UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ x ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended April 30, 2006
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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Commission File Number 1-4702
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AMREP CORPORATION
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(Exact name of registrant as specified in its Charter)
Oklahoma 59-0936128
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
212 Carnegie Center, Suite 302
Princeton, New Jersey 08540
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 716-8200
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes No X
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Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Act").
Yes No X
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act.
Large accelerated filer Accelerated filer Non-accelerated filer X
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Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes No X
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As of October 31, 2005, which was the last business day of the Registrant's most
recently completed second fiscal quarter, the aggregate market value of the
Common Stock held by non-affiliates of the Registrant was $44,854,869. Such
aggregate market value was computed by reference to the closing sale price of
the Registrant's Common Stock as quoted on the New York Stock Exchange on such
date. For purposes of making this calculation only, the Registrant has defined
affiliates as including all directors and executive officers and certain persons
related to them. In making such calculation, the Registrant is not making a
determination of the affiliate or non-affiliate status of any holders of shares
of Common Stock.
As of July 27, 2006, there were 6,645,112 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this annual report on Form 10-K, portions of the
Registrant's definitive proxy statement to be filed within 120 days after the
end of the fiscal year covered by this annual report on Form 10-K are
incorporated herein by reference.
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PART I
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Item 1. Business
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GENERAL
The Company*, through its subsidiaries, is primarily engaged in three business
segments: the Real Estate business operated by AMREP Southwest Inc. and its
subsidiaries (collectively, "AMREP Southwest"), and the Fulfillment Services and
Newsstand Distribution Services businesses operated by Kable Media Services,
Inc. and its subsidiaries (collectively, "Kable"). Data concerning industry
segments is set forth in note 17 of the notes to the consolidated financial
statements. The Company's foreign sales and activities are not significant.
REAL ESTATE OPERATIONS
The Company conducts its Real Estate business through AMREP Southwest, with
these activities occurring primarily in Rio Rancho, New Mexico. As of July 1,
2006, the Real Estate business employed approximately 15 persons, none of whom
were represented by labor unions. The Company considers its relations with these
employees to be good.
Land Development Properties - Rio Rancho
Rio Rancho (including the City) consists of 91,049 contiguous acres in Sandoval
County, New Mexico, near Albuquerque, of which approximately 73,600 acres have
been platted into approximately 113,800 homesite and commercial lots, 16,400
acres are dedicated to community facilities, roads and drainage and the
remainder is unplatted land. At April 30, 2006, approximately 88,200 of these
lots had been sold. The Company currently owns approximately 18,500 acres in Rio
Rancho, of which approximately 4,900 acres are in contiguous blocks which are
being developed or are suitable for development and approximately 2,000 acres
are in areas with a high concentration of ownership suitable for special
assessment districts or city redevelopment areas which may allow for future
development under the auspices of local government. The balance is in scattered
lots which may require the purchase of a sufficient number of adjoining lots to
create tracts suitable for development or which may be sold individually or in
small groups.
Development activities conducted or arranged by the Company include the
obtaining of necessary governmental approvals ("entitlements"), installation of
utilities and necessary storm drains, and building or improving of roads. At Rio
Rancho, the Company is developing both residential lots and sites for commercial
and industrial use as the demand warrants, and also is securing entitlements for
large development tracts for sale to homebuilders. The engineering work at Rio
Rancho is performed by both Company employees and outside firms, but development
work is performed by outside contractors. Land at Rio Rancho is marketed by
Company personnel, both directly and through brokers. The Company competes with
other owners of land in the Albuquerque area who offer for sale developed
residential lots and sites for commercial and industrial use.
Today, Rio Rancho is the third largest city in New Mexico with a population
approaching 70,000. The commercial areas in Rio Rancho presently include more
than 500 businesses and professional offices, as well as 17 shopping centers
with approximately 1.7 million square feet of retail and office space, including
a 55,000 square foot office building and a 29,000 square foot commercial rental
property which are owned by the Company. The industrial areas have approximately
85 buildings with approximately 4.5 million square feet, including a
manufacturing facility containing approximately 3.1 million square feet which is
owned and occupied by Intel Corporation, Rio Rancho's largest employer.
Since early 1977, no individual lots without homes at Rio Rancho have been sold
by the Company to consumers. A substantial number of lots without homes were
sold prior to 1977, and most of these are in areas where utilities have not yet
been installed. However, under certain of the contracts pursuant to which the
lots were sold, if utilities have not reached a lot when the purchaser is ready
to build a home, the
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*As used herein, "Company" includes the Registrant and its subsidiaries unless
the context requires or indicates otherwise.
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Company is obligated to exchange a lot in an area then serviced by water,
telephone and electric utilities for the lot of the purchaser, without cost to
the purchaser. The Company has not incurred significant costs related to such
exchanges.
Other Real Estate Properties
The Company has various investment properties, principally consisting of the
55,000 square foot office building it owns in Rio Rancho in which it occupies
approximately 5,400 square feet and leases the remainder, and the 29,000 square
foot commercial rental property it owns in Rio Rancho that is presently being
offered for lease. The Company may develop additional investment properties in
the future.
The Company also owns two tracts of land in Colorado, consisting of one
residential property of approximately 160 acres planned for approximately 350
homes which is being offered for sale subject to obtaining all necessary
entitlements, and one property of approximately 10 acres zoned for commercial
use, which is also being offered for sale but which may be developed by the
Company.
FULFILLMENT SERVICES AND NEWSSTAND DISTRIBUTION SERVICES OPERATIONS
Through Kable, the Company (i) performs subscription fulfillment and related
services for publishers and other customers and (ii) distributes periodicals
nationally and in Canada and, to a small degree, in other foreign countries. As
of July 1, 2006, Kable employed approximately 1,280 persons, of whom
approximately 1,130 were involved in its fulfillment activities and 150 in
distribution activities, none of whom were represented by labor unions. The
Company considers its relations with these employees to be good.
Fulfillment Services
Kable's Fulfillment Services business performs a number of fulfillment and
fulfillment-related activities, principally magazine subscription fulfillment
services, lettershop and graphic arts services, customer telephone support, list
services and product fulfillment services, and it accounted for 85% of Kable's
revenues in fiscal 2006.
In the magazine subscription fulfillment service operation, Kable processes new
orders, receives and accounts for payments, prepares and sends to each
publisher's printer labels or tapes containing the names and addresses of
subscribers for mailing each issue, handles subscriber telephone inquiries and
correspondence, prepares renewal and statement notifications for mailing,
maintains subscriber lists and data bases, generates marketing and statistical
reports, processes internet orders and prints forms and promotional materials.
Kable performs all of these services for many clients, but some clients utilize
only certain of them. Although by far the largest number of magazine titles for
which Kable performs fulfillment services are consumer publications, Kable also
performs services for a number of trade (business) publications, membership
organizations and government agencies which utilize the broad capabilities of
Kable's extensive data base system.
Kable's lettershop and graphic arts departments prepare and mail statements and
renewal forms for its publisher clients to use in their subscriber mailings.
List services clients are also primarily publishers for whom Kable maintains
client customer lists, selects names for clients who rent their lists to others,
merges rented lists with a client's list to eliminate duplication for the
client's promotional mailings, and sorts and sequences mailing labels to provide
optimum postal discounts for clients. Product fulfillment services are provided
for Kable's publisher clients and other direct marketers. In this activity,
Kable receives, warehouses, processes and ships merchandise.
The Company believes that Kable is the second largest provider of subscription
fulfillment services to magazine publishers in the United States, performing
fulfillment services for approximately 725 different magazine titles for
approximately 250 clients and maintaining almost 41 million active subscriber
names for its client publishers. In a typical month, Kable produces
approximately 50 million mailing labels for its client publishers and also
processes over 15 million pieces of outgoing mail for its clients.
There are a number of companies that perform fulfillment services for publishers
and with which Kable competes, including one which is much larger than Kable.
4
Since publishers often utilize only a single fulfillment company for a
particular publication, there is intense competition to obtain fulfillment
contracts with publishers. Competition for non-publisher clients is also
intense. Kable has a staff whose primary task is to solicit fulfillment
business.
Newsstand Distribution Services
In its Newsstand Distribution Services operation, Kable distributes magazines
for over 250 publishers. Among the titles are many special interest magazines,
including automotive, puzzle, men's sophisticates, comics, romance and sports.
Kable generally purchases the publications from its publisher clients and sells
them to independent wholesalers. The wholesalers in turn sell the publications
to retail outlets. All parties generally have full return rights for unsold
copies. In a typical month during fiscal 2006, Kable distributed approximately
25 million copies of various titles through a distribution network of
approximately 100 independent wholesalers. The newsstand distribution business
accounted for 15% of Kable's revenues in fiscal 2006.
While Kable does not handle all publications of all of its publisher clients, it
usually is the exclusive distributor for the publications it distributes. Kable
has a distribution sales and marketing force that works with wholesalers and
retailers to promote product sales and assist in determining the number of
copies of product to be delivered to each retailer. Kable generally does not
physically handle any product. It determines, in consultation with the
wholesalers and publishers, the number of copies of each issue to be
distributed, and generates and delivers to each publisher's printer shipping
instructions with the addresses of the wholesalers and the number of copies of
product to be shipped to each. All magazines have an "off-sale" date (generally
the on-sale date of the next issue) following which the retailers return unsold
copies to the wholesalers, who destroy them after accounting for returned
merchandise in a manner satisfactory to Kable.
