November 30, 2005
Division of Corporation Finance
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0404
Attention: Rufus Decker, Branch Chief
Re: AMREP Corporation
File Number 1-4702
Dear Mr. Decker:
The following comments are in response to the comments contained in your letter
dated October 25, 2005 regarding the review of the Annual Report on Form 10-K of
AMREP Corporation (the "Company") for the fiscal year ended April 30, 2005
("2005 Form 10-K") and the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 31, 2005.
Comments with Respect to the 2005 Form 10-K:
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Comment Number 1 (General):
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Please be advised that the Company will include the additional disclosures and
revisions responsive to the comments contained in the above-referenced letter
and discussed below in its future filings.
Comment Number 2 (Critical Accounting Policies and Estimates, page 8):
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The Company identified six major areas of accounting policy that require the use
of judgments and estimates in the preparation of its financial statements. The
Company will expand the disclosures in future filings for certain of these
practices, as discussed below.
Revenue recognition/allowance for magazine returns
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As disclosed in Note 1 to the consolidated financial statements, Newsstand
Distribution revenues represent commissions earned from the distribution of
publications. The commission is the difference between the sale price the
Company receives from its wholesaler customers and the purchase price the
Company pays to its publisher clients. It is the prevailing practice in the
magazine distribution industry to distribute for retail sale three to four times
the number of copies of a magazine title that are estimated by the distributor
will be sold, with a right of return for all unsold copies at all levels of the
distribution chain. Consequently, approximately 70% to 75% of the magazines
distributed to wholesalers are returned to the Company, and the Company is able
to pass-through all magazine returns that it receives from its wholesaler
customers for credit to the publishers from whom the magazines were purchased,
with the difference between the two credit amounts representing the commission
which would have been earned by the Company on the returned magazines had they
been sold. Thus, variations in the estimates that the Company makes in its
financial statements for future returns from wholesalers are largely offset by
similar variations in the estimates of the related publisher credits to which
the Company is entitled.
In future filings, the list of areas requiring significant judgments and
estimates set forth in the second paragraph under "Critical Accounting Policies"
will be modified to explain that "returns" include both magazines returned to
the Company from wholesalers and the offsetting return of magazines by the
Company to publishers for credit, by expanding the description under clause
"(i)" as follows:
"(i) the determination of revenue recognition for the magazine services
business, which is based on estimates of allowances for magazine returns to the
Company from wholesalers and the offsetting return of magazines by the Company
to publishers for credit;"
In addition, the third paragraph under "Critical Accounting Policies" will be
modified to describe that the Company receives offsetting credits for returned
magazines and to quantify the effect of a potential difference in the actual
rate of return of publications compared to the Company's estimate, by expanding
the description under clause "(i)" as follows:
"(i) distribution revenues represent commissions earned from the distribution of
publications for client publishers which are recorded by the Company at the time
the publications go on sale; 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
current sales information and other relevant data, including wholesalers'
historical return practices and publisher and like-title sales histories. The
financial impact to the Company of a change to the sales estimate for magazine
returns to it from its wholesalers is substantially offset by the simultaneous
change in the Company's estimate of its cost of purchase since it passes on the
returns to the publishers for credit. As a result, the effect of a difference
between the actual and estimated return rate on the Company's commission
revenues is the amount of the commission attributable to the difference. The
effect of an increase or decrease in the Company's estimated rate of returns of
1% during any period would be dependent upon the mix of magazines involved and
the related selling prices and commission rates, but would generally result in a
change in that period's net commission revenue of approximately $125,000."
Pension Plan accounting
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As disclosed, major assumptions incorporated in the pension computations include
the expected investment rate of return on retirement plan assets and the
interest rate used to determine the present value of liabilities (the discount
rate). The Company will expand its disclosures in the future to include the
effect on pension expense of changes in the rates used in its assumptions. In
future filings, clause "(v)" of the third paragraph under "Critical Accounting
Policies" will be modified by adding the following information to the present
description:
"(v)... The effect of every .25% change in the investment rate of return on
retirement plan assets would increase or decrease the pension expense by
approximately $65,000 per year, and a change in the discount rate of .25% at a
fiscal year-end would result in an increase or decrease in the subsequent year's
pension cost of approximately $55,000." (Note - the amounts included herein are
based on underlying, relevant information as reported for fiscal 2005, and would
be modified in future disclosures, as appropriate).
