UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL REPORT AND TRANSITION REPORTS 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, 2005
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
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
incorporation or organization) Identification No.)
641 Lexington Ave., 6th Floor
New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 705-4700
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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 (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
--- ---
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 an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
Aggregate market value of Common Stock held by non-affiliates of the Registrant,
computed by reference to the last sales price of such Common Stock on October
31, 2004 (the last business day of the Registrant's most recently completed
second fiscal quarter) on the New York Stock Exchange Composite Tape -
$28,687,507.
Number of shares of Common Stock, par value $.10 per share, outstanding at July
26, 2005 - 6,626,112.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the Registrant are incorporated by
reference into the indicated parts of this report: Definitive Proxy Statement
for 2005 Annual Meeting - Part III.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K of AMREP
Corporation for the fiscal year ended April 30, 2005 is being filed to correct
minor technical and typographical errors which appear in Items 7, 7(A) and 8 of
the original filing. This Amendment does not report any changes to any of the
Registrant's revenues, income, cash flows, assets or liabilities reported in the
original filing.
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 I of Part I of this
annual report on Form 10-K.
As indicated in Item I, 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 16 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 2005, 2004 and 2003 mean the fiscal years ended April 30, 2005, 2004
and 2003.
2
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 date of
those financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Areas that require significant judgments
and estimates to be made include: (i) the determination of revenue recognition
for the magazine distribution services business, which is based on estimates of
allowances for magazine returns; (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) cash flow and valuation
assumptions in performing asset impairment tests of long-lived assets and assets
held for sale; (v) pension plan accounting; and (vi) 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 are
believed to be reasonable under the circumstances. Certain of the most critical
assumptions made in arriving at these accounting estimates are based on the
following considerations: (i) distribution revenues represent commissions earned
from the distribution of publications for client publishers which are recorded
at the time the publications go on sale; however, since such publications are
generally sold on a fully returnable basis, management also provides for
estimated returns by charges to income which are determined on an issue by issue
basis utilizing sales information and other relevant data, including publisher
and like-title history; (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) asset impairment determinations (including that of goodwill) are
based upon the intended use of assets and expected future cash flows; (v)
pension plan accounting and disclosure is based upon numerous assumptions and
estimates, including the expected rate of investment return on retirement plan
assets, the interest rate used to determine the present value of liabilities
(the discount rate), and certain employee-related factors such as turnover,
retirement age and mortality; and (vi) the Company is currently involved in one
significant legal proceeding, which is described in Item 3 of this annual report
on Form 10-K and which could have a material adverse effect if decided against
the Company, and several routine matters. The legal proceeding described in Item
3 is not expected to come to trial before calendar 2006. 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 this
litigation that is significantly different from the judgments made in connection
with preparing the accompanying financial statements.
Year Ended April 30, 2005 Compared to Year Ended April 30, 2004
---------------------------------------------------------------
Results of Operations
As discussed in more detail below, the Company began accounting for its water
utility subsidiary as a "discontinued operation" in the quarter ended January
31, 2005. Accordingly, financial information from prior periods has been
reclassified to conform to this presentation.
Consolidated revenues increased from $129,291,000 in 2004 to $134,506,000 in
2005, or 4%, as a result of revenue growth in the Company's Real Estate
operations which was partially offset by decreased revenues from Kable's
magazine service operations. Net income from continuing operations increased
38%, from $11,297,000, or $1.71 per share, in 2004 to $15,588,000, or $2.36 per
share, in 2005, primarily as a result of the increased revenues and higher gross
margins on land sales in the Real Estate operations.
Revenues from Kable's Fulfillment Services and Newsstand Distribution Services
businesses (collectively, "magazine service operations") decreased from
3
$99,791,000 in 2004 to $96,913,000 in 2005. This decrease of 3% was the net
result of a 4% revenue decline in Kable's Fulfillment Services segment partially
offset by a 7% revenue increase in its Newsstand Distribution Services segment.
The decline in Fulfillment Services revenues was anticipated and largely
attributable to customer losses at Kable's Colorado fulfillment business which
had been identified and known prior to Kable's acquisition of that business in
2003, while the increase in revenues of Newsstand Distribution Services resulted
from additional business obtained in connection with Kable's purchase of certain
distribution contracts in the third quarter of 2005. Kable's total operating
expenses decreased 4% in 2005 compared to 2004, with the operating expenses of
Fulfillment Services decreasing 6% compared to the prior year due in part to
decreases in payroll and other variable expenses resulting from the revenue
decrease, reduced third-party charges for outsourced computer processing and the
inclusion in the prior year of approximately $1,600,000 of costs of relocating
and centralizing certain fulfillment operations. Fulfillment operating expenses
amounted to 84% of related revenues in 2005 compared to 86% in 2004. Operating
costs for Newsstand Distribution Services increased 10% in 2005 compared to 2004
as a result of costs related to the increased revenues acquired in 2005 in
connection with the purchase of certain newsstand distribution contracts, as
well as certain costs incurred in the third and fourth quarters of 2005 for a
special market study, and amounted to 68% of related revenues in 2005 compared
to 66% in 2004.
As previously reported, it was expected that customer losses would occur at
Kable's Colorado fulfillment business subsequent to the acquisition of that
business in 2003 resulting from contract terminations or non-renewals known or
anticipated at that time, and such customer losses have occurred throughout
fiscal 2004 and fiscal 2005. It is expected that there will be a further
significant decrease in fulfillment revenues in Colorado in fiscal 2006 compared
to fiscal 2005 reflecting the customer losses which occurred during fiscal 2005,
so that the results for Kable's Fulfillment Services business for 2005 are not
necessarily a good indication of what may occur in future periods.
Revenues from land sales at the Company's AMREP Southwest subsidiary increased
approximately 29%, to $36,154,000 in 2005 from $28,012,000 in 2004. This
improvement was the result of an increased volume of sales of both developed and
undeveloped lots in the Company's principal market of Rio Rancho, New Mexico,
including the sale of several large parcels for commercial development. The
gross profit percentages on land sales were 55% in 2005 and 51% in 2004. The
pretax profit contribution from Real Estate operations also improved
significantly in 2005 versus 2004, increasing from $11,410,000 in 2004 to
$15,485,000 in 2005 reflecting the higher 2005 revenues and gross profit
percentages. As previously reported, revenues and related gross profits from
land sales can vary significantly from period to period as a result of many
factors, including the nature and timing of specific transactions, so that prior
results are not necessarily a good indication of what may occur in future
periods.
Real estate commissions and selling expenses increased as a percentage of
related revenues, from 3% in 2004 to 5% in 2005, due to the closing of a higher
mix of land sales in 2004 without the involvement of a broker. Such costs
generally vary depending upon the terms of specific land sale transactions. Real
estate and corporate general and administrative expenses increased in 2005
versus 2004, principally due to the effect of an actuarial gain that occurred in
the prior year resulting from the curtailment of future service benefits under
the Company's pension plan. Kable's general and administrative costs decreased
by approximately $300,000 from 2004 to 2005, and they remained at approximately
9% of total revenues in both years.
Interest and other revenues consisted primarily of interest on real estate
mortgage loans and cash equivalents as well as rental income from commercial
investments, and amounted to $1,439,000 in 2005 and $1,488,000 in 2004. Other
expenses primarily consisted of expenses associated with rental operations and
real estate taxes on land parcels not under development, and increased from
$1,140,000 in 2004 to $1,453,000 in 2005 principally due to the cost of the
settlement of warranty claim litigation related to the Company's previous
homebuilding operations.
Results for 2004 included the recognition in the third quarter of a pretax gain
of $1,686,000 (equivalent to $0.16 per share) from the accelerated recognition
of a deferred actuarial gain resulting from the curtailment of future service
benefits under the Company's pension plan. This transaction resulted in
consolidated pension income of $485,000 in 2004 compared to pension expense of
$303,000 in 2005 (see note 9 to the consolidated financial statements).