Kable 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. Kable is usually not paid by
wholesalers for product until some time after the product has gone on sale, and
is therefore exposed to potential credit risks with both 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 should
be printed and distributed and on limiting its advances to the publisher
accordingly.
Kable competes primarily with three other national distributors, all of whom are
substantially larger than Kable. Each of these larger competitors is owned by or
affiliated with a magazine publishing company. Such companies publish a
substantial portion of all magazines published in the United States, and the
competition for the distribution rights to the remaining publications is
intense. In addition, there has been a major consolidation and reduction in the
number of wholesalers to whom Kable distributes magazines arising from changes
within the magazine distribution industry in recent years. As a result, three of
these wholesalers accounted for approximately 57% of the fiscal 2006 gross
billings of the Newsstand Distribution Services operations and approximately 47%
of Kable's consolidated accounts receivable at April 30, 2006.
Item 1A. Risk Factors
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The risks described below are among those that could materially and adversely
affect the Company's business, financial condition or results of operations.
These risks could cause actual results to differ materially from historical
experience and from results predicted by any forward-looking statements related
to conditions or events that may occur in the future. These risks are not the
only risks the Company faces, and other risks include factors not presently
known as well as those that are currently considered to be less significant.
Real Estate Operations
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The Company's Real Estate business is highly concentrated in one market, and
current results and future growth may be limited if the economy contracts in
this market. 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 from
time to time, including economic contraction due to, among other things, the
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failure of key industries and employers. The Company's results of operations or
future growth may be adversely impacted if the demand for residential or
commercial real estate declines in Rio Rancho as a result of such changes in
economic conditions.
The Company owns a depleting asset, and long-term growth in the Real Estate
business will require the acquisition of additional inventory or expansion into
new markets. Substantially all of the Company's real estate revenues are derived
from sales of its core inventory in Rio Rancho, New Mexico. This property was
acquired more than 40 years ago, and as of April 30, 2006, the Company still
owned approximately 18,500 acres from this original purchase. From time to time
during the Company's history, it has operated in other markets and it still owns
some land in Colorado, but currently its operations are conducted entirely in
Rio Rancho. The continuity and future growth of the Company will require that it
acquire new properties in Rio Rancho or expand to other markets to provide it
with sufficient assets in order to maintain its current level of operations. The
success of any such acquisitions may depend on the Company's ability to identify
and fairly value appropriate assets for acquisition and to successfully manage
and integrate such assets and personnel acquired in these transactions. If the
Company does not acquire new real estate assets, it will eventually liquidate
its existing holdings and be out of the real estate business.
The Company is subject to substantial legal, regulatory and other requirements
regarding the development of land, which can cause delays in land sales and
increase costs. Development activities performed in connection with real estate
sales (including obtaining necessary governmental approvals, access to water
supplies, installation of utilities and necessary storm drains, and building or
improving roads) are regulated by numerous local, state and federal statutes,
ordinances, rules and regulations, including those concerning zoning, resource
protection and other environmental impacts. These regulations often provide
broad discretion to governmental authorities that regulate these matters and
from whom the Company must obtain approvals. The approval process can result in
delays and increases in cost to the Company as well as its primary customers,
commercial and residential builders. Government regulations and legal challenges
may delay the start of planned communities, increase the Company's expenses or
limit its customers' development activities. Various local, state and federal
statutes, ordinances, rules and regulations concerning access to water supplies,
zoning, construction, sales and similar matters also apply to the industry. This
governmental regulation affects the Company's land sales activities and at times
may limit the Company's ability to develop or sell land. Delays and increased
expenses may also be experienced as a result of legal challenges to proposed
communities, whether brought by governmental authorities or private parties.
Increases in taxes or governmental fees would increase the Company's costs.
Also, adverse changes in tax laws could reduce customer demand for land for
commercial and residential development. Increases in real estate taxes and other
local governmental fees, such as fees imposed on developers to fund schools,
open space and road improvements or to provide low and moderate income housing,
would increase the Company's costs and have an adverse effect on the Company's
operations. In addition, increases in local real estate taxes or changes in
income tax laws that would reduce or eliminate tax deductions or incentives
could adversely affect homebuilders' potential customer demand and could
adversely affect future sales.
Changing market conditions may adversely affect companies in the real estate
industry who rely upon adequate credit in order to finance their purchases of
land from the Company. Residential and commercial developers to whom the Company
sells land frequently rely upon third party financing to provide the capital
necessary for their acquisition of land. Changes in economic and other external
market conditions may result in their inability to obtain suitable financing,
which could adversely impact the Company's ability to sell land, or necessitate
it to sell land at lower prices, thus reducing the margins that the Company has
historically achieved.
Adverse changes in general economic, real estate development or other business
conditions could adversely affect the Company's business and its financial
results. A significant percentage of the Company's real estate revenues are
derived from customers in the residential homebuilding business, which is
sensitive to changes in economic conditions and other factors, such as the level
of employment, consumer confidence, consumer income, availability of mortgage
financing and interest rate levels. Adverse changes in any of these conditions,
in particular in the Rio Rancho market where the Company operates, could
decrease demand and therefore affect the pricing of land sold to developers,
resulting in a decrease in the Company's revenues and earnings.
6
Real Estate is a cyclical industry. During periods of economic expansion, the
Real Estate business generally benefits from the demand for developable land.
During periods of economic contraction, the Company is generally adversely
affected by declining demand for land. Also, there can be no assurance that an
increase in demand or an economic expansion will be sustained in the Rio Rancho
market, where the Company's core real estate business is based and operates.
The Real Estate business is dependent on subcontractors. The development of land
on a timely basis is critical to the Company's ability to close sales of
property in accordance with its contractual obligations. The availability of
subcontractors in the Rio Rancho market can be affected by numerous factors
beyond the Company's control, including the general demand for these
subcontractors by other sellers of land. While alternate suppliers exist for
many of the services required by the Company, there can be no assurance that the
Company will not experience delays or be forced to seek alternative suppliers,
which may increase costs or adversely affect its ability to sell land on a
timely basis.
Media Service Operations
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The Company participates in highly competitive industries and competitive
pressures may result in a decrease in its revenues and profitability. The
Fulfillment and Newsstand Distribution Services businesses compete in highly
competitive markets, and some competitors have financial resources that are
substantially greater than those of the Company. Over the past several years,
the Company has experienced significant price competition in its markets.
Competitive pressures could cause the Company's Media Services businesses to
lose market share or result in significant price erosion that would have an
adverse effect on their results of operations.
The introduction and increased popularity of alternative technologies for the
distribution of news, entertainment and other information and the resulting
shift in consumer habits and advertising expenditures from print to other media
could adversely affect the Newsstand Distribution and Fulfillment Services
businesses. Revenues in the Media Services business segments are principally
derived from services performed for publishers. The distribution of news,
entertainment and other information via the Internet has become increasingly
popular over the past several years, and viewing news, entertainment and other
content on a personal computer, cellular phone or other device has become
increasingly popular as well. Accordingly, the resulting shift of advertising
dollars from traditional print to online media could adversely affect the
publishing industry and, ultimately, have a "trickle down" negative impact on
the Company's Newsstand Distribution and Fulfillment Services businesses due to
a shift in consumer demand away from the print media and toward digital
downloading and other delivery methods.
Media operations could face increased costs and business disruption resulting
from instability in the newsstand distribution channel. The Company extends
credit to various companies that may be affected by changes in economic or other
external conditions. Financial instruments that may potentially subject the
Company to a significant concentration of risk primarily consist of trade
accounts receivable from wholesalers in the magazine distribution industry. Due
to industry consolidation, four wholesalers represent approximately 80% of the
wholesale magazine distribution business. There is a possibility of further
consolidation among these wholesalers, and the insolvency of any of them could
have a material, adverse impact on the Company's financial condition and results
of operations. Should there be a disruption in the wholesale channel, it could
impede the ability to distribute magazines to the retail marketplace.
The Company's operating results depend in part on continued successful research,
development and marketing of new or improved services and data processing
capabilities. There can be no assurance that the Company will continue
successfully to introduce new services and data processing capabilities on a
timely and cost-effective basis. The success of new and improved services
depends on their initial and continued acceptance by the various publishers and
customers with whom the Company conducts its business. The Company's several
revenue streams are affected by varying degrees of technological change and
shifts in customer demand, which may result in the transition of services
provided and an increased importance of being "first to market" with new
services and information processing innovations. Difficulties or delays in the
development, production or marketing of new services and information processing
capabilities may be experienced, and this may negatively impact the Company's
operating results and prevent it from realizing the return on investment
required to bring new services and information processing capabilities to market
on a timely and cost effective basis.
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The Company operates in highly competitive markets that are subject to rapid
change, and the Company must continue to invest in developing technologies and
adapt various systems in order to remain competitive. There are substantial
uncertainties associated with the Company's efforts to develop new technologies
and services for the media fulfillment and distribution markets it serves. The
Company makes significant investments in new information processing technologies
and services that may not be profitable and even if they are profitable,
operating margins for new technologies and services may be lower than the
margins that the Company has experienced historically.
The Company's operations could be disrupted if its information systems fail,
causing increased expenses and loss of sales. The Company's business depends on
the efficient and uninterrupted operation of its computer and communications
capabilities, including the maintenance of customer data bases for billing and
label processing, as well as its magazine distribution order regulation system.
