2008
- McGladrey & Pullen, LLP
- Consolidated Balance Sheets - April 30, 2008 and 2007
- Consolidated Statements of Income for the Three Years Ended April 30, 2008
- Consolidated Statements of Shareholders' Equity for the Three Years Ended
April 30, 2008
- Consolidated Statements of Cash Flows for the Three Years Ended April 30,
2008
- Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following financial statement schedule
------------------------------
is filed as part of this report:
AMREP Corporation and Subsidiaries:
- Schedule II - Valuation and Qualifying Accounts
Financial statement schedules not included in this annual report on
Form 10-K have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits.
---------
The exhibits filed in this report are listed in the Exhibit Index.
The Registrant agrees, upon request of the Securities and Exchange
Commission, to file as an exhibit each instrument defining the rights of
holders of long-term debt of the Registrant and its consolidated
subsidiaries which has not been filed for the reason that the total amount
of securities authorized thereunder does not exceed 10% of the total assets
of the Registrant and its subsidiaries on a consolidated basis.
(b) Exhibits. See (a)3 above.
---------
(c) Financial Statement Schedules. See (a)2 above.
------------------------------
60
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMREP CORPORATION
(Registrant)
Dated: July 14, 2008 By /s/ Peter M. Pizza
------------------------
Peter M. Pizza
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the dates indicated.
/s/ Peter M. Pizza /s/ Albert V. Russo
------------------------- --------------------------
Peter M. Pizza Albert V. Russo
Vice President and Chief Financial Director
Officer Principal Financial Dated: July 14, 2008
Officer and Principal
Accounting Officer*
Dated: July 14, 2008
/s/ Edward B. Cloues II /s/ Samuel N. Seidman
------------------------ --------------------------
Edward B. Cloues II Samuel N. Seidman
Director Director
Dated: July 14, 2008 Dated: July 14, 2008
/s/ Lonnie A. Coombs /s/ James Wall
------------------------ --------------------------
Lonnie A. Coombs James Wall
Director Director*
Dated: July 14, 2008 Dated: July 14, 2008
/s/ Nicholas G. Karabots /s/ Jonathan B, Weller
------------------------ --------------------------
Nicholas G. Karabots Jonathan B, Weller
Director Director
Dated: July 14, 2008 Dated: July 14, 2008
/s/ Michael P. Duloc
--------------------------
Michael P. Duloc
President, Kable Media Services, Inc.*
Dated: July 14, 2008
-----------------
*The Registrant is a holding company that does substantially all of its business
through two indirect wholly-owned subsidiaries (and their subsidiaries). Those
indirect wholly-owned subsidiaries are AMREP Southwest Inc. ("ASW") and Kable
Media Services, Inc. ("Kable"). James Wall is the principal executive officer of
ASW, and Michael P. Duloc is the principal executive officer of Kable. The
Registrant has no chief executive officer. Its executive officers include James
Wall, Senior Vice President and Peter M. Pizza, Vice President and Chief
Financial Officer, and Michael P. Duloc, who may be deemed an executive officer
by reason of his position with Kable.
61
AMREP CORPORATION AND SUBSIDIARIES
----------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(Thousands)
Additions
--------------------------------
Charges Charged
Balance at (Credits) to (Credited) to
Beginning Costs and Other Balance at End
Description of Period Expenses Accounts Deductions of Period
----------- --------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2008:
Allowance for doubtful accounts
(included in receivables - real
estate operations on the
consolidated balance sheet) $ 48 $ 64 $ - $ - $ 112
---------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and
doubtful accounts (included in
receivables - magazine circulation
operations on the consolidated
balance sheet)
$ 53,606 $ 3,521 $ - $ 542 $ 56,585
--------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2007:
Allowance for doubtful accounts
(included in receivables - real
estate operations on the
consolidated balance sheet) $ 96 $ - $ - $ 48 $ 48
--------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and
doubtful accounts (included in
receivables - magazine circulation
operations on the consolidated
balance sheet) $ 55,606 $ (1,447) $ - $ 553 $ 53,606
--------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2006:
Allowance for doubtful accounts
(included in receivables - real
estate operations on the
consolidated balance sheet) $ 96 $ - $ - $ - $ 96
--------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and
doubtful accounts (included in
receivables - magazine circulation
operations on the consolidated
balance sheet) $ 59,165 $ (3,483) $ - $ 76 $ 55,606
--------------- --------------- ---------------- -------------- --------------
Note: Charges (credits) recorded in magazine circulation operations include a
reserve for the estimate of magazine returns from wholesalers, which are
substantially offset by offsetting credits related to the return of these
magazines to publishers.