Discontinued Operations
In September 2004, a jury verdict was reached in court proceedings in connection
with the condemnation of the Company's El Dorado water utility subsidiary (the
4
"Utility") in Santa Fe, New Mexico which valued the Utility at $11,000,000. The
condemning authority, the Eldorado Water & Sanitation District (the "District"),
had proposed a $6,200,000 valuation, which the Company had contested. On
November 9, 2004, the Court entered its judgment confirming the jury verdict in
the condemnation case, and required the District to deposit $7,000,000 into the
Court's account by December 1, 2004. The Court granted the District possession
of the Utility fifteen days after the date of the deposit, and required that the
remaining balance of the verdict be deposited with 6% interest no later than
June 1, 2005 or the property would be returned to the Company and the $7,000,000
deposit refunded. The District made the initial required $7,000,000 deposit on
November 15, 2004 and took possession of the Utility's assets on December 1,
2004, at which time the Company began to account for the operations of the
Utility as a "Discontinued Operation" and reclassified prior periods to conform
to this presentation. On May 27, 2005, the $4,000,000 balance of the
condemnation award was paid with interest. The Company estimates that the
after-tax net gain from the condemnation (including interest, and net of
expenses) will be approximately $3.5 million, or $0.53 per share. The results of
the transaction, which will be reported as a Gain from the Sale of Discontinued
Operations, will be recorded in the Company's financial statements for its
fiscal 2006 first quarter which ends on July 31, 2005.
Year Ended April 30, 2004 Compared to Year Ended April 30, 2003
---------------------------------------------------------------
Results of Operations
Consolidated revenues increased from $72,189,000 in 2003 to $129,291,000 in
2004, primarily due to (i) Kable's acquisition of the subscription fulfillment
business of Electronic Data Systems Corporation ("EDS") in April 2003 and (ii) a
substantial increase in land sales activity at the Company's AMREP Southwest
real estate subsidiary. As a result, net income from continuing operations
increased from $6,227,000, or $0.94 per share, in 2003 to $11,297,000, or $1.71
per share, in 2004.
Revenues from magazine service operations increased from $54,058,000 in 2003 to
$99,791,000 in 2004. Fulfillment Services revenues increased from $39,226,000 in
2003 to $87,629,000 in 2004, principally as a result of the acquisition of the
EDS subscription fulfillment business in April 2003. This revenue increase was
offset in part by a decline in revenues from the Newsstand Distribution Services
business from $14,832,000 in 2003 to $12,162,000 in 2004, primarily due to a
decline in magazine sales rates. Kable's total operating expenses also increased
as a result of the acquisition of the EDS subscription fulfillment business.
Operating expenses for Fulfillment Services increased from $33,658,000 in 2003
to $74,986,000 in 2004, and were approximately 86% of related revenues in 2004
and 2003. Fulfillment Services operating costs increased slightly as a
percentage of related revenues as a result of the EDS acquisition, where certain
costs of the acquired business's Colorado location were relatively higher than
at the Company's other locations. These costs included charges of approximately
$1,600,000 for relocating and centralizing certain fulfillment operations
following the acquisition. Operating costs for Newsstand Distribution Services
decreased to $8,032,000 in 2004 compared to $8,869,000 in 2003, but increased as
a percentage of revenues from 60% in 2003 to 66% in 2004, reflecting the decline
in Newsstand Distribution Services revenues.
Revenues from land sales at the Company's AMREP Southwest subsidiary also
increased substantially in 2004, from $15,965,000 in 2003 to $28,012,000 in
2004. This improvement was the result of greater 2004 sales of both developed
and undeveloped lots in the Company's principal market of Rio Rancho, New
Mexico. The gross profit percentages on land sales were 51% in 2004 and 54% in
2003. The pretax profit contribution from the Real Estate segment improved
significantly in 2004 versus 2003, reflecting the much higher 2004 revenues.
Revenues and related gross profits from land sales can vary significantly from
period to period as a result of many factors, including the nature and timing of
specific transactions, and prior results are not necessarily a good indication
of what may occur in the future.
Real estate commissions and selling expenses decreased as a percentage of
related revenues from 5% in 2003 to 3% in 2004 due to closing a higher mix of
land sales in 2004 without the involvement of a broker. Such costs generally
vary depending upon the terms of specific land sale transactions. Real estate
and corporate general and administrative expenses decreased approximately 7% in
2004 versus 2003 principally as a result of the allocable share of the pension
gain recorded in the third quarter of 2004 which was netted against this
expense. Kable's general and administrative costs increased in 2004 compared to
2003 as a result of the acquisition of the EDS subscription fulfillment
business, but decreased from approximately 13% of Kable's revenues in 2003 to 9%
in 2004. Interest expense increased in 2004 compared to 2003 as a result of
borrowings incurred in connection with the acquisition as well as for additional
working capital requirements.
5
Results for 2004 included a pretax gain of $1,686,000 (equivalent to $0.16 per
share) from the accelerated recognition of a deferred actuarial gain due to the
curtailment of future service benefits under the Company's pension plan. This
resulted in consolidated pension income of $485,000 in 2004 compared to pension
expense of $160,000 in 2003 (see note 9 to the consolidated financial
statements).
Interest and other revenues decreased from $2,166,000 in 2003 to $1,488,000 in
2004 because there were certain non-recurring revenues in 2003, including
interest on a tax refund and an insurance settlement. Other expenses were
$1,023,000 in 2003 and $1,140,000 in 2004.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During the past several years, the Company has financed its operations from
internally generated funds from real estate sales and magazine service
operations, and from borrowings under its various lines-of-credit and
development loan agreements.
Cash Flows From Financing Activities
------------------------------------
In April 2005, various of Kable's subsidiaries comprising its Fulfillment
Services and Newsstand Distribution Services businesses entered into a credit
arrangement with a bank that allows separate revolving credit borrowings for
each business of up to $11,000,000 for Fulfillment Services and up to $9,000,000
for Newsstand Distribution Services based upon a prescribed percentage of each
borrower's eligible accounts receivable, as defined. The individual credit lines
are collateralized by substantially all of each borrower's assets (consisting
principally of accounts receivable and machinery and equipment) and bear
interest at the bank's prime rate (5.75% at April 30, 2005) or, at the
borrower's option, a reserve adjusted overnight or 30-day LIBOR-based interest
rate plus a margin established quarterly of from 1.75% to 2.50%, dependent upon
the borrower's funded debt to EBITDA ratio, as defined. At April 30, 2005, the
interest rate was based on the overnight LIBOR rate option (3.0%), the borrowing
availability of the Fulfillment Services business was $11,000,000 against which
$5,981,000 was outstanding with interest at a rate of 4.94%, and the borrowing
availability of the Newsstand Distribution Services business was $9,000,000
against which $1,524,000 was outstanding with interest at a rate of 4.69%. The
credit arrangement requires the maintenance or achievement of certain financial
ratios and contains certain financial restrictions, the most significant of
which limit the amount of dividends and other payments that may be made by Kable
to its parent or other affiliates, as well as capital expenditures and other
borrowings. This credit arrangement matures in May 2010. An additional
$3,000,000 is available under this credit arrangement for capital expenditures.
AMREP Southwest has a loan agreement with a bank with a maximum borrowing
capacity of $10,000,000 that is used to support real estate development in New
Mexico. The loan is uncollateralized and bears interest at the bank's prime rate
less 0.75% or, at the borrower's option, a LIBOR-based interest rate plus 2.0%.
At April 30, 2005, there were no balances outstanding under this arrangement.
The credit agreement contains certain financial restrictions, the most
significant of which limit other borrowings and require the maintenance of a
minimum tangible net worth (as defined) and a certain level of unencumbered
inventory. This credit arrangement matures in October 2008.
Consolidated notes payable outstanding were $12,054,000 at April 30, 2005
compared to $12,643,000 at April 30, 2004. The Real Estate business had no
borrowings outstanding at April 30, 2005 compared to loans of $200,000 at April
30, 2004. Kable's combined outstanding borrowings decreased from $12,443,000 at
April 30, 2004 to $12,054,000 at April 30, 2005.