If a key system were to fail or experience unscheduled down-time for any reason,
even if only for a short period, the Company's operations and financial results
could be adversely affected. The Company's systems could be damaged or
interrupted by fire, flood, power loss, telecommunications failure, break-ins or
similar events. The Company has a formal disaster recovery plan in place, but
this plan may not be entirely successful in preventing delays or other
complications that could arise from information systems failure and, if it is
not successful, the Company's business interruption insurance may not adequately
compensate it for losses that may occur.
Virtually all of the Company's revenues in the Newsstand Distribution Services
business are derived from sales made on a fully returnable basis, and an error
in estimating expected returns could cause a misstatement of revenues for the
period affected. As is customary in the magazine distribution industry,
virtually all of the Company's revenues in this business segment are derived
from sales made on a fully returnable basis. During the year ended April 30,
2006, approximately 75% of the magazines initially distributed by the Company
were ultimately returned for credit by customers. The Company recognizes
revenues from the distribution of magazines at the time of delivery to the
wholesalers, less a reserve for estimated returns that is based on historical
experience and most recent sales data on an issue-by-issue basis. Although the
Company has the contractual right to return these magazines for offsetting
credits from the publishers from whom the magazines are purchased, an error in
estimating the percentage of returns at the end of an accounting period would
have the effect of understating or overstating revenues in the period affected
as well as in the subsequent periods when the correct information became known.
The Company depends on the Internet to deliver some of its services, which may
expose the Company to increased risks. Many of the Company's operations and
services, including order taking on behalf of customers and communications with
customers and suppliers, involve use of the Internet, and the Company's business
is subject to any factors that adversely affect Internet usage, including the
reliability of Internet service providers, which, from time to time, have
operational problems and experience service outages. Additionally, one of the
requirements of the continued growth over the Internet is the secure
transmission of confidential information over public networks. Failure to
prevent security breaches of the Company's networks or those of its customers or
well-publicized security breaches affecting the Internet in general could
significantly harm growth and revenues.
Other Entity-Wide Risk Factors
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The Company requires access to credit facilities, and either the inability to
obtain adequate financing or increases in interest rates could adversely affect
its results of operations. The Company's operations depend on its ability to
obtain financing for development of land inventory in the Real Estate business
and for working capital and capital expenditure requirements in the Media
Services business. If the Company is not able to obtain suitable financing, its
costs could increase and its revenues could decrease, or the Company could be
precluded from continuing its operations at current levels.
Increases in interest rates can make it more difficult and expensive to obtain
the funds needed to operate the Company's businesses. The applicable interest
rates on the revolving bank credit facilities that both the Real Estate business
and Media Service business have in place fluctuate based on changes in
short-term interest rates generally and on the amount of outstanding borrowings
under those facilities. Increases in interest rates would increase the Company's
interest expense.
8
The Company may engage in acquisitions and may encounter difficulties in
integrating these businesses and, therefore, may not realize the anticipated
benefits of the acquisitions. From time to time, the Company may seek to grow
through strategic acquisitions intended to complement or expand one or more of
its businesses or to enable it to enter a new business. The success of these
transactions may depend on its ability to integrate systems and personnel
acquired in these transactions without substantial costs, delays or other
operational or financial problems. The Company may encounter difficulties in
integrating acquisitions with its operations or in separately managing a new
business. Furthermore, the Company may not realize the degree or timing of
benefits that it anticipates when first entering into a transaction. Any of the
foregoing could adversely affect the Company's business and results of
operations.
The Company's management and internal systems may not be adequate to handle its
potential growth. To manage future growth, the Company's management must
continue to improve operational and financial systems and to expand, train,
retain and manage its employee base. At the same time, the Company will likely
be required to manage an increasing number of relationships with various
customers and other parties. If the Company's systems, procedures and controls
are inadequate to support its operations, expansion could be halted and the
opportunity to gain significant additional market share could be lost. Any
inability to manage growth effectively may harm the Company's business.
If the Company's accounting controls and procedures are circumvented or
otherwise fail to achieve their intended purposes, its business could be
seriously harmed. Although the Company evaluates its internal control over
financial reporting and disclosure controls and procedures as of the end of each
quarter, it may not be able to prevent all instances of accounting errors or
fraud in the future. These control systems remain subject to the risk of human
error and the risk that controls can be circumvented for wrongful purposes by
individuals in management and non-management positions. The Company's business
could be seriously harmed by any material failure of these control systems.
The Company has a principal shareholder whose interests may conflict with other
investors. The Company's principal shareholder owns approximately 55% of its
outstanding capital stock. As a result, the principal shareholder exercises
significant influence over the Company's major decisions, including through his
ability to nominate and elect the members of the Board of Directors.
The Company's common stock price has been volatile, which could result in
substantial losses for stockholders. The Company's common stock is currently
traded on the New York Stock Exchange. The closing sale prices of its common
stock have ranged from a low of $21.58 per share to a high of $46.75 per share
for the 52-week period ending April 30, 2006. The trading price of the Company's
common stock can be affected by numerous factors, including, but not limited to,
announcements of new services, additions or departures of key personnel,
quarterly fluctuations in the Company's operating results, changes in analysts'
estimates of financial performance, general conditions in the industries in
which the Company operates and in the financial markets and a variety of other
risk factors, including the ones disclosed in this annual report on Form 10-K.
The Company's quarterly operating results can fluctuate significantly. The
Company has experienced, and may continue to experience, significant
fluctuations in its quarterly operating results, which may adversely affect its
stock price. Future quarterly operating results may not align with past trends
as a result of numerous factors, including many that result from the
unpredictability of the nature and timing of real estate land sales, the
variability in gross profit margins and competitive pressures.
Changes in tax laws or the interpretation of tax laws may negatively affect the
Company's business. The Company believes that its recorded tax balances are
adequate. However, it is not possible to predict the effects of possible changes
in tax laws or in their interpretation and whether such changes could have a
material negative effect on the Company's operating results.
The Company may be subject to costly litigation and governmental proceedings
that could adversely affect its results of operations. From time to time, the
Company may be subject to various claims and lawsuits by the government,
competitors, customers or other parties arising in or out of the ordinary course
of business. Such matters can be time-consuming, divert management's attention
and resources, and cause the Company to incur significant expenses. Furthermore,
there can be no assurance that the results of any of these actions will not have
a material adverse effect on the Company's future operating results or cash
flows.
9
Terrorist attacks and threats may disrupt the Company's operations and
negatively impact its revenues, costs and stock price. The terrorist attacks in
September 2001 in the U.S., the U.S. response to those attacks and the resulting
decline in consumer confidence had a substantial adverse impact on the U.S.
economy. Any similar future events may disrupt the Company's operations or those
of its customers. In addition, these events have had and may continue to have an
adverse impact on the U.S. economy in general and consumer confidence and
spending in particular, which could harm the Company's revenues. Any new
terrorist events or threats could have a negative impact in the U.S. and world
financial markets, which could reduce the price of the Company's common stock
and limit the capital resources available to it and the homebuilders,
publishers, customers and others with whom the Company conducts business. This
could have a significant impact on revenues, costs and operating results and
might result in increased volatility in the market price of the Company's common
stock.
The Company's pension plan is underfunded, and may require additional cash
contributions. The Company's pension plan is underfunded by approximately $3.2
million at April 30, 2006. A key assumption underlying the actuarial
calculations upon which the Company's accounting and reporting obligations are
based is an assumed investment rate of return of 8%; if the pension plan assets
do not realize this expected rate of return or if other assumptions are
incorrect, the Company could be required to make substantial contributions to
its pension plan until the plan is fully funded, which could limit the Company's
financial flexibility.
The Company is dependent on its key personnel. The Company is dependent upon the
continued services of certain key officers and employees, and the loss of key
personnel could have an adverse effect on the Company's business. The Company
does not maintain "key man" insurance for any of its officers, and its continued
success depends on the ability to attract and retain a skilled labor force.
There can be no assurance that the Company will be successful in attracting and
retaining the personnel required either to maintain its business or expand its
operations.
Item 1B. Unresolved Staff Comments
- -------- -------------------------
Not applicable.
Item 2. Properties
- ------- ----------
The Company's executive offices are located in approximately 2,500 square feet
of leased space in an office building in Princeton, New Jersey. Real Estate
operations are based in approximately 5,400 square feet in a Company-owned
55,000 square foot office building in Rio Rancho, New Mexico, with the remaining
space leased to commercial tenants. In addition, other real estate inventory and
investment properties are described in Item 1. Kable's executive offices are
based in New York City, and these offices together with the production,
administration, sales and other facilities for its Fulfillment Services and
Newsstand Distribution Services businesses are located in twelve owned and
leased facilities which, in the aggregate, comprise approximately 600,000 square
feet of space in Mt. Morris, Illinois, Marion, Ohio, Louisville, Colorado, New
York City and Cerritos, California. The Company believes its facilities are
adequate for its current and anticipated requirements.
Item 3. Legal Proceedings
- ------- -----------------
A. On May 3, 2000, a civil action was commenced in the United States District
Court for the Southern District of New York entitled United Magazine Company, et
al. v. Murdoch Magazines Distribution, Inc., et al. The Complaint was filed by
five affiliated magazine wholesalers and a related service company (collectively
referred to as "Unimag") against Murdoch, a national distributor of magazines,
and Chas. Levy Circulating Co., a magazine wholesaler. An Amended Complaint was
filed on August 31, 2000, in which the Company's Kable News Company, Inc.
subsidiary and three other national distributors were added as defendants.