62
EXHIBIT INDEX
-------------
NUMBER ITEM
------ ----
2.1 Agreement and Plan of Merger by and among AMREP Corporation, Kable
Media Services, Inc., Glen Garry Acquisition, Inc., Palm Coast Data
Holdco, Inc., Palm Coast Data LLC and the Sellers set forth on the
signature page thereto, dated as of November 7, 2006 - Incorporated by
reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K
filed January 19, 2007.
3.1 Certificate of Incorporation, as amended - Incorporated by reference
to Exhibit 3.1 to Registrant's Registration Statement on Form S-3
filed March 21, 2007.
3.2 By-Laws, as amended- Incorporated by reference to Exhibit 3 (b) to
Registrant's Quarterly Report on Form 10-Q filed December 14, 2006.
4.1 Second Amended and Restated Loan and Security Agreement dated as of
January 16, 2007 among Kable Media Services, Inc., Kable News Company,
Inc., Kable Distribution Services, Inc., Kable News Export, Ltd.,
Kable News International, Inc., Kable Fulfillment Services, Inc.,
Kable Fulfillment Services of Ohio, Inc., Palm Coast Data Holdco, Inc.
and Palm Coast Data LLC and LaSalle Bank National Association -
Incorporated by reference to Exhibit 10.1 to Registrant's Current
Report on Form 8-K filed January 19, 2007.
4.2 First Modification to Loan Documents dated as of January 18, 2008,
modifying the Second Amended and Restated Loan and Security Agreement
dated as of January 16, 2007 among Kable News Company, Inc., Kable
Distribution Services, Inc., Kable News Export, Ltd., Kable News
International, Inc., Kable Fulfillment Services, Inc., Kable
Fulfillment Services of Ohio, Inc., Palm Coast Data Holdco, Inc. and
Palm Coast Data LLC, and LaSalle Bank National Association and related
loan documents - Incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K filed February 5, 2008.
4.3 Loan Agreement dated January 8, 2007 between AMREP Southwest Inc. and
Compass Bank - Incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K filed January 12, 2007.
4.4 $25,000,000 Promissory Note (Revolving Line of Credit) dated September
18, 2006 of AMREP Southwest Inc. payable to the order of Compass Bank
- Incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K filed September 21, 2006.
4.5 $14,180,455 Promissory Note (Term Note) dated January 8, 2007 of AMREP
Southwest Inc. payable to the order of Compass Bank - Incorporated by
reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K
filed January 12, 2007.
10.1 Non-Employee Directors Option Plan, as amended - Incorporated by
reference to Exhibit 10 (i) to Registrant's Annual Report on Form 10-K
for the fiscal year ended April 30, 1997.*
10.2 Amended and Restated Distribution Agreement dated as of April 30, 2006
between Kappa Publishing Group, Inc. and Kable Distribution Services,
Inc. - Incorporated by reference to Exhibit 10 (d) to Registrant's
Annual Report on Form 10-K for the fiscal year ended April 30, 2006.**
10.3 2006 Equity Compensation Plan - Incorporated by reference to Appendix
B to the Registrant's Proxy Statement for its 2006 Annual Meeting of
Shareholders forming a part of Registrant's Definitive Schedule 14A
filed August 14, 2006.*
21 Subsidiaries of Registrant - Filed herewith.
23 Consent of McGladrey & Pullen, LLP - Filed herewith.
31.1 Certification required by Rule 13a - 14 (a) under the Securities
Exchange Act of 1934 - Filed herewith.
31.2 Certification required by Rule 13a - 14 (a) under the Securities
Exchange Act of 1934 - Filed herewith.
31.3 Certification required by Rule 13a - 14 (a) under the Securities
Exchange Act of 1934 - Filed herewith.
32.1 Certification required by Rule 13a - 14 (b) under the Securities
Exchange Act of 1934 - Filed herewith.
-----------------------
* Management contract or compensatory plan or arrangement in which directors or
officers participate.
** Portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934.
63
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