Cash Flows From Operating Activities
------------------------------------
AMREP Southwest's real estate inventory amounted to $51,648,000 at April 30,
2004 compared to $52,906,000 at April 30, 2005. Inventories in the Company's
core real estate market of Rio Rancho increased from approximately $44,794,000
at April 30, 2004 to $46,674,000 at April 30, 2005 as the result of development
spending offset by land sale activity. The balance of inventory principally
consisted of properties in Colorado and, in 2004, Florida.
Receivables from the Company's magazine service operations increased from
$42,768,000 at April 30, 2004 to $51,348,000 at April 30, 2005 due in part to
the purchase of additional distribution contracts in 2005 as well as the timing
of billings and payments. Accounts payable and accrued expenses increased from
6
$41,931,000 at April 30, 2004 to $50,720,000 at April 30, 2005 primarily as a
result of the inclusion of the $7,000,000 deposit received in connection with
the condemnation of the Utility (included in Investing Activities in the
consolidated statements of cash flows) as well as, to a lesser extent, an
increase in Kable's publishers' accounts payable reflecting the increase in
receivables from magazine service operations.
The Company's unfunded pension liability under its defined benefit retirement
plan increased from $3,206,000 at April 30, 2004 to $5,780,000 at April 30,
2005, principally due to an increase in plan liabilities resulting from a change
in the discount rate used in actuarial calculations from 6.25% to 5.75%. As a
result, the Company recorded a comprehensive loss of $1,362,000 in 2005 compared
to comprehensive income of $1,420,000 in 2004 which reflects the change in the
unfunded pension liability net of the related deferred tax and unrecognized
prepaid pension amounts in each year.
Cash Flows From Investing Activities
------------------------------------
Capital expenditures for property, plant and equipment were primarily related to
Kable's magazine service operations and consisted of hardware and software
expenditures incurred in connection with the expansion of the fulfillment
services business. Capital expenditures for investment assets were incurred
principally in connection with the development of commercial rental properties
by AMREP Southwest. The Company believes that it has adequate financing
capability to provide for its anticipated future capital expenditures.
Future Payments Under Contractual Obligations
---------------------------------------------
The table below summarizes significant contractual cash obligations as of April
30, 2005 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 $ 12,054 $ 2,099 $ 2,450 $ 7,505 $ -
Operating leases 9,788 7,246 2,464 78 -
----------- ------------ ----------- ------------ -------------
Total $ 21,842 $ 9,345 $ 4,914 $ 7,583 $ -
=========== ============ =========== ============ =============
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123, "Accounting
for Stock-Based Compensation" and supercedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and its related
implementation guidance. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their grant-date fair values in fiscal years
beginning after June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS No. 123 no longer will be an
alternative to financial statement recognition. The Company is required to adopt
SFAS No. 123R in the first quarter of fiscal 2007 which will begin May 1, 2006.
SFAS No. 123R allows for either prospective recognition of compensation expense
or retroactive recognition, which may date back to the original issuance of SFAS
No.123 in the year of adoption. The Company is currently evaluating these
transition methods, and does not believe that the implementation of this
standard will have a material impact on its financial position or results of
operations; however, the total expense recorded in future periods will depend on
several variables, including the number of share-based awards that vest and the
fair value of those vested awards.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an Amendment of APB No. 129" ("SFAS No. 153). The amendments made by SFAS
No.153 are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance". This standard is
effective for nonmonetary asset exchanges occurring after July 1, 2005. The
adoption of this standard is not expected to impact the Company's financial
position or results of operations.
7
SEGMENT INFORMATION
-------------------
Information by industry segment is presented in note 16 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,
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 "pretax income (loss)
contribution" of each segment as summarized in note 16 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 concern 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
magazine 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 and 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 assumptions
which are difficult to 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 update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
A wide range of factors could materially affect the Company's future performance
and financial and competitive position, including the following: (i) the level
of demand for land in Rio Rancho, New Mexico, the principal market in which the
Company's real estate subsidiary sells land; (ii) the possibility of further
adverse changes in the magazine distribution system for magazines that the
Company's Kable distribution subsidiary distributes, including the financial
failure of a major wholesaler; (iii) the existing United Magazine lawsuit
described in Item 3 of this Form 10-K and possible future litigation and
governmental proceedings; (iv) the availability of financing and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business, including possible acquisitions; (v) changes in U.S.
financial markets, including significant interest rate fluctuations; (vi) the
failure to carry out marketing and sales plans; (vii) the effect of or the
failure to successfully complete various internal computer system enhancements
in process and intended to integrate the systems of the subscription fulfillment
8
business acquired in April 2003 and described in note 12 to the consolidated
financial statements, or other acquired businesses, if any, into the Company
without substantial costs, delays or other operational or financial problems;
(viii) the ability to renew customer contracts within the magazine service
operations business segments on favorable terms and conditions; and (ix) changes
in economic or business conditions, including general economic and business
conditions that are less favorable than expected.
This list of factors that may affect the Company's future performance and its
financial and competitive position and also the accuracy of forward-looking
statements is illustrative, but by no means exhaustive. Accordingly, all
forward-looking statements should be evaluated with the understanding of their
inherent uncertainty.
Item 7(A). 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, 2005 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") (amounts in thousands):
There- FMV @
2006 2007 2008 2009 2010 after Total 4/30/05
---- ---- ---- ---- ---- ----- ----- -------
Fixed rate
receivables $ 1,419 $ 1,156 $ 1,697 $ - $ - $ - $ 4,272 $ 3,944
Weighted average
interest rate 8.2% 8.1% 8.1% - - - 8.2% -
Fixed rate debt $ 2,099 $ 1,387 $ 1,063 $ - $ - $ - $ 4,549 $ 4,495
Weighted average
interest rate 5.1% 4.9% 4.0% - - - 4.8% -
Variable rate
debt $ - $ - $ - $ - $ 7,505 $ - $ 7,505 $ 7,505
Weighted average
interest rate - - - - 4.9% - 4.9% -
9
Item 8. Financial Statements and Supplementary Data
------- -------------------------------------------
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Shareholders
AMREP Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of AMREP
Corporation and subsidiaries as of April 30, 2005 and 2004, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended April 30, 2005. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 2005, in conformity with U.S. generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II accompanying the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
June 10, 2005
10
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2005 AND 2004
(Dollar amounts in thousands)
ASSETS 2005 2004
------ ---------------- -----------------
CASH AND CASH EQUIVALENTS $ 37,743 $ 26,805
RECEIVABLES, net:
Magazine service operations 51,348 42,768
Real estate operations 6,277 6,297
---------------- -----------------
57,625 49,065
REAL ESTATE INVENTORY 52,906 51,648
INVESTMENT ASSETS, net 11,356 9,611
PROPERTY, PLANT AND EQUIPMENT, net 11,600 18,261
OTHER ASSETS, net 12,347 10,584
ASSETS OF DISCONTINUED OPERATIONS 5,541 -
GOODWILL 5,191 5,191
---------------- -----------------
TOTAL ASSETS $ 194,309 $ 171,165
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 50,720 $ 41,931
LIABILITIES OF DISCONTINUED OPERATIONS 13 -
NOTES PAYABLE:
Amounts due within one year 2,099 1,830
Amounts subsequently due 9,955 10,813
---------------- -----------------
12,054 12,643
TAXES PAYABLE 2,220 1,867
DEFERRED INCOME TAXES 6,117 5,996
ACCRUED PENSION COST 5,780 3,206
---------------- -----------------
TOTAL LIABILITIES 76,904 65,643
---------------- -----------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
shares authorized - 20,000,000; shares issued - 7,414,704 at
April 30, 2005 and 7,409,204 at April 30, 2004 741 741
Capital contributed in excess of par value 45,395 45,133
Retained earnings 82,695 69,815
Accumulated other comprehensive loss, net (5,976) ( 4,614)
Treasury stock, at cost (5,450) ( 5,553)