Motions by the defendants to dismiss the Amended Complaint were granted, with
leave to the plaintiffs to replead specified claims. In June 2001, a Second
Amended Complaint was filed which included two claims against Kable News: (i)
violation of the Robinson-Patman Act, which generally prohibits discriminatory
pricing, and (ii) breach of fiduciary duty.
The defendants moved to dismiss the Second Amended Complaint. The Court denied
the motions with respect to the Robinson-Patman Act claim but dismissed the
10
claim for breach of fiduciary duty. Kable News then answered the Robinson-Patman
Act claim, denying the material allegations and asserting affirmative defenses.
Kable News also asserted counterclaims to recover certain unpaid debts from
Unimag.
Pursuant to an order of a United States Magistrate Judge in October 2003, Unimag
presented each of the defendants with an analysis of its damage claim against
such defendant. The damage claim against Kable News amounts to approximately
$15.2 million; any damages awarded would be trebled.
Pretrial discovery has been completed. The action against Levy was settled, and
the remaining defendants moved for summary judgment. In September 2005, the
Court granted the motion for summary judgment of the defendants, including Kable
News, and judgment in favor of the defendants was entered on September 27, 2005.
Unimag filed an appeal of the judgment on July 5, 2006.
In April 2006, Unimag entered into a consent judgment in favor of Kable News on
the counterclaims of Kable News for $4,159,770, plus interest at the rate of 6%
per annum from September 30, 1999, and Kable News agreed not to enforce the
judgment until the action has been concluded. Unimag is no longer in business
and does not appear to have the assets to pay that judgment.
B. The Company and its subsidiaries are involved in various other claims and
legal actions arising in the normal course of business. While the ultimate
results of these matters cannot be predicted with certainty, management believes
that they will not have a material adverse effect on the Company's consolidated
financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2006.
Executive Officers of the Registrant
Set forth below is certain information concerning persons who are the current
executive officers of the Company.
Name Office Held / Principal Occupation for Past Five Years Age
- ---- ------------------------------------------------------ ---
James Wall Senior Vice President of the Company since 1991; 69
Chairman, President and Chief Executive Officer of
AMREP Southwest Inc., a wholly-owned subsidiary of
the Company, since 1991.
Peter M. Pizza Vice President and Chief Financial Officer of the 55
Company since May 2001; Vice President and Controller
of the Company from 1997 to 2001.
Joseph S. Moran Vice President, General Counsel and Secretary of the 58
Company since June 2005; Mr. Moran previously served
as Vice President, General Counsel and Secretary of
SatCon Technology Corporation from 2001 to 2005.
Michael P. Duloc President and Chief Operating Officer of the Company's 49
Newsstand Distribution Services business since 1996
and of the Company's Fulfillment Services business
since 2000.
The executive officers are elected or appointed by the Board of Directors of the
Company or its appropriate subsidiary to serve until the appointment or election
and qualification of their successors or their earlier death, resignation or
removal.
11
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder
- ------- -------------------------------------------------------------
Matters
-------
The Company's common stock is traded on the New York Stock Exchange under the
symbol "AXR". On July 1, 2006, there were approximately 1,450 holders of record
of the common stock. The range of high and low closing prices for the last two
fiscal years by quarter is presented below:
FIRST SECOND THIRD FOURTH
--------------- --------------- ---------------- ----------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------ ------ ------
2006 $ 30.40 $ 21.58 $ 33.00 $ 24.00 $ 33.88 $ 23.22 $ 46.75 $ 27.25
2005 $ 20.80 $ 17.03 $ 18.55 $ 17.10 $ 23.90 $ 17.18 $ 28.34 $ 22.58
Dividend Policy
On July 14, 2006, the Board of Directors declared a special cash dividend of
$0.85 per common share payable on August 16, 2006 to shareholders of record at
the close of business on July 31, 2006. Previously, the Company had declared
special dividends of $0.55, $0.40 and $0.25 per share following the close of the
Company's fiscal years ending April 30, 2005, 2004 and 2003. The Board has
stated it may consider special dividends from time-to-time in the future in
light of conditions then existing, including earnings, financial condition, cash
position, and capital requirements and other needs. Notwithstanding such
statement and the status of such future conditions, no assurance is given that
there will be any such future dividends declared or that future dividend
declarations, if any, will be commensurate in amount or frequency with past
dividends.
In addition to the foregoing four special annual dividends, on December 7, 2005,
the Board of Directors declared a special cash dividend of $3.50 per common
share payable on January 9, 2006 to shareholders of record at the close of
business on December 19, 2005. The Board indicated that the Company's financial
condition, substantial cash position and anticipated cash flow, particularly
from its real estate operations, in relation to its then-current capital
requirements were major factors in its determination to reward shareholders with
this special cash dividend.
Sales of Unregistered Company Stock
Pursuant to the Company's 2002 Non-Employee Directors' Stock Plan, the Company
issued an aggregate of 7,500 shares of its Common Stock to its six non-employee
directors on March 15, 2006, as partial payment for their services as directors
for the six months preceding such issuances. These issuances were not registered
under the Securities Act of 1933, as amended, by reason of the exemption
provided in Section 4(2) of such Act for transactions by an issuer not involving
any public offering.
Equity Compensation Plan Information
See Item 12 of Part III of this annual report on Form 10-K that incorporates
such information by reference from the Company's Proxy Statement for its 2006
Annual Meeting of Shareholders.
Item 6. Selected Financial Data
- ------- -----------------------
The selected consolidated financial data presented below for, and as of the end
of, each of the last five fiscal years has been derived from and is qualified by
reference to the consolidated financial statements. The consolidated financial
statements have been audited by McGladrey & Pullen, LLP, independent registered
public accounting firm. The information should be read in conjunction with the
consolidated financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
is Item 7 of Part II of this annual report on Form 10-K. These historical
results are not necessarily indicative of the results to be expected in the
future.
12
(In thousands of dollars except per share amounts)
Year Ended April 30,
----------------------------------------------------------------------------------
2006 2005 2004 2003 2002
-------------- --------------- --------------- --------------- -------------
Financial Summary (a):
Revenues $ 148,296 $ 134,506 $ 129,291 $ 72,189 $ 81,911
Income from Continuing
Operations $ 22,494 $ 15,588 $ 11,297 $ 6,227 $ 3,721
Income (loss) from
Discontinued Operations,
net of tax $ 3,556 $ (63) $ 380 $ 46 $ (23)
Net Income $ 26,050 $ 15,525 $ 11,677 $ 6,273 $ 3,698
Total Assets $ 189,041 $ 194,309 $ 171,165 $ 159,550 $ 149,832
Capitalization:
Shareholders' Equity $ 118,970 $ 117,405 $ 105,522 $ 93,828 $ 93,479
Notes Payable $ 6,016 $ 12,054 $ 12,643 $ 18,427 $ 16,619
Per Share:
Earnings from Continuing
Operations $ 3.39 $ 2.36 $ 1.71 $ 0.94 $ 0.57
Income (loss) from
Discontinued Operations $ 0.54 $ (0.01) $ 0.06 $ 0.01 $ (0.01)
Earnings Per Share-
Basic and Diluted $ 3.93 $ 2.35 $ 1.77 $ 0.95 $ 0.56
Book Value $ 17.91 $ 17.72 $ 15.97 $ 14.24 $ 14.22
Cash Dividend $ 4.05 $ 0.40 $ 0.25 $ - $ -
Shares Outstanding 6,644 6,626 6,606 6,588 6,574
(a) Amounts for 2002-2004 have been reclassified to present the discontinued
operation of the Company's utility subsidiary. See note 2 to the
consolidated financial statements.
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 17 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 2006, 2005 and 2004 mean the fiscal years ended April 30, 2006, 2005
and 2004.
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
13
and estimates to be made include: (i) the determination of revenue recognition
for the Newsstand Distribution Services business, which is based on estimates of
allowances for magazine returns to the Company from wholesalers and the
offsetting return of magazines by the Company to publishers for credit; (ii)
allowances for doubtful accounts; (iii) real estate cost of sales calculations,
which are based on land development budgets and estimates of costs to complete;
(iv) the determination of revenue recognition under the percentage-of-
completion method for certain construction contracts, which is determined based
on the percentage of total costs incurred to date in proportion to total
estimated costs to complete the project; (v) cash flow and valuation assumptions
in performing asset impairment tests of long-lived assets and assets held for
sale; (vi) pension plan accounting; and (vii) legal contingencies. Actual
results could differ from those estimates.
There are numerous critical assumptions that may influence accounting estimates
in these and other areas. Management bases its critical assumptions on
historical experience, third-party data and various other estimates that it
believes to be reasonable under the circumstances. Certain of the most critical
assumptions made in arriving at these accounting estimates include the
following: (i) Newsstand Distribution Services revenues represent commissions
earned from the distribution of publications for client publishers that are
recorded by the Company at the time the publications go on sale in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue
Recognition When Right of Return Exists". The publications generally are sold on
a fully returnable basis, which is in accordance with prevailing trade practice.