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Other
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Cost of sales calculations are dependent upon estimates of future development
budgets and estimates of costs to complete. The effect of changes in these two
estimates is accounted for prospectively, in accordance with prescribed
accounting rules for changes in accounting estimates. Typically, however, the
Company is required to complete a substantial portion of improvements that are
directly related to a site before a buyer will close on the property.
The effect of changes in the other identified Critical Accounting Policies where
estimates are utilized (i.e., allowance for bad debts, cash flow and valuation
assumptions for long-lived assets, and legal contingencies) are based on
judgments that are specific to the underlying facts and circumstances in each
situation, and therefore the effect of "generalized" variations in estimates are
not readily quantifiable.
The Company proposes to make no revisions to these disclosures.
Prior Material Changes in Accounting Estimates
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There have been no material changes made to the Company's accounting estimates
in the past three years. In the event of significant changes in the future, the
Company would add the appropriate disclosure.
Comment Number 3 (Management's Discussion and Analysis - Results of Operations,
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pages 8 though 10):
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In the Fulfillment Services business segment there are multiple revenue streams,
including revenues from the maintenance of customer computer files and the
performance of other fulfillment-related activities, including telephone (call
center) support, graphic arts and lettershop services. Generally, a customer
contracts for and utilizes all available services as a total package, and the
Company would not provide its ancillary services to a customer unless it were
also providing the core service of maintaining a data base of names. Thus,
variations in fulfillment revenues are the result of fluctuations in the number
and sizes of customers rather than in the demand for a particular service.
Accordingly, explanations to describe revenue fluctuations have typically noted
customer gains and losses rather than any other reason, such as a change in
demand for individual product services. This is also particularly true in the
Newsstand Distribution Services business where there is only one primary service
provided which results in one revenue source, the commission earned on the
distribution of magazines.
In future filings, the Company will incorporate the information that is
presently included in Item 1 of the Form 10-K into Management's Discussion and
Analysis. This will specifically state that the Company competes with other
companies, including larger companies, in the Newsstand Distribution and
Fulfillment Services businesses, and that the competition for new customers is
intense in both segments. The Company will add language clarifying that this
competition results in a price sensitive industry, and will specify whether
changes in revenue resulted from changes in the customer base or other factors.
Historically, when the Company has been aware of a future trend, favorable or
adverse, it has disclosed such trend, as it has done in recent years when it
disclosed an expected decline in Fulfillment Services revenues due to a loss of
customers, and will continue to do so.
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Future filings will also be modified to specifically indicate that the primary
expenses in both segments are payroll, equipment and occupancy costs. The
Company will continue to provide detail on significant cost variances between
periods and on future trends should they arise. In addition, the Company will
continue to provide the margin information and explanations of changes or future
trends should they exist.
Comment Number 4 (Summary of Significant Accounting Policies-Newsstand
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Distribution Services Revenue Recognition and related Accounts Receivable and
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Accounts Payable, page 20):
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The revenue recognition policy for distribution revenues, beginning with the
second sentence of the "Revenue recognition" portion of Note 1, will be revised
as follows:
"Distribution revenues represent commissions earned from the distribution of
publications for client publishers and are recorded at the time the publications
go on sale at the retail level, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return
Exists". Because publications are sold throughout the distribution chain on a
fully-returnable basis in accordance with prevailing industry practice, the
Company provides for estimated returns from wholesalers at the time the
publications go on sale by charges to income that are based on historical
experience and most recent sales data for publications on a title-by-title
basis, and then simultaneously provides for estimated credits from publishers
for the related returns. Accordingly, revenues represent the difference between
the Company's estimate of net sales to independent wholesalers offset by its
estimate of net purchases from publisher clients. Estimates are continually
reevaluated throughout the sales process, and final settlement is typically made
90 days after a magazine's "off-sale" date."