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 117,405 105,522
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 194,309 $ 171,165
================ =================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
11
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended April 30,
-------------------------------------------------------
2005 2004 2003
--------------- --------------- ----------------
REVENUES:
Magazine service operations $ 96,913 $ 99,791 $ 54,058
Real estate operations-
Land sales 36,154 28,012 15,965
Interest and other 1,439 1,488 2,166
--------------- --------------- ----------------
134,506 129,291 72,189
--------------- --------------- ----------------
COSTS AND EXPENSES:
Operating expenses-
Magazine service operations 79,324 83,020 42,527
Real estate commissions and selling 1,863 923 836
Other 1,453 1,140 1,023
Real estate cost of sales-
Land sales 16,105 13,634 7,365
General and administrative-
Magazine Service operations 8,507 8,801 6,962
Real estate operations and corporate 3,680 2,894 3,114
Interest, net 660 944 582
--------------- --------------- ----------------
111,592 111,356 62,409
--------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 22,914 17,935 9,780
PROVISION FOR INCOME TAXES FROM
CONTINUING OPERATIONS 7,326 6,638 3,553
--------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS 15,588 11,297 6,227
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESS
(NET OF INCOME TAXES) (63) 380 46
--------------- --------------- ----------------
NET INCOME $ 15,525 $ 11,677 $ 6,273
=============== =============== ================
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS $ 2.36 $ 1.71 $ 0.94
EARNINGS (LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS (0.01) 0.06 0.01
--------------- --------------- ----------------
EARNINGS PER SHARE - BASIC AND DILUTED $ 2.35 $ 1.77 $ 0.95
=============== =============== ================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,616 6,595 6,580
=============== =============== ================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
12
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, 2002 7,400 $ 740 $ 44,935 $ 53,513 $ - $ (5,709) $ 93,479
Net income - - - 6,273 - - 6,273
Other comprehensive loss - - - - (6,034) - (6,034)
----------
Total comprehensive income 239
----------
Issuance of stock under
Directors' Plan - - 14 - - 52 66
Exercise of stock options 7 1 43 - - - 44
------- -------- --------------- -------- ------------- ---------- ----------
BALANCE, April 30, 2003 7,407 741 44,992 59,786 (6,034) (5,657) 93,828
Net income - - - 11,677 - - 11,677
Other comprehensive income - - - - 1,420 - 1,420
----------
Total comprehensive income 13,097
----------
Cash dividends - - - (1,648) - - (1,648)
Issuance of stock under
Directors' Plan - - 126 - - 104 230
Exercise of stock options 2 - 15 - - - 15
------- -------- --------------- -------- ------------- ---------- ----------
BALANCE, April 30, 2004 7,409 741 45,133 69,815 (4,614) (5,553) 105,522
Net income - - - 15,525 - - 15,525
Other comprehensive loss - - - - (1,362) - (1,362)
----------
Total comprehensive income 14,163
----------
Cash dividends - - - (2,645) - - (2,645)
Issuance of stock under
Directors' Plan - - 159 - - 103 262
Exercise of stock options 6 - 103 - - - 103
------- -------- --------------- -------- ------------- ---------- ----------
BALANCE, April 30, 2005 7,415 $ 741 $ 45,395 $ 82,695 $ (5,976) $ (5,450) $ 117,405
======= ======== =============== ======== ============= ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
13
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended April 30,
------------------------------------------------
2005 2004 2003
----------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,525 $ 11,677 $ 6,273
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation and amortization 5,343 5,015 3,071
Non-cash credits and charges:
(Gain) loss on disposition of property plant and equipment - 619 (109)
Provision for doubtful accounts (172) 680 237
Pension (benefit) accrual 303 ( 485) 160
Stock based compensation - Directors' Plan 262 230 66
Changes in assets and liabilities, excluding the effect of acquisitions:
Receivables (8,388) (7,311) (1,024)
Real estate inventory (1,258) 4,863 (788)
Other assets (2,876) (1,451) (246)
Accounts payable and accrued expenses 1,499 2,806 (1,112)
Taxes payable` 353 1,262 (522)
Deferred income taxes 1,333 3,542 933
----------- ------------- ------------
Net cash provided by operating activities 11,924 21,447 6,939
----------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant, and equipment (3,060) (3,402) (1,873)
Capital expenditures - investment assets (1,885) (266) (43)
Deposit from condemnation of Utility Company 7,000 - -
Proceeds from disposition of property, plant and equipment 190 - 404
Acquisitions, net (100) - (6,580)
----------- ------------- ------------
Net cash provided (used) by investing activities 2,145 (3,668) (8,092)
----------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 25,596 27,831 28,098
Principal debt payments (26,185) (33,615) (26,290)
Exercise of stock options 103 15 44
Cash dividends (2,645) (1,648) -
----------- ------------- ------------
Net cash provided (used) by financing activities (3,131) (7,417) 1,852
----------- ------------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 10,938 10,362 699
CASH AND CASH EQUIVALENTS, beginning of year 26,805 16,443 15,744
----------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 37,743 $ 26,805 $ 16,443
=========== ============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 568 $ 822 $ 918
=========== ============= ============
Income taxes paid - net of refunds $ 6,817 $ 2,049 $ 3,173
=========== ============= ============
Non-cash transaction: Note payable for acquisition of
Distribution contracts $ 1,170 $ - $ -
=========== ============= ============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
14
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. Kable Media
Services, Inc. ("Kable") operates in the fulfillment services and magazine
distribution services businesses (collectively, "magazine service operations"),
and AMREP Southwest Inc. ("AMREP Southwest") operates in the real estate
industry, principally in New Mexico. 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 2005, 2004 and
2003 mean the fiscal years ended April 30, 2005, 2004 and 2003, respectively,
unless the context otherwise indicates.
Revenue recognition
-------------------
Revenues from magazine service operations include revenues from the distribution
of periodicals and subscription fulfillment and other activities. Distribution
revenues represent commissions earned from the distribution of publications for
client publishers which are recorded 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 which are based on experience. 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 Issue No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent",
reimbursed postage costs are accounted for on a net basis.
Land sales are recognized when all elements of 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 and title and other attributes of ownership have been conveyed to the
buyer by means of a closing. 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.
Cash and cash equivalents
-------------------------
Cash equivalents consist of short term, highly liquid investments which have an
original maturity of ninety days or less, and that 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 distribution
receivables, return allowances. Management determines the allowances for
doubtful accounts by reviewing and identifying troubled accounts on a monthly
basis 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. Management determines the estimated returns for magazines on an
issue by issue basis utilizing historical sales information and other relevant
information, including publisher and like-title history.
15
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 40 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 which 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.
Goodwill
--------
The excess of amounts paid for business acquisitions over the net fair value of
the assets acquired and liabilities assumed ("goodwill") is carried as an asset.
Goodwill arose in connection with the acquisition of Kable in 1969 and, since
this acquisition was made prior to the effective date of Accounting Principles
Board Opinion ("APB") No. 17, was not amortized.
Effective May 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and intangible assets with an
indefinite life are no longer subject to amortization and are reviewed for
impairment at least annually. An impairment charge is recognized only when the
calculated fair value of a reporting unit, including goodwill, is less than its
carrying amount. Based on a review completed in April 2005, the Company believes
that no goodwill impairment existed at April 30, 2005.
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 assets' carrying value and the 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.
16
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 issues stock options to non-employee directors under the
Non-Employee Directors Option Plan (see note 9). The Company accounts for stock
option grants in accordance with APB No. 25, "Accounting for Stock Issued to
Employees", and has adopted the disclosure-only provisions of SFAS No. 123 as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". Stock options granted have been 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. Further, the amount of additional compensation disclosable under the
disclosure-only provisions of SFAS No. 123 is immaterial for all periods
presented.