Accordingly, the Company provides for estimated returns by charges to income
that are determined on an issue-by-issue basis utilizing historical experience
and current sales information. The financial impact to the Company of a change
in the sales estimate for magazine returns to it from its wholesalers is
substantially offset by the simultaneous change in the Company's estimate of its
cost of purchases since it passes on the returns to publishers for credit. As a
result, the effect of a difference between the actual and estimated return rates
on the Company's commission revenues is the amount of the commission
attributable to the difference. The effect of an increase or decrease in the
Company's estimated rate of returns of 1% during any period would be dependent
upon the mix of magazines involved and the related selling prices and commission
rates, but would generally result in a change in that period's net commission
revenues of approximately $125,000; (ii) management determines the allowance for
doubtful accounts by attempting to identify troubled accounts by analyzing the
credit risk of specific customers and by using historical experience applied to
the aging of accounts and, where appropriate within the real estate business, by
reviewing any collateral which may secure a receivable; (iii) real estate
development costs are incurred throughout the life of a project, and the costs
of initial sales from a project frequently must include a portion of costs that
have been budgeted based on engineering estimates or other studies, but not yet
incurred; (iv) percentage-of-completion revenue recognition for certain
construction contracts is based on the percentage of total costs incurred to
date in proportion to total estimated costs to complete the contract. Total
estimated costs, and thus contract income, are impacted by several factors
including, but not limited to, changes in the costs of subcontractors, materials
and equipment, productivity and scheduling; (v) asset impairment determinations
(including that of goodwill) are based upon the intended use of assets and
expected future cash flows; (vi) 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. The
effect of every 0.25% change in the investment rate of return on retirement plan
assets would increase or decrease the pension expense by approximately $70,000
per year, and a change in the discount rate of 0.25% at a fiscal year-end would
result in an increase or decrease in the subsequent year's pension cost of
approximately $45,000; and (vii) 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 several routine matters. If the summary judgment in favor of
the defendants, including the Company, were reversed upon appeal in the
significant proceeding and if the plaintiffs were then to prevail in the case,
the result could have a material adverse effect on the financial condition of
the Company. 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 other litigation that is significantly different from
our assumptions.
Year Ended April 30, 2006 Compared to Year Ended April 30, 2005
- ---------------------------------------------------------------
Results of Operations
Net income in 2006 was $26,050,000, or $3.93 per share, compared to net income
of $15,525,000, or $2.35 per share, in 2005. The 2006 results consisted of net
14
income from continuing operations of $22,494,000, or $3.39 per share, and net
income from discontinued operations of $3,556,000, or $0.54 per share, versus
net income from continuing operations of $15,588,000, or $2.36 per share, and a
net loss from discontinued operations of $63,000, or $0.01 per share, in 2005.
The substantial increase in net income from continuing operations in 2006 was
attributable to significant revenue growth and the resulting gross profits
achieved in the Company's Real Estate operations. Consolidated revenues
increased to $148,296,000 in 2006 from $134,506,000 in 2005 as a result of the
increased real estate revenues, partially offset by decreased revenues from the
Company's Media Services operations (as described below).
Net income from discontinued operations in 2006 reflected the gain from the
disposition of the primary assets of the Company's El Dorado, New Mexico water
utility subsidiary, which were taken through condemnation proceedings. The
Company began accounting for this subsidiary as a discontinued operation in the
quarter ended January 31, 2005. Accordingly, financial information for prior
periods has been reclassified to conform to this presentation.
Revenues from land sales at the Company's AMREP Southwest subsidiary increased
approximately 60%, from $36,154,000 in 2005 to $57,810,000 in 2006, resulting in
significantly higher gross profits in 2006 compared to the prior year. This
substantial revenue increase was due to increased sales of both developed and
undeveloped lots in the Company's principal market of Rio Rancho, New Mexico. An
increase in revenues from the sale of developed lots to homebuilders from
$14,994,000 in 2005 to $31,920,000 in 2006 demonstrated the continuing strength
of the Rio Rancho market, while revenues from the sale of undeveloped builder
lots increased from $11,914,000 in 2005 to $19,514,000 in 2006 principally due
to one large transaction that was part of a redevelopment project being
undertaken by another company. Revenues from sales of commercial and industrial
properties decreased slightly in 2006, from $7,183,000 in 2005 to $6,376,000 in
2006, as the prior year included one large sale that represented a major
component of the revenues whereas 2006 activity consisted of numerous smaller
transactions. The average gross profit percentage on land sales decreased to 54%
in 2006 from 55% in 2005, reflecting the relative mix of lots sold in each year.
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 future periods.
Revenues from Kable's Fulfillment Services and Newsstand Distribution Services
businesses (collectively, "Media Services operations") decreased approximately
9%, from $96,913,000 in 2005 to $88,463,000 in 2006. This revenue decline was
due to a decrease in Fulfillment Services revenues of $8,564,000 (10%) offset in
part by a $114,000 (1%) increase in Newsstand Distribution Services revenues.
Although there are multiple revenue streams in the Fulfillment Services
business, including revenues from the maintenance of customer computer files and
the performance of other fulfillment-related activities, including telephone
(call center) support and graphic arts and lettershop services, a customer
generally contracts for and utilizes all available services as a total package,
and the Company would not provide its ancillary services to a customer unless it
was also providing the core service of maintaining a 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. This
is also true in the Newsstand Distribution Services business where there is only
one primary service provided which results in one revenue source, the
commissions earned on the distribution of magazines. The Company competes with
other companies, including three much larger companies in the Newsstand
Distribution Services business and one much larger company in the Fulfillment
Services business, and the competition for new customers is intense in both
segments, which results in a price sensitive industry which may restrict the
Company's ability to increase its prices.
The 10% revenue decline in Fulfillment Services in 2006 was principally caused
by customer losses that occurred in earlier periods at Kable's Colorado
fulfillment services business that was acquired from Electronic Data Systems
Corporation ("EDS") in fiscal 2003, while revenues of Newsstand Distribution
Services increased 1% primarily because decreases in gross billings to existing
customers were offset by additional revenues generated by new business. Total
operating expenses of the Media Services operation decreased by $5,368,000
(6.8%) in 2006 compared to 2005, with the operating expenses of Fulfillment
Services decreasing $5,179,000 (7.4%) compared to the prior year principally due
to decreases in payroll and other variable expenses resulting from the
fulfillment services revenue decrease as well as the non-recurrence of certain
consulting expenses incurred in the prior year. Fulfillment operating expenses
15
amounted to 87% of related revenues in 2006 compared to 84% in 2005. Operating
expenses for Newsstand Distribution Services decreased $189,000 (2.1%) in 2006
compared to 2005 principally as a result of certain one-time 2005 marketing
costs, and these expenses amounted to 66% of related revenues in 2006 compared
to 68% in 2005.
Real estate commissions and selling expenses decreased from $1,863,000 in 2005
to $1,427,000 in 2006, representing approximately 5.2% and 2.5% of related
revenues in each year; the higher rate in 2005 was primarily due to legal and
other closing costs associated with condemnation proceedings related to the
Company's last parcel of land in Florida. Such costs generally vary depending
upon the terms of specific sale transactions. Real estate and corporate general
and administrative expenses increased by $630,000 in 2006 as a result of an
increase in the Company's stock price which is used to value the portion of
director compensation that is paid in stock, the addition of a corporate general
counsel and the presence in the prior year of a sublease on certain corporate
office space which offset a portion of the Company's rental expense. General and
administrative costs of Media Services operations decreased by approximately
$821,000 (10%) from 2005 to 2006, and remained at approximately 9% of Kable's
total revenues in both years.
Interest and other revenues, which consist primarily of interest on real estate
mortgage loans and rental income, increased from $1,439,000 in 2005 to
$2,023,000 in 2006 as a result of higher average balances of invested cash and
cash equivalents during 2006. Other expenses primarily consist of expenses
associated with rental operations and real estate taxes on land parcels not
under development, and these expenses decreased from approximately $1,453,000 in
2005 to $1,114,000 in 2006, principally due to costs incurred in 2005 to settle
certain warranty claims related to the Company's previously discontinued
homebuilding operations.
The Company's effective tax rate from continuing operations was 31.3% in 2006
compared to 32.0% in 2005. The decrease from the statutory rate in both years
was primarily due to tax benefits associated with charitable contributions of
land.
Year Ended April 30, 2005 Compared to Year Ended April 30, 2004
- ---------------------------------------------------------------
Results of Operations
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 that was partially offset by decreased revenues from Kable's Media
Services operations. Net income from continuing operations increased 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 land sales increased approximately 29%, from $28,012,000 in 2004
to $36,154,000 in 2005. 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 sales of several large parcels
for commercial development in Rio Rancho. The gross profit percentages on land
sales were 55% and 51% in 2005 and 2004. As previously noted, 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 future periods.
Revenues from Media Services operations decreased from $99,791,000 in 2004 to
$96,913,000 in 2005. This decrease of 3% was the net result of a 4% decline in
the Fulfillment Services segment offset in part by a 7% increase in the
Newsstand Distribution Services segment. The decline in Fulfillment Services
revenues was anticipated and principally the result of customer losses at the
Company's Colorado fulfillment business which had been identified and known
prior to Kable's acquisition of that business from EDS in 2003, while the
increase in revenues of Newsstand Distribution Services resulted from additional
business obtained in connection with the purchase of certain distribution
contracts in the third quarter of 2005. 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
16
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, including additional
market study costs incurred in the third and fourth quarters of 2005, and
amounted to 68% of related revenues in 2005 compared to 66% in 2004.