An additional paragraph will be included in the "Cash Flows From Financing
Activities" section of "Liquidity and Capital Resources" within the Management
Discussion and Analysis, as follows:
"The Newsstand Distribution Services business generally makes substantial cash
advances to publishers against future sales, which publishers may use to help
pay for printing, paper and production costs prior to the product going on sale.
The Company is usually not paid by wholesalers for product until some time after
the product has gone on sale, however, and is therefore exposed to potential
credit risks with both the publishers and the wholesalers. Its ability to limit
its credit risk and make a profit is dependent in part on its skill in
estimating the number of copies of an issue which are expected to be sold, and
on limiting its advances to the publisher accordingly."
In future filings, the Company will also separately identify accounts receivable
from wholesalers and accounts payable to publishers in its footnote data, as
follows:
o The table in Note 3 will separately identify accounts receivable from
wholesalers, fulfillment services receivables, and other receivables
(if significant).
o Accounts payable presented on the balance sheet will separately
identify "accounts payable to publishers" and "other accounts
payable".
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Comment Number 5:
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The allowance for estimated returns of $57,524,000 in 2005 and $53,808,000 in
2004 was approximately 70.2% and 76.1% of the total amount of accounts
receivable from wholesalers in the Newsstand Distribution Services business that
matured within one year of April 30, 2005 and 2004, respectively. As stated in
the response to Comment Number 2, it is prevailing industry practice in the
magazine distribution industry to distribute a much higher number of
publications than are expected to sell at the retail level, and a return rate of
70% or higher is not unusual.
As stated below in the response to Comment Number 6, the information reported on
Schedule II for the charges (credits) recorded in magazine circulation
operations are gross amounts which are offset by credits received by the Company
from publishers for returns, and the net amounts do not have a material effect
on income.
Comment Number 6:
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The charges and credits reflected on Schedule II for magazine circulation
operations are recorded in the allowance for bad debts and the estimate of
magazine returns from wholesalers during the fiscal year; because all products
are sold with the right of return throughout the distribution chain, the Company
receives offsetting credits related to the return of these magazines to
publishers, who bear the ultimate risk and responsibility for unsold magazines.
The amounts of the wholesaler and publisher credits substantially offset each
other and thus do not have a material effect on income. A footnote indicating
such will be added to Schedule II in future filings, as follows:
"Charges (credits) recorded in magazine circulation operations include a reserve
for the estimate of magazine returns from wholesalers of (amounts to be
disclosed), which are substantially offset by offsetting credits related to the
return of these magazines to publishers."
Comment Number 7:
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A sentence will be added to the end of the second paragraph following the table
in Note 7, as follows:
"As a result of the concentration of accounts receivable in three customers, the
Company could be adversely affected by adverse changes in their financial
condition or other factors negatively affecting these companies."
Comment Number 8 (Summary of Significant Accounting Policies - Land sales, page
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20):
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The Company discloses that its land sales are recognized when required elements
of SFAS No. 66 are met, including being bound by terms of a 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.
The Company will expand the disclosure of land sale revenue recognition policies
stated in the first sentence of the second paragraph under "Revenue recognition"
to include:
"...and the Company is not obligated to perform further significant development
on the specific property sold."
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Because the Company does not sell its land on a retail basis as defined in
paragraph 100 of SFAS No. 66, it has not included the required disclosures of
paragraphs 45 though 48 and paragraph 50 of SFAS No. 66 that are applicable to
retail land sellers.