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) which,
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, inventory
valuation, allowances for magazine returns, the recoverability of long-term
assets and amortization periods, pension plan assumptions and legal
contingencies. Actual results could differ from those estimates.
Recent accounting pronouncements
--------------------------------
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supercedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and its related
implementation guidance. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their grant-date fair values in fiscal years
beginning after June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS No. 123 no longer will be an
alternative to financial statement recognition. The Company is required to adopt
SFAS No. 123R in the first quarter of fiscal 2007, which will begin on May 1,
2006. SFAS No. 123R allows for either prospective recognition of compensation
expense or retroactive recognition, which may date back to the original issuance
of SFAS No. 123 in the year of adoption. The Company is currently evaluating
these transition methods, and does not believe that the implementation of this
standard will have a material impact on its financial position or results of
operations; however, the total expense recorded in future periods will depend on
several variables, including the number of share-based awards that vest and the
fair value of those vested awards.
In December 2004, the FASB issued SFAS No. 153, "Exchanges on Nonmonetary Assets
- an Amendment of APB No. 129" ("SFAS No. 153"). The amendments made by SFAS No.
153 are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance". This standard is
effective for nonmonetary asset exchanges occurring after July 1, 2005. The
adoption of this standard is not expected to impact the Company's financial
position or results of operations.
17
Reclassifications
-----------------
The Company began to account for the operations of its El Dorado, New Mexico
water utility subsidiary as a "Discontinued Operation" during the third quarter
of 2005 and has reclassified prior periods to conform to this presentation (see
note 2). Certain other prior year amounts in the consolidated financial
statements have been reclassified to conform with the 2005 presentation with no
effects on net income or shareholders' equity.
(2) DISCONTINUED OPERATIONS:
------------------------
In September 2004, a jury verdict was reached in court proceedings in connection
with the condemnation of the Company's El Dorado water utility subsidiary (the
"Utility") in Santa Fe, New Mexico which valued the Utility at $11,000,000. The
condemning authority, the Eldorado Water & Sanitation District (the "District"),
had proposed a $6,200,000 valuation, which the Company had contested. On
November 9, 2004, the Court entered its judgment confirming the jury verdict in
the condemnation case, and required the District to deposit $7,000,000 into the
Court's account by December 1, 2004. The Court granted the District possession
of the Utility fifteen days after the date of the deposit, and required that the
remaining balance of the verdict be deposited with 6% interest no later than
June 1, 2005 or the property would be returned to the Company and the $7,000,000
deposit refunded. The District made the initial required $7,000,000 deposit on
November 15, 2004 and took possession of the Utility's assets on December 1,
2004, at which time the Company began to account for the operations of the
Utility as a "Discontinued Operation" and reclassified prior periods to conform
to this presentation. On May 27, 2005, the $4,000,000 balance of the
condemnation award was paid with interest. The Company estimates that the
after-tax net gain from the condemnation (including interest, and net of
expenses) will be approximately $3.5 million, or $0.53 per share. The results of
the transaction, which will be reported as a Gain from the Sale of Discontinued
Operations, will be recorded in the Company's financial statements for its
fiscal 2006 first quarter which ends on July 31, 2005.
(3) RECEIVABLES:
------------
Receivables consist of: April 30,
-------------------------------------
2005 2004
---------------- -----------------
(Thousands)
Magazine service operations-
Accounts receivable (maturing within one year) $ 110,513 $ 98,388
Allowances for-
Estimated returns (57,524) (53,808)
Doubtful accounts (1,641) (1,812)
---------------- -----------------
$ 51,348 $ 42,768
================ =================
Real estate operations-
Mortgage and other receivables $ 6,373 $ 6,489
Allowance for doubtful accounts (96) (192)
---------------- -----------------
$ 6,277 $ 6,297
================ =================
Magazine service operations receivables collateralize line-of-credit
arrangements utilized for the magazine service operations (see note 8). Mortgage
receivables bear interest at rates ranging from 8.0% to 12.0% and result
primarily from land sales.
The Company extends credit to various companies in the real estate and magazine
operations industries which 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. 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. In recent years, as a
result of changes within the magazine distribution industry, there has been a
major consolidation and reduction in the number of wholesalers to whom Kable
distributes magazines and, as a result, approximately 44% and 45% of Kable's
accounts receivable were due from three customers at April 30, 2005 and 2004,
respectively.
18
Kable performs fulfillment services for and purchases magazines for resale to
wholesalers from 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 2%, 2% and 4% of consolidated
revenues in 2005, 2004 and 2003, respectively.
Maturities of principal on real estate receivables at April 30, 2005 were as
follows: 2006 - $3,503,000; 2007 - $1,156,000; 2008 - $1,714,000.
(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, 2005 and 2004 were $2,825,000 and $3,208,000,
respectively. Interest costs capitalized during 2005, 2004 and 2003 were
$65,000, $126,000 and $287,000, respectively. Accumulated capitalized real
estate taxes included in the inventory of land and improvements at April 30,
2005 and 2004 were $2,635,000 and $3,116,000, respectively. Real estate taxes
capitalized during 2005, 2004 and 2003 were $18,000, $42,000 and $72,000,
respectively. Previously capitalized interest costs and real estate taxes
charged to real estate cost of sales were $883,000, $608,000 and $319,000 in
2005, 2004 and 2003, respectively, and $64,000 was charged to commercial rental
properties in 2005.
Substantially all of the Company's real estate assets are located in Rio Rancho,
New Mexico. As a result of this geographic concentration, the Company could be
affected by changes in economic conditions in this region.
(5) INVESTMENT ASSETS:
------------------
Investment assets consist of:
April 30,
-------------------------------------
2005 2004
---------------- -----------------
(Thousands)
Land held for long-term investment $ 6,573 $ 6,573
---------------- -----------------
Commercial rental properties -
Land, buildings and improvements 6,839 4,957
Furniture and fixtures 216 213
---------------- -----------------
7,055 5,170
Accumulated depreciation (2,272) (2,132)
---------------- -----------------
4,783 3,038
---------------- -----------------
$ 11,356 $ 9,611
================ =================
Land held for long-term investment represents property located in areas that
will not be developed in the near term and thus has not been offered for sale.
Depreciation charged to operations amounted to $140,000, $137,000 and $138,000
in 2005, 2004 and 2003, respectively.
(6) PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment consists of:
April 30,
-------------------------------------
2005 2004
---------------- -----------------
(Thousands)
Land, buildings and improvements $ 4,139 $ 4,392
Furniture and equipment 27,317 24,299
Utility plant and equipment - 8,308
Other 116 139
---------------- -----------------
31,572 37,138
Accumulated depreciation and amortization (19,972) (18,877)
---------------- -----------------
$ 11,600 $ 18,261
================ =================
19
Depreciation charged to operations amounted to $4,001,000, $4,100,000 and
$1,943,000 in 2005, 2004 and 2003, respectively. As a result of the condemnation
of the Utility, the Company began accounting for this subsidiary as a
"discontinued operation" during the quarter ended January 31, 2005 (see note 2).
(7) OTHER ASSETS:
-------------
Other assets consist of:
April 30,
-------------------------------------
2005 2004
---------------- -----------------
(Thousands)
Prepaid expenses $ 1,587 $ 1,235
Deferred charges, net 9,105 8,836
Security and other deposits 325 266
Other 1,330 247
---------------- -----------------
$ 12,347 $ 10,584
================ =================
Amortization related to deferred charges was $1,202,000, $778,000 and $990,000
in 2005, 2004 and 2003, respectively.
(8) DEBT FINANCING:
---------------
Debt financing consists of:
April 30,
-------------------------------------
2005 2004
---------------- -----------------
(Thousands)
Notes payable -
Line-of-credit borrowings -
Real estate operations and other $ - $ 200
Magazine service operations 7,505 8,618
Other notes payable 4,549 3,825
---------------- -----------------
$ 12,054 $ 12,643
================ =================
Maturities of principal on notes outstanding at April 30, 2005 are as follows
2006 - $2,099,000; 2007 - $1,387,000; 2008 - $1,063,000; 2009 - $0; 2010 -
$7,505,000.