Real estate commissions and selling expenses increased as a percentage of
related revenues, from 3.3% in 2004 to 5.2% in 2005, due to the closing of a
higher mix of land sales in the prior year without the involvement of a broker.
Such costs generally vary depending upon the terms of specific 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, as discussed below. Media
Services general and administrative costs decreased by approximately $300,000
from 2004 to 2005, and remained at approximately 9% of total revenues in both
years.
Interest and other revenues consist primarily of interest on real estate
mortgage loans and rental income, and was approximately $1,488,000 in 2004
compared to $1,439,000 in 2005. Other expenses primarily consist of expenses
associated with rental operations and real estate taxes on land parcels not
under development, and these expenses increased from approximately $1,140,000 in
2004 to $1,453,000 in 2005, principally due to costs incurred in 2005 to settle
certain warranty claims related to the Company's previously discontinued
homebuilding operations.
Results for 2004 included the recognition in the third quarter of a pretax gain
of approximately $1,700,000 (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 10 to the consolidated financial
statements).
The Company's effective tax rate from continuing operations was 32.0% in 2005
compared to 37.0% in 2004. The decrease in 2005 was primarily due to tax
benefits associated with the charitable contribution of land.
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 operations, and
from borrowings under its various loan agreements.
Cash Flows From Financing Activities
- ------------------------------------
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 unsecured 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, 2006, there were no balances outstanding under this facility. The
credit agreement contains certain covenants, 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
expires in October 2008.
The companies within the Media Services operations have a credit arrangement
with a bank that matures in 2010 and allows separate revolving credit borrowings
of up to $11,000,000 for Fulfillment Services and up to $9,000,000 for Newsstand
Distribution Services, in each case based upon a prescribed percentage of the
borrower's eligible accounts receivable. 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 (7.75% at April 30, 2006) or, at the
borrower's option, a reserve adjusted overnight or 30-day LIBOR-based interest
rate (4.94% at April 30, 2006) plus, in either case, a margin established
quarterly of from 1.75% to 2.50% depending upon the borrower's funded debt to
EBITDA ratio, as defined. At April 30, 2006, the borrowing availability of the
Fulfillment Services business was $10,216,000 against which $1,898,000 was
outstanding, the borrowing availability of the Newsstand Distribution Services
business was $7,997,000 against which $479,000 was outstanding, and the interest
rate for outstanding borrowings was 6.69% based on the overnight LIBOR rate
option. The loan agreement requires the maintenance or achievement of certain
financial ratios and contains certain other covenants, 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. An additional $2,007,600 is available under this credit
arrangement for capital expenditures.
17
In May, 2006, the Media Services operations loan agreement was amended to
provide for an additional $10,000,000 revolving facility to a subsidiary of the
Newsstand Distribution Services business on the same terms (except for the
amount borrowable and the use of proceeds) as provided in the existing credit
agreement. The proceeds of borrowings under this arrangement may be used only to
pay accounts payable under a magazine distribution agreement with one of the
borrower's publisher customers. Subject to such maximum loan amount, up to 40%
of the amount of the borrower's accounts receivable from the distribution of
magazines covered by the distribution agreement with that customer may be
borrowed. The amendment also provided for a secured term loan to the Fulfillment
Services business of $1,470,000, bearing interest at the rate of 6.25% and
repayable in equal monthly installments through 2010, the proceeds of which were
applied to the financing of certain equipment.
Consolidated notes payable outstanding at April 30, 2006 were $6,016,000
compared to $12,054,000 at April 30, 2005. All outstanding borrowings at April
30, 2006 and 2005 were related to Media Services operations.
Cash Flows From Operating Activities
- ------------------------------------
Inventories amounted to $47,533,000 at April 30, 2006 compared to $52,906,000 at
April 30, 2005. Inventories in the Company's core real estate market of Rio
Rancho decreased from $46,674,000 at April 30, 2005 to $40,981,000 at April 30,
2006 as the result of land sales. The balance of inventory principally consisted
of properties in Colorado in both years.
Receivables from Real Estate operations increased from $6,277,000 at April 30,
2005 to $14,592,000 at April 30, 2006, principally due to the receipt of a note
in the amount of $9,557,000 in connection with an April 2006 land sale. This
note was paid in full in June 2006. Pursuant to the terms of the sale, the buyer
also provided a "loan reserve letter of credit" which guarantees the Company
payment for certain remaining development obligations it retained in connection
with the sale, which is being accounted for on the "percentage of completion"
method (see note 1 to the consolidated financial statements, "Revenue
recognition - real estate"). Consideration received in excess of amounts
recognized as land sale revenue on this transaction is reported as deferred
revenue on the accompanying consolidated balance sheet.
Receivables from Media Service operations decreased from $51,348,000 at April
30, 2005 to $37,140,000 at April 30, 2006 as a result of reduced wholesaler
billings in the Newsstand Distribution Services business and decreased
Fulfillment Services revenues as well as an improved rate of collection.
Accounts payable and accrued expenses decreased from $50,733,000 at April 30,
2005 to $39,382,000 at April 30, 2006, mainly because the prior year included a
$7,000,000 deposit held in connection with the condemnation proceedings on the
assets of the Company's utility subsidiary.
Other assets increased from $12,347,000 at April 30, 2005 to $15,238,000 at
April 30, 2006, principally as a result of amounts deferred in connection with
the development of a new information systems platform for Fulfillment Services.
The unfunded pension liability of the Company's defined benefit retirement plan
decreased from $5,780,000 at April 30, 2005 to $3,234,000 at April 30, 2006,
principally due to an increase in the fair market value of the plan assets
during the year resulting from a combination of realized and unrealized gains
from investment assets. As a result, the Company recorded comprehensive income
of $1,904,000 in 2006 compared to a comprehensive loss of $1,362,000 in 2005,
reflecting the change in the unfunded pension liability in each year net of the
related deferred tax and unrecognized prepaid pension amounts.
Cash Flows From Investing Activities
- ------------------------------------
Capital expenditures for property, plant and equipment amounted to approximately
$3,683,000 and $3,060,000 in 2006 and 2005 and consisted principally of
expenditures for computer hardware and software for Kable's Fulfillment Services
segment. In addition, capital expenditures for investment assets were $213,000
in 2006 and $1,885,000 in 2005 and were principally related to the development
of commercial properties owned by the real estate business. The Company believes
that it has adequate financing capability to provide for anticipated capital
expenditures.
18
Future Payments Under Contractual Obligations
- ---------------------------------------------
The table below summarizes significant contractual cash obligations as of April
30, 2006 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 $ 6,016 $ 1,673 $ 1,709 $ 2,634 $ -
Operating leases 25,055 5,396 6,482 4,827 8,350
----------- ------------ ----------- ------------ -------------
Total $ 31,071 $ 7,069 $ 8,191 $ 7,461 $ 8,350
=========== ============ =========== ============ =============
NEW AND EMERGING ACCOUNTING STANDARDS
- -------------------------------------
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections". SFAS No. 154 requires
restatement of prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. Also, SFAS No. 154 requires that
retrospective application of a change in accounting principle be limited to the
direct effects of the change. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.
In June 2005, the FASB ratified Emerging Issues Task Force ("EITF") Issue No.
04-10, "Determining Whether to Aggregate Operating Segments That Do Not Meet the
Quantitative Thresholds". The standard is effective for fiscal years ending
after September 15, 2005, and does not effect the current presentation of the
Company's reportable operating segments.
In November 2005, the FASB issued FASB Staff Position ("FSP") FAS 115-1 and FAS
124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments". The FSP provides guidance regarding when an investment is
impaired, whether that impairment is other than temporary and measurement of the
impairment loss. The FSP applies to debt and equity securities, except equity
securities accounted for under the equity method. The FSP is effective for
reporting periods beginning after December 15, 2005. The Company is currently
evaluating the application of this FSP to determine its potential impact on its
consolidated financial statements.
In addition to these recently issued accounting standards, there are several
emerging accounting issues that could potentially impact the Company's
consolidated financial statements in the future, including (i) a proposed SFAS
on "Fair Value Measurements" (exposure draft); (ii) a proposed Interpretation on
"Accounting for Uncertain Tax Positions - an interpretation of FASB Statement
No. 109 (exposure draft)"; and (iii) a proposed SFAS "Accounting for Pensions
and Other Postretirement Benefits (preliminary views)".
The Company will monitor these emerging issues to assess any potential future
impact on its consolidated financial statements.
SEGMENT INFORMATION
- -------------------
Information by industry segment is presented in note 17 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)
19
contribution" of each segment as summarized in note 17 to the consolidated
financial statements is presented for informational purposes, and is not
necessarily the amount that would be reported if the segment were an independent
company.
IMPACT OF INFLATION
- -------------------
Operations of the Company can be impacted by inflation. Within the industries in
which the Company operates, inflation can cause increases in the cost of
materials, services, interest and labor. Unless such increased costs are
recovered through increased sales prices or improved operating efficiencies,
operating margins will decrease. Within the land development industry, the
Company encounters particular risks. A large part of the Company's real estate
sales are to homebuilders who face their own inflationary concerns that rising
housing costs, including interest costs, may substantially outpace increases in
the income of potential purchasers and make it difficult for them to finance the
purchase of a new home or sell their existing home. If this situation were to
exist, the demand for the Company's land by these homebuilder customers could
decrease. In general, in recent years interest rates have been at historically
low levels and other price increases have been commensurate with the general
rate of inflation in the Company's markets, and as a result the Company has not
found the inflation risk to be a significant problem in its real estate or Media
Services operations businesses.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
- -------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking", including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's shareholders and news releases. All statements that
express expectations, estimates, forecasts or projections are forward-looking
statements within the meaning of the Act. In addition, other written or oral
statements which constitute forward-looking statements may be made by or on
behalf of the Company. Words such as "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates", "projects", "forecasts", "may",
"should", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and contingencies
that are difficult to predict. These risks and uncertainties include, but are
not limited to, those set forth in Item 1A above under the heading "Risk
Factors". Many of the factors that will determine the Company's future results
are beyond the ability of management to control or predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in or suggested by such forward-looking statements. The Company undertakes no
obligation to revise or update any forward-looking statements, or to make any
other forward-looking statements, whether as a result of new information, future
events or otherwise.