Comment Number 9 (Summary of Significant Accounting Policies - Land sales, page
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20):
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The Company will revise its disclosures in future filings to describe the method
by which it determines the cost of land sales, as follows:
"Cost of land sales includes all direct acquisition costs and other costs
specifically identified with the property, including pre-acquisition costs and
capitalized real estate taxes and interest, and an allocation of certain common
development costs associated with the entire project. Common developments costs
include the installation of utilities and roads, and may be based upon estimates
of cost to complete. The allocation of costs is based on the relative fair value
of the property before development. Estimates and cost allocations are reviewed
on a regular basis until a project is substantially completed, and are revised
and reallocated as necessary on the basis of current estimates."
Comment Number 10 (Note 2-Discontinued Operations, page 23):
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The Company will revise its disclosures in future filings to disclose relevant
financial information about the discontinued operation, as follows:
"Revenues of the water utility subsidiary were: 2005 - $1,210,000 (through
November 30, 2004); 2004 - $1,816,000; and 2003 - $1,602,000. Pretax income
(loss) of the water utility subsidiary was: 2005 - $(131,000) (through November
30, 2004); 2004 - $595,000; and 2003 - $76,000."
Comment Number 11 (Note 7-Other Assets, page 25):
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In future filings, the Company will expand the table in Note 7 ("Other Assets")
to separately disclose the gross amounts of the largest components of net
deferred charges, which are software development costs ($4,839,000 at April 30,
2005, net of $2,457,000 of amortization) and deferred order entry costs
($3,745,000 at April 30, 2005), and will disclose the aggregate amount of
accumulated amortization. Disclosures in Note 7 will also be expanded to include
the following information directly below the table:
"Software development costs include internal and external costs of the
development of new or enhanced software programs and are generally amortized
over five years. Deferred order entry costs represent costs incurred in
connection with the data entry of customer subscription information to data base
files and are charged directly to operations over a 12-month period. "Other"
includes the costs of customer contracts acquired in November 2004 and are
amortized over four years.
Amortization of Other Assets for each of the next five years is estimated to be
as follows: 2006- $1,200,000; 2007 - $2,100,000; 2008 - $2,400,000; 2009 -
$2,100,000 ; and 2010 - $2,100,000."
In response to your inquiries, there were no intangibles acquired in connection
with the April, 2003 business acquisition. No assets are included in the Note 7
disclosures that are not amortized or charged to expense.
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Comment Number 12 (Commitments and Contingencies: Land sales contracts, page
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30):
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A sentence will be added to the "Land sales contracts" section of Note 13,
"Commitments and Contingencies", stating the following:
"No recognition has been given to the conditional sales contracts in the
financial statements."
Comment Number 13 (Controls and Procedures, page 34):
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The Company confirms that its disclosure controls and procedures were effective
as of April 30, 2005 and July 31, 2005, (i) to provide reasonable assurance that
the information required to be disclosed in the reports that the Company filed
or submitted under the Securities and Exchange Act of 1934 was recorded,
processed, summarized and reported within the time frame specified in the
Securities and Exchange Commission's rules and forms, and (ii) to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is accumulated and
communicated to management, including the Company's principal executive and
principal financial officers, or persons performing similar functions, as
appropriate, to allow timely decisions regarding disclosure.
The definition of disclosure controls set forth above will be used in future
filings.
Comment with Respect to the Form 10-Q for the Quarter Ended July 31, 2005:
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Comment Number 14 (General):
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Please be advised that Company will incorporate the revisions required by the
comments contained in this letter into its future Form 10-Q filings.
***
The Company hereby acknowledges:
o The Company is responsible for the adequacy and accuracy of the
disclosure in its filings;
o Comments made by the SEC staff or changes to disclosure in
response to staff comments do not foreclose the Securities and
Exchange Commission from taking any action with respect to the
Company's filings; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
I trust that this is responsive to your comments. If you have additional
comments or need to contact the Company further, you may contact me at (212)
705-4705.
Yours truly,
/s/ Peter M. Pizza
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Peter M. Pizza
Vice President - Chief Financial Officer
cc: Richard Day - McGladrey & Pullen, LLP
Irving Needleman, Esq. - McElroy, Deutsch, Mulvaney & Carpenter, LLP
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