Lines-of-credit and other borrowings
------------------------------------
In April 2005, various of Kable's subsidiaries comprising its Fulfillment
Services and Newsstand Distribution Services businesses entered into a credit
arrangement with a bank which allows separate revolving credit borrowings for
each business of up to $11,000,000 for Fulfillment Services and up to $9,000,000
for Newsstand Distribution Services based upon a prescribed percentage of each
borrower's eligible accounts receivable, as defined. The individual credit lines
are collateralized by substantially all of each borrower's assets (consisting
principally of accounts receivable and machinery and equipment) and bear
interest at the bank's prime rate (5.75% at April 30, 2005) or, at the
borrower's option, a reserve adjusted overnight or 30-day LIBOR-based interest
rate plus a margin established quarterly of from 1.75% to 2.50% dependent upon
the borrower's funded debt to EBITDA ratio, as defined. At April 30, 2005, the
interest rate was based on the overnight LIBOR rate option (3.0%), the borrowing
availability of the Fulfillment Services business was $11,000,000 against which
$5,981,000 was outstanding with interest at a rate of 4.94%, and the borrowing
availability of the Newsstand Distribution Services business was $9,000,000
against which $1,524,000 was outstanding with interest at a rate of 4.69%. The
credit arrangement requires the maintenance or achievement of certain financial
ratios and contains certain financial restrictions, the most significant of
which limit the amount of dividends and other payments that may be made by the
borrowers to their parent or other affiliates, as well as capital expenditures
and other borrowings. This credit arrangement matures in May 2010. An additional
$3,000,000 is available under this credit arrangement for capital expenditures.
AMREP Southwest has a loan agreement with a bank with a maximum borrowing
capacity of $10,000,000 that may be used to support real estate development in
New Mexico. The loan is uncollateralized and bears interest at the bank's prime
20
rate less 0.75% or, at the borrower's option, a LIBOR-based interest rate plus
2.0%. At April 30, 2005, there were no balances outstanding under this
arrangement. The credit agreement contains certain financial restrictions, the
most significant of which limit other borrowings and require the maintenance of
a minimum tangible net worth (as defined) and a certain level of unencumbered
inventory. This credit arrangement matures in October 2008.
Other notes payable consist of equipment financing loans and, in 2005, a note
payable related to the acquisition of distribution contracts, with a weighted
average interest rate of 4.8% in 2005 and 5.4% in 2004.
(9) BENEFIT PLANS:
--------------
Retirement plan
---------------
The Company has a retirement plan which, prior to March 1, 2004, covered
substantially all full-time employees and provided benefits based upon a
percentage of the employee's annual salary. Effective March 1, 2004, accumulated
benefits were frozen and future service credits were curtailed. 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 (income) for 2005, 2004 and 2003 was comprised of the
following components:
Year Ended April 30,
------------------------------------------------------
2005 2004 2003
--------------- ---------------- ----------------
(Thousands)
Service cost (including plan expenses) $ 124 $ 784 $ 568
Interest cost on projected
benefit obligation 1,817 1,762 1,804
Expected return on assets (2,064) (1,793) (2,049)
Amortization of prior service cost - (293) (352)
Recognized net actuarial loss 426 741 189
--------------- ---------------- ----------------
Pension cost for normal activity 303 1,201 160
(Gain) on curtailment - (1,686) -
--------------- ---------------- ----------------
Total cost (benefit) recognized in pretax income 303 (485) 160
Cost (benefit) recognized in pretax other
comprehensive income 2,271 (2,368) 10,057
--------------- ---------------- ----------------
$ 2,574 $ (2,853) $ 10,217
=============== ================ ================
Assumptions used in determining net periodic pension cost were:
Year Ended April 30,
-----------------------------------------------------------
2005 2004 2003
----------------- ----------------- -----------------
Discount rates 5.75% 6.25% 6.25%
Expected long-term rate of return
on assets 8.0% 8.0% 8.0%
21
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,
-------------------------------
2005 2004
------------- --------------
(Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 30,048 $ 29,483
Service cost (excluding expense component) - 684
Interest cost 1,817 1,762
Actuarial (gain) loss 1,821 (123)
Benefits paid (1,878) (1,758)
------------- --------------
Benefit obligation at end of year $ 31,808 $ 30,048
------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 26,842 $ 22,400
Actual return on plan assets 1,277 5,299
Employer contribution - 1,025
Benefits paid (1,878) (1,758)
Expenses paid (212) (124)
------------- --------------
Fair value of plan assets at end of year $ 26,029 $ 26,842
------------- --------------
Funded status $ (5,780) $ (3,206)
Unrecognized net actuarial loss 9,961 7,689
------------- --------------
Net amount recognized in the balance sheets $ 4,181 $ 4,483
============= ==============
Amounts recognized on the balance sheets:
Accrued pension costs $ (5,780) $ (3,206)
Pre-tax accumulated comprehensive loss 9,961 7,689
------------- --------------
$ 4,181 $ 4,483
============= ==============
The average asset allocation for the retirement plan was as follows:
April 30,
-------------------------------
2005 2004
------------- --------------
Equity securities 75 % 70 %
Fixed income securities 22 27
Other (principally cash and cash equivalents) 3 3
------------- --------------
Total 100 % 100 %
============= ==============
The Company recorded other comprehensive income (loss) of ($1,362,000) in 2005,
$1,420,000 in 2004 and ($6,034,000) in 2003 to account for the net effect of
changes to the unfunded pension liability.
The investment mix between equity securities and fixed income securities is
based upon achieving a desired return by balancing higher return, more volatile
equity securities and lower return, 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 plan's expected return on assets, as shown above, 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. In
2004, $1,025,000 was paid by the Company to the plan. No contributions were
required in 2005 and 2003. No contribution is expected to be required in 2006.
The amount of future annual benefit payments is expected to be between $1.9
million and $2.1 million in 2006 through 2010, and an aggregate of approximately
$11.2 million is expected to be paid in the five year period 2011-2015.
22
Savings and Salary Deferral Plan
--------------------------------
The Company has a Savings and Salary Deferral Plan, commonly referred to as a
401(k) plan, in which all full-time 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. As of March 1, 2004, the Company matches 66.67% of
eligible employees' defined contributions up to a maximum of 4% of such
employees' compensation. Prior to March 1, 2004, the matching contribution was
33.33% of each employee's defined contribution up to a maximum of 2% of
compensation. The Company's contribution to the plan amounted to approximately
$841,000, $389,000 and $251,000 in 2005, 2004 and 2003, respectively.
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 receives
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 $262,000 in 2005 (15,000 shares
issued), $230,000 in 2004 (15,000 shares issued) and $66,000 in 2003 (7,500
shares issued), and 27,500 shares remain available for grant at April 30, 2005.
Stock option plans
------------------
The Company has a Non-Employee Directors Option Plan which has 19,000 shares
reserved for issuance at April 30, 2005 and provides for an automatic issuance
of options 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.
A summary of activity in the Company's stock option plan is as follows:
Year Ended April 30,
-----------------------------------------------------------------------
2005 2004 2003
-------------------- ----------------------- ----------------------
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 9,500 $ 9.12 9,000 $ 6.30 13,000 $ 5.92
Granted 3,000 17.55 3,000 15.19 3,000 8.45
Exercised (5,500) 6.34 (2,500) 6.23 (7,000) 6.53
Expired or canceled - - - - - -
------------------- ------------------- -----------------
Options outstanding at
end of year 7,000 14.92 9,500 9.12 9,000 6.30
=================== =================== =================
Available for grant at
end of year 12,000 15,000 18,000
=================== =================== ==================
Options exercisable at
end of year 4,000 6,500 6,000
=================== =================== ==================
Range of exercise prices
for options exercisable
at end of year $3.95 to $17.55 $3.95 to $8.45 $3.95 to $7.75
=================== =================== ==================
Options outstanding at April 30, 2005 are exercisable over a four year period
beginning one year from date of grant. The weighted average remaining
contractual life of options outstanding at April 30, 2005, 2004 and 2003 was
3.6, 3.2, and 3.1 years, respectively. The weighted average fair value of
options granted during the year was $5.57 in 2005, $4.82 in 2004 and $2.84 in
23
2003. 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 2005, 2004 and 2003, respectively: expected
volatility of 42%, 44% and 46%; risk-free interest rates of 2.8%, 2.0% and 2.6%;
and expected lives of 3 years.