20
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, 2006 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 @
2007 2008 2009 2010 2011 after Total 4/30/06
---- ---- ---- ---- ---- ----- ----- -------
Fixed rate
receivables $ 10,956 $ 3,217 $ 37 $ - $ - $ - $ 14,210 $ 14,094
Weighted average
interest rate 8.0% 8.4% 8.3% - - - 8.1% -
Fixed rate debt $ 1,673 $ 1,419 $ 290 $ 257 $ - $ - $ 3,639 $ 3,385
Weighted average
interest rate 5.2% 4.6% 6.9% 6.9% - - 5.2% -
Variable rate
debt $ - $ - $ - $ - $ 2,377 $ - $ 2,377 $ 2,377
Weighted average
interest rate - - - - 6.7% - 6.7% 6.7%
21
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Shareholders
AMREP Corporation
Princeton, New Jersey
We have audited the accompanying consolidated balance sheets of AMREP
Corporation and subsidiaries as of April 30, 2006 and 2005, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended April 30, 2006. Our audits also included
the financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and schedule 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information therein.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
June 13, 2006
22
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2006 AND 2005
(Dollar amounts in thousands)
ASSETS 2006 2005
------ ---------------- -----------------
CASH AND CASH EQUIVALENTS $ 46,882 $ 37,743
RECEIVABLES, net:
Real estate operations 14,592 6,277
Media services operations 37,140 51,348
---------------- -----------------
51,732 57,625
REAL ESTATE INVENTORY 47,533 52,906
INVESTMENT ASSETS, net 11,586 11,356
PROPERTY, PLANT AND EQUIPMENT, net 10,879 11,600
OTHER ASSETS, net 15,238 12,347
ASSETS OF DISCONTINUED OPERATIONS - 5,541
GOODWILL 5,191 5,191
---------------- -----------------
TOTAL ASSETS $ 189,041 $ 194,309
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 39,382 $ 50,733
DEFERRED REVENUE 7,741 -
NOTES PAYABLE:
Amounts due within one year 1,673 2,099
Amounts subsequently due 4,343 9,955
---------------- -----------------
6,016 12,054
TAXES PAYABLE 4,548 2,220
DEFERRED INCOME TAXES 9,150 6,117
ACCRUED PENSION COST 3,234 5,780
---------------- -----------------
TOTAL LIABILITIES 70,071 76,904
---------------- -----------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
shares authorized - 20,000,000; shares issued - 7,417,204 at
April 30, 2006 and 7,414,704 at April 30, 2005 741 741
Capital contributed in excess of par value 45,772 45,395
Retained earnings 81,875 82,695
Accumulated other comprehensive loss, net (4,072) (5,976)
Treasury stock, at cost (5,346) (5,450)
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 118,970 117,405
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 189,041 $ 194,309
================ =================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
23
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended April 30,
-------------------------------------------------------
2006 2005 2004
--------------- --------------- ----------------
REVENUES:
Real estate operations-
Land sales $ 57,810 $ 36,154 $ 28,012
Media services operations 88,463 96,913 99,791
Interest and other 2,023 1,439 1,488
--------------- --------------- ----------------
148,296 134,506 129,291
--------------- --------------- ----------------
COSTS AND EXPENSES:
Real estate cost of sales-
Land sales 26,732 16,105 13,634
Operating expenses-
Media services operations 73,956 79,324 83,020
Real estate commissions and selling 1,427 1,863 923
Other 1,114 1,453 1,140
General and administrative-
Media services operations 7,686 8,507 8,801
Real estate operations and corporate 4,310 3,680 2,894
Interest, net 344 660 944
--------------- --------------- ----------------
115,569 111,592 111,356
--------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 32,727 22,914 17,935
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS 10,233 7,326 6,638
--------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS 22,494 15,588 11,297
INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESS
(NET OF INCOME TAXES) 3,556 (63) 380
--------------- --------------- ----------------
NET INCOME $ 26,050 $ 15,525 $ 11,677
=============== =============== ================
EARNINGS PER SHARE FROM CONTINUING OPERATIONS $ 3.39 $ 2.36 $ 1.71
EARNINGS (LOSS) PER SHARE FROM DISCONTINUED OPERATIONS .54 (0.01) 0.06
--------------- --------------- ----------------
EARNINGS PER SHARE - BASIC AND DILUTED $ 3.93 $ 2.35 $ 1.77
=============== =============== ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 6,633 6,616 6,595
=============== =============== ================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
24
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, 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 - - 227 - - 103 330
Exercise of stock options 6 - 35 - - - 35
------- -------- --------------- -------- ------------- ---------- ----------
BALANCE, April 30, 2005 7,415 741 45,395 82,695 (5,976) (5,450) 117,405
Net income - - - 26,050 - - 26,050
Other comprehensive income - - - - 1,904 - 1,904
----------
Total comprehensive income 27,954
----------
Cash dividends - - - (26,870) - - (26,870)
Issuance of stock under
Directors' Plan - - 337 - - 104 441
Exercise of stock options 2 - 40 - - - 40
------- -------- --------------- -------- ------------- ---------- ----------
BALANCE, April 30, 2006 7,417 $ 741 $ 45,772 $ 81,875 $ (4,072) $ (5,346) $ 118,970
======= ======== =============== ======== ============= ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
25
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended April 30,
------------------------------------------------
2006 2005 2004
----------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,050 $ 15,525 $ 11,677
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation and amortization 5,568 5,343 5,015
Non-cash credits and charges:
(Gain) loss on disposition of assets (5,345) - 619
Provision for doubtful accounts (104) (172) 680
Pension (benefit) accrual 627 303 ( 485)
Stock based compensation - Directors' Plan 441 330 230
Changes in assets and liabilities, excluding the effect of acquisitions:
Receivables 4,202 (8,388) (7,311)
Real estate inventory 6,942 (1,258) 4,863
Other assets (4,027) (2,876) (1,451)
Accounts payable and accrued expenses and deferred revenue 3,400 1,499 2,806
Taxes payable` 2,328 353 1,262
Deferred income taxes 1,764 1,333 3,542
----------- ------------- ------------
Net cash provided by operating activities 41,846 11,992 21,447
----------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant, and equipment (3,683) (3,060) (3,402)
Capital expenditures - investment assets (213) (1,885) (266)
Deposit from condemnation of Utility Company - 7,000 -
Proceeds from disposition of property, plant and equipment 4,057 190 -
Acquisitions, net - (100) -
----------- ------------- ------------
Net cash provided (used) by investing activities 161 2,145 (3,668)
----------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 29,162 25,596 27,831
Principal debt payments (35,200) (26,185) (33,615)
Exercise of stock options 40 35 15
Cash dividends (26,870) (2,645) (1,648)
----------- ------------- ------------
Net cash (used) by financing activities (32,868) (3,199) (7,417)
----------- ------------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 9,139 10,938 10,362
CASH AND CASH EQUIVALENTS, beginning of year 37,743 26,805 16,443
----------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 46,882 $ 37,743 $ 26,805
=========== ============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 377 $ 568 $ 822
=========== ============= ============
Income taxes paid - net of refunds $ 8,230 $ 6,817 $ 2,049
=========== ============= ============
Non-cash transaction:
Note payable for acquisition of Distribution contracts $ - $ 1,170 $ -
Foreclosure on land sale contract $ 1,795 $ - $ -
Transfer of development costs from inventory to investment assets $ 262 $ - $ -
=========== ============= ============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
26
AMREP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES:
-------------------------------------------------------------------
Organization and principles of consolidation
--------------------------------------------
The consolidated financial statements include the accounts of AMREP Corporation,
an Oklahoma corporation, and its subsidiaries (individually and collectively, as
the context requires, the "Company"). The Company, through its principal
subsidiaries, is primarily engaged in three business segments. AMREP Southwest
Inc. ("AMREP Southwest") operates in the real estate industry, principally in
New Mexico, and Kable Media Services, Inc. ("Kable") operates in the fulfillment
services and magazine distribution services businesses (collectively, "media
services operations"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
The consolidated balance sheets are presented in an unclassified format since
the Company has substantial operations in the real estate industry and its
operating cycle is greater than one year.
Fiscal Year
-----------
The Company's fiscal year ends on April 30. All references to 2006, 2005 and
2004 mean the fiscal years ended April 30, 2006, 2005 and 2004 unless the
context otherwise indicates.
Revenue recognition
-------------------
Real Estate
- -----------
Land sales are recognized when all elements of Statement of Financial Accounting
Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate", are met,
including when the parties are bound by the terms of the contract, all
consideration (including adequate cash) has been exchanged, title and other
attributes of ownership have been conveyed to the buyer by means of a closing
and the Company is not obligated to perform further significant development of
the specific property sold. Profit is recorded either in its entirety or on the
installment method depending upon, among other things, the ability to estimate
the collectibility of the unpaid sales price. In the event the buyer defaults on
the obligation, the property is taken back and recorded as inventory at the
unpaid receivable balance, net of any deferred profit, but not in excess of fair
market value less estimated costs to sell.
Cost of land sales includes all direct acquisition costs and other costs
specifically identified with the property, including pre-acquisition costs and
capitalized real estate taxes and interest, and an allocation of certain common
development costs associated with the entire project. Common development costs
include the installation of utilities and roads, and may be based upon estimates
of cost to complete. The allocation of costs is based on the relative fair value
of the property before development. Estimates and cost allocations are reviewed
on a regular basis until a project is substantially completed, and are revised
and reallocated as necessary on the basis of current estimates.
During 2006, the Company entered into one sale that requires the Company to
complete certain development work subsequent to closing. Additional sales of
this nature are likely to be entered into in fiscal year 2007. In such
situations, sales are recorded under the percentage-of-completion method.
Revenues and cost of sales are recorded as development work is performed based
on the percentage that incurred costs to date bear to the Company's estimates of
total costs and contract value. Cost estimates include direct and indirect costs
such as labor, materials and overhead. If a contract extends over an extended
period, revisions in cost estimates during the progress of work would have the
effect of adjusting earnings applicable to performance in prior periods in the
current period. When the current contract estimate indicates a loss, provision
is made for the total anticipated loss in the current period. Consideration
received in excess of amounts recognized as land sale revenues is accounted for
as deferred revenue.
27
Media Services
- --------------
Revenues from media services operations include revenues from the distribution
of periodicals and subscription fulfillment and other activities. Revenues from
subscription fulfillment activities represent fees earned from the maintenance
of computer files for customers, which are billed and earned monthly, and other
fulfillment activities including customer telephone support, product
fulfillment, and graphic arts and lettershop services, all of which are billed
and earned as the services are provided. In accordance with Emerging Issues Task
Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net
as an Agent", certain reimbursed postage costs are accounted for on a net basis.
Distribution revenues represent commissions earned from the distribution of
publications for client publishers and are recorded by the Company at the time
the publications go on sale at the retail level, in accordance with SFAS No. 48,
"Revenue Recognition When Right of Return Exists". Because the publications are
sold throughout the distribution chain on a fully-returnable basis in accordance
with prevailing industry practice, the Company provides for estimated returns
from wholesalers at the time the publications go on sale by charges to income
that are based on historical experience and most recent sales data for
publications on a issue-by-issue basis, and then simultaneously provides for
estimated credits from publishers for the related returns. Accordingly, revenues
represent the difference between the Company's estimates of its net sales to
independent wholesalers and its net purchases from publisher clients. Estimates
are continually reevaluated throughout the sales process, and final settlement
is typically made 90 days after a magazine's "off-sale" date.
Cash and cash equivalents
-------------------------
Cash equivalents consist of short-term, highly liquid investments 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.
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 that improve or extend the useful
life of existing assets are capitalized. Upon sale or other disposition of
assets, their cost and the related accumulated depreciation or amortization are
removed from the accounts and the resulting gain or loss, if any, is reflected
in operations.
28
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 2006, the Company believes
that no goodwill impairment existed at April 30, 2006.
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.
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 10). 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.
29
Management's estimates and assumptions
--------------------------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The significant estimates that
affect the financial statements include, but are not limited to, real estate
inventory valuation and related revenue recognition, allowances for magazine
returns and doubtful accounts, the recoverability of long-term assets and
amortization periods, pension plan assumptions and legal contingencies. Actual
results could differ from these estimates; however, there have been no material
changes made to the Company's accounting estimates in the past three years.
New and Emerging Accounting Standards
-------------------------------------
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections". SFAS No. 154 requires
restatement of prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. Also, SFAS No. 154 requires that
retrospective application of a change in accounting principle be limited to the
direct effects of the change. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.
In June 2005, the FASB ratified EITF Issue No. 04-10, "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." The
standard is effective for fiscal years ending after September 15, 2005, and does
not effect the current presentation of the Company's reportable operating
segments.
In November 2005, the FASB issued FASB Staff Position ("FSP") FAS 115-1 and FAS
124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments." The FSP provides guidance regarding when an investment is
impaired, whether that impairment is other than temporary and measurement of the
impairment loss. The FSP applies to debt and equity securities, except equity
securities accounted for under the equity method. The FSP is effective for
reporting periods beginning after December 15, 2005. The Company is currently
evaluating the application of the FSP to determine its potential impact on its
consolidated financial statements.
In addition to the recently issued accounting standards, there are several
emerging accounting issues that could potentially impact the Company's
consolidated financial statements in the future, including (i) a proposed SFAS
on "Fair Value Measurements" (exposure draft); (ii) a proposed Interpretation on
"Accounting for Uncertain Tax Positions - an interpretation of FASB Statement
No. 109 (exposure draft)"; and (iii) a proposed SFAS "Accounting for Pensions
and Other Postretirement Benefits (preliminary views)".
The Company will monitor these emerging issues to assess any potential future
impact on its consolidated financial statements.
(2) DISCONTINUED OPERATIONS:
------------------------
Net income from discontinued operations in 2006 reflects the gain from the
disposition of the primary assets of the Company's El Dorado, New Mexico water
utility subsidiary, which were taken through condemnation proceedings. Financial
information for operations of this subsidiary for prior periods has been
reclassified to conform to this presentation.
Revenues of the water utility subsidiary were: 2005 - $1,210,000 (through
November 30, 2004) and 2004 - $1,816,000. Pretax income (loss) of the water
utility subsidiary was: 2005 - $(100,000) (through November 30, 2004) and 2004 -
$595,000.
30
(3) RECEIVABLES:
------------
Receivables consist of: April 30,
-------------------------------------
2006 2005
---------------- -----------------
(Thousands)
Real estate operations-
Mortgage and other receivables $ 14,688 $ 6,373
Allowance for doubtful accounts (96) (96)
---------------- -----------------
$ 14,592 $ 6,277
================ =================
Media services operations (maturing within one year)-
Fulfillment services $ 20,266 $ 24,487
Newsstand Distribution Services, net of estimated returns 18,409 28,502
---------------- -----------------
38,675 52,989
Allowance for doubtful accounts (1,535) (1,641)
---------------- -----------------
$ 37,140 $ 51,348
================ =================
The Company extends credit to various companies in its real estate and media
services businesses that may be affected by changes in economic or other
external conditions. Financial instruments that may potentially subject the
Company to a significant concentration of risk primarily consist of trade
accounts receivable from wholesalers in the magazine distribution industry.
Approximately 47% and 44% of media services net accounts receivable were due
from three customers at April 30, 2006 and 2005. 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. As industry practices allow, the
Company's policy is to manage its exposure to credit risk through credit
approvals and limits and, on occasion (particularly in connection with real
estate land sales), the taking of collateral. The Company also provides an
allowance for doubtful accounts for potential losses based upon factors
surrounding the credit risk of specific customers, historical trends and other
financial and non-financial information.
Real estate mortgages receivable includes one mortgage in the amount of
$9,557,000 that was received as partial payment in connection with a land sale
in April 2006 and paid in full in June 2006. Pursuant to the terms of the sale,
the buyer also provided a "loan reserve letter of credit" which guarantees the
Company payment for certain remaining development obligations it retained in
connection with the sale, which is being accounted for on the "percentage of
completion" method (see note 1, "Revenue recognition - Real Estate"). Real
estate mortgage receivables bear interest at rates ranging from 8.0% to 10.0%
and result primarily from land sales. Maturities of principal on real estate
receivables at April 30, 2006 were as follows: 2007 - $11,402,000; 2008 -
$3,249,000; 2009 - $37,000.
Because the publications distributed by the Company are sold throughout the
distribution chain on a fully-returnable basis in accordance with prevailing
industry practice, the Company provides for estimated returns from wholesalers
at the time the publications go on sale by charges to income that are based on
historical experience and most recent sales data for publications on an
issue-by-issue basis, and then simultaneously provides for estimated credits
from publishers for the related returns. Newsstand Distribution Services
accounts receivable are net of estimated magazine returns of $54,071,000 in 2006
and $57,524,000 in 2005.
Media services operations receivables collateralize line-of-credit arrangements
utilized for the Newsstand Distribution and Fulfillment service operations (see
note 9). Both of these business segments provide services to publishing
companies owned or controlled by a major shareholder and member of the Board of
Directors. Commissions and other revenues earned on these transactions
represented approximately 2% of consolidated revenues in each of 2006, 2005 and
2004.
In connection with one customer arrangement in the Newsstand Distribution
Services business, a publisher has guaranteed the collection of the Company's
related accounts receivable from wholesalers to whom the Company has resold the
publisher's magazines by allowing an offset of past due or uncollectible amounts
from wholesalers against amounts due the publisher for the purchase of
magazines. Pursuant to this arrangement, the Company has the right of offset and
has offset $20,368,000 of accounts receivable at April 30, 2006 against the
related accounts payable.
31
(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, 2006 and 2005 were $2,644,000 and $2,825,000. Interest
costs capitalized during 2006, 2005 and 2004 were $21,000, $65,000 and $126,000.
Accumulated capitalized