Stock options granted have been 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 plans. Further, the
amount of additional compensation disclosable under the disclosure-only
provisions of SFAS No. 123 is immaterial for all periods presented.
(10) INCOME TAXES:
-------------
The provision for income taxes consists of the following:
Year Ended April 30,
-------------------------------------------------------
2005 2004 2003
---------------- --------------- ---------------
(Thousands)
Current:
Federal $ 5,770 $ 2,961 $ 2,335
State and local 488 350 316
---------------- --------------- ---------------
6,258 3,311 2,651
---------------- --------------- ---------------
Deferred:
Federal 928 3,011 793
State and local 103 531 140
---------------- --------------- ---------------
1,031 3,542 933
---------------- --------------- ---------------
Total provision for income taxes $ 7,289 $ 6,853 $ 3,584
================ =============== ===============
The provision for income taxes has been allocated as follows:
Year Ended April 30,
-------------------------------------------------------
2005 2004 2003
---------------- --------------- ---------------
(Thousands)
Continuing operations $ 7,326 $ 6,638 $ 3,553
Discontinued operations (37) 215 31
---------------- --------------- ---------------
Total provision for income taxes $ 7,289 $ 6,853 $ 3,584
================ =============== ===============
The components of the net deferred income tax liability are as follows:
April 30,
-------------------------------------
2005 2004
--------------- ----------------
(Thousands)
Deferred income tax assets-
State tax loss carryforwards $ 4,902 $ 5,009
Accrued pension costs 2,316 1,282
Real estate inventory valuation - 566
Other 1,562 1,573
--------------- ----------------
Total deferred income tax assets 8,780 8,430
--------------- ----------------
Deferred income tax liabilities-
Real estate basis differences (2,022) (2,149)
Reserve for periodical returns (1,470) (1,177)
Depreciable assets (3,369) (3,270)
Capitalized costs for financial reporting
purposes, expensed for tax (3,281) (2,968)
--------------- ----------------
Total deferred income tax liabilities (10,142) (9,564)
--------------- ----------------
Valuation allowance for realization of state tax
loss carry forwards (4,755) (4,862)
--------------- ----------------
Net deferred income tax liability $ (6,117) $ (5,996)
=============== ================
24
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
(benefit):
Year Ended April 30,
--------------------------------------------------------
2005 2004 2003
---------------- --------------- ---------------
(Thousands)
Computed tax provision at
statutory rate $ 8,020 $ 6,098 $ 3,325
Increase (reduction) in tax resulting from:
State income taxes, net of federal
income tax effect 395 717 391
Other, primarily permanent differences related to
real estate land contributions (1,089) (177) (163)
---------------- --------------- ----------------
Actual tax provision $ 7,326 $ 6,638 $ 3,553
================ =============== ================
(11) SHAREHOLDERS' EQUITY:
---------------------
The Company recorded other comprehensive income (loss) of ($1,362,000) in 2005,
$1,420,000 in 2004 and ($6,034,000) in 2003 to account for the net effect of
changes to the unfunded pension liability (see note 9).
In connection with the 2002 Non-Employee Directors' Stock Plan, 15,000 shares of
common stock were issued from treasury stock in each of 2005 and 2004 to members
of the Board of Directors as partial compensation for services. As a result,
there were 788,592 and 803,592 shares held in the treasury at April 30, 2005 and
2004, respectively.
(12) ACQUISITIONS:
-------------
In November 2004, Kable's Distribution Services subsidiary purchased a portfolio
of magazine distribution contracts for a total purchase price of approximately
$1,270,000, consisting of cash ($100,000) and a $1,170,000 note payable. The
purchase price was capitalized and is included in Other Assets on the
accompanying consolidated balance sheet.
In April 2003, Kable's Fulfillment Services subsidiary acquired certain tangible
and intangible assets and assumed certain liabilities constituting the
subscription fulfillment business of Electronic Data Systems Corporation and
various subsidiaries in order to expand its fulfillment operations. The purchase
price for these assets was approximately $10,000,000 and consisted of cash and
the assumption of certain customer deposit liabilities. The transaction has been
accounted for as a purchase in accordance with SFAS No. 141, "Business
Combinations", and the results of operations since the date of acquisition are
included in the consolidated financial statements. The purchase price was
allocated to the acquired assets based upon an appraisal and other studies. The
purchase price allocation was as follows: Property, plant and equipment -
$7,486,000; Other assets - $4,296,000; Accrued expenses - $5,202,000; Total cash
price - $6,580,000.
(13) COMMITMENTS AND CONTINGENCIES:
------------------------------
Land sale contracts
-------------------
The Company has entered into several conditional sales contracts for the sale of
approximately 1,180 lots in Rio Rancho, New Mexico which would close at varying
times throughout fiscal 2006 and 2007; however, since each of the contracts
permits the purchaser to terminate its obligations by forfeiture of a relatively
modest deposit, there are no assurances that all, or even a substantial portion,
of the lots subject to the contracts will be sold pursuant to the contracts.
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 2005, 2004 and 2003 was approximately $9,359,000,
$12,075,000 and $4,378,000 respectively.
25
The total minimum rental commitments for years subsequent to April 30, 2005 of
$9,788,000 are due as follows: 2006 - $7,246,000; 2007 - $2,105,000; 2008 -
$359,000; 2009 - $61,000; 2010 - $17,000; thereafter - none.
Lot exchanges
-------------
In connection with certain individual homesite 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.
(14) LITIGATION:
-----------
A subsidiary of Kable is a defendant in a lawsuit in which the plaintiff is a
former wholesaler no longer in business who alleges 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 is seeking damages from the Kable
defendant of approximately $15.2 million; any damages awarded would be trebled.
Kable's subsidiary is vigorously defending itself, but the outcome of this
matter is unknown. Pretrial discovery has been completed, and it is unlikely
that a trial will commence prior to calendar 2006. No provision has been made in
the financial statements for this contingency.
The Company and its subsidiaries are involved in various other claims and legal
actions incident to their operations which, in the opinion of management and
based upon advice of counsel, will not materially affect the consolidated
financial position or results of operations of the Company and its subsidiaries.
(15) 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, magazine service 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 $3.9 million and $4.2 million versus carrying amounts of $4.3
million and $4.1 million at April 30, 2005 and April 30, 2004, respectively. The
estimated fair value of the Company's long-term, fixed-rate notes payable was
$4.5 million versus a carrying amount of $4.5 million as of April 30, 2005 and
$3.9 million versus $3.8 million as of April 30, 2004.
(16) INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT
-------------------------------------------------------
INDUSTRY SEGMENTS:
------------------
The Company has identified three segments in which it currently operates under
the definition established by SFAS No. 131. The Company's magazine service
operations subsidiary has two identified segments, Newsstand Distribution
Services and Fulfillment Services. Newsstand Distribution Services operations
involve the national and, to a small degree, international distribution and sale
of periodicals to wholesalers, and Fulfillment Services operations involve the
performance of subscription and product fulfillment and other related activities
on behalf of various publishers and other clients. 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. Corporate revenues and expenses not identifiable with a specific
segment are grouped together in this presentation. Certain revenues and expenses
which in prior years had been included with Corporate have been reclassified to
conform to the current year presentation and included in Real Estate Operations.
In addition, the operations of the Company's Utility subsidiary, which
previously had been included in Corporate, are presented as "Discontinued
Operations" within the accompanying financial statements, and therefore its
revenues and expenses are excluded from the segment information. Certain common
expenses as well as identifiable assets are allocated among industry segments
based upon management's estimate of each segment's absorption.
26
Summarized data relative to the industry segments in which the Company has
operations is as follows (amounts in thousands):
Newsstand
Distribution Fulfillment Real Estate
Services Services Operations Corporate Consolidated
-------- -------- ---------- --------- ------------
Year ended April 30, 2005:
Revenues $ 13,017 $ 83,896 $ 37,385 $ 208 $ 134,506
Expenses 11,603 76,228 20,995 2,106 110,932
Management fee (income) 116 784 900 (1,800) -
Interest expense, net 47 555 5 53 660
--------------- ------------- ------------- ------------ --------------
Pretax income (loss) contribution
from continuing operations $ 1,251 $ 6,329 $ 15,485 $ (151) $ 22,914
=============== ============= ============= ============ ==============
Depreciation and amortization $ 575 $ 4,403 $ 188 $ 177 $ 5,343
Identifiable assets $ 38,681 $ 41,918 $ 75,571 $ 32,948 $ 189,118
Intangible assets $ 3,893 $ 1,298 $ - $ - $ 5,191
Capital expenditures $ - $ 3,018 $ 1,913 $ 14 $ 4,945
----------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2004:
Revenues $ 12,162 $ 87,629 $ 29,415 $ 85 $ 129,291
Expenses 11,036 80,786 17,022 1,568 110,412
Management fee (income) 141 592 770 (1,503) -
Interest expense, net 30 615 213 86 944
--------------- ------------- ------------- ------------ --------------
Pretax income (loss) contribution
from continuing operations $ 955 $ 5,636 $ 11,410 $ (66) $ 17,935
=============== ============= ============= ============ ==============
Depreciation and amortization $ 459 $ 4,087 $ 225 $ 244 $ 5,015
Identifiable assets $ 33,917 $ 38,983 $ 76,934 $ 16,140 $ 165,974
Intangible assets $ 3,893 $ 1,298 $ - $ - $ 5,191
Capital expenditures $ 218 $ 3,069 $ 266 $ 115 $ 3,668
----------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2003:
Revenues $ 14,832 $ 39,226 $ 17,738 $ 393 $ 72,189
Expenses 12,147 37,342 10,932 1,406 61,827
Management fee (income) 182 518 700 (1,400) -
Interest expense, net 190 162 137 93 582
--------------- ------------- ------------- ------------ --------------
Pretax income contribution
from continuing operations $ 2,313 $ 1,204 $ 5,969 $ 294 $ 9,780
=============== ============= ============= ============ ==============
Depreciation and amortization $ 763 $ 1,848 $ 227 $ 233 $ 3,071
Identifiable assets $ 31,962 $ 34,970 $ 73,991 $ 13,436 $ 154,359
Intangible assets $ 3,893 $ 1,298 $ - $ - $ 5,191
Capital expenditures $ 66 $ 1,263 $ 65 $ 522 $ 1,916
----------------------------------------------------------------------------------------------------------------------------
27
(17) SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
----------------------------------------------
(In thousands of dollars, except per share amounts)
Quarter Ended
-----------------------------------------------------------------
Year ended April 30, 2005: July 31, October 31, January 31, April 30,
2004 2004 2005 2005
-------------- --------------- -------------- --------------
Revenues $ 33,638 $ 33,230 $ 31,486 $ 36,152
Gross Profit 9,967 9,465 7,120 11,072
Income from continuing
operations, net of taxes 3,941 4,370 2,511 4,766
-------------- --------------- -------------- --------------
Income (loss) from operations of
discontinued business, net of
taxes 85 (175) 50 (23)
-------------- --------------- -------------- --------------
Net income $ 4,026 $ 4,195 $ 2,561 $ 4,743
============== =============== ============== ==============
Earnings (loss) per share - Basic
and Diluted:
Continuing Operations $ 0.60 $ 0.66 $ 0.38 $ 0.72
Discontinued Operations 0.01 (0.03) 0.01 -
-------------- --------------- -------------- --------------
Total $ 0.61 $ 0.63 $ 0.39 $ 0.72
============== =============== ============== ==============
Year ended April 30, 2004: July 31, October 31, January 31, April 30,
2003 2003 2004 2004
-------------- --------------- -------------- --------------
Revenues $ 33,061 $ 32,173 $ 32,969 $ 31,088
Gross Profit 9,416 7,604 6,933 7,544
Income from continuing
operations, net of taxes 3,375 2,564 3,341 2,017
-------------- --------------- -------------- --------------
Income from operations of
discontinued business, net of
taxes 156 152 42 30
-------------- --------------- -------------- --------------
Net income $ 3,531 $ 2,716 $ 3,383 $ 2,047
============== =============== ============== ==============
Earnings per share - Basic and
Diluted:
Continuing Operations $ 0.51 $ 0.39 $ 0.50 $ 0.31
Discontinued Operations 0.03 0.02 0.01 -
-------------- --------------- -------------- --------------
Total $ 0.54 $ 0.41 $ 0.51 $ 0.31
============== =============== ============== ==============
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMREP CORPORATION
(Registrant)
Dated: August 3, 2005 By /s/Peter M. Pizza
-----------------
Peter M. Pizza
Vice President and Chief
Financial Officer
29
EXHIBIT INDEX
-------------
3 (a) (i) Articles of Incorporation, as amended - Incorporated by reference
to Exhibit (3) (a) (i) to Registrant's Annual Report on Form
10-K for the fiscal year ended April 30, 1998.
3 (a) (ii) Certificate of Merger - Incorporated by reference to Exhibit (3)
(a) (ii) to Registrant's Annual Report on Form 10-K for the
fiscal year ended April 30, 1998.
3 (b) By-Laws as restated July 13, 2004 - Incorporated by reference to
Exhibit 3 (b) to Registrant's Annual Report on Form 10-K for
the fiscal year ended April 30, 2004.
4 (a) Amended and Restated Loan and Security Agreement dated as of
April 28, 2005 among Kable News Company, Inc., Kable
Distribution Services, Inc., Kable News Export, Ltd., Kable
News International, Inc., Kable Fulfillment Services, Inc.
and Kable Fulfillment Services of Ohio, Inc. and LaSalle
Bank National Association. - Incorporated by reference to
Exhibit 10.1 to Registrant's Current Report on Form 8-K
filed May 3, 2005.
4 (b) Credit Agreement dated as of April 1, 2005 between AMREP Southwest
Inc. and Wells Fargo Bank, National Association -
Incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K filed May 11, 2005.
4 (c) Revolving Line of Credit Note dated April 1, 2005 from AMREP
Southwest Inc. to Wells Fargo Bank, National Association -
Incorporated by reference to Exhibit 10.2 to Registrant's
Current Report on Form 8-K filed May 11, 2005.
10 (a) 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 (b) 2002 Non-Employee Directors' Stock Plan - Incorporated by reference
to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 2003.*
10 (c) Offer letter dated June 2, 2005 from Registrant to Joseph S. Moran
- Incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K filed June 8, 2005.*
21 Subsidiaries of Registrant - Incorporated by reference to Exhibit
21 to Registrant's Annual Report on Form 10-K for the fiscal
year ended April 30, 2005 filed July 28, 2005.
23 Consent of McGladrey & Pullen, LLP - Filed herewith.
31.1 Certification required by Rule 13a - 14 (a) under the Securities
Exchange Act of 1934.
31.2 Certification required by Rule 13a - 14 (a) under the Securities
Exchange Act of 1934.
31.3 Certification required by Rule 13a - 14 (a) under the Securities
Exchange Act of 1934.
32 Certification required by Rule 13a - 14 (b) under the Securities
Exchange Act of 1934.
--------------
* Management contract or compensatory plan or arrangement in which directors or
officers participate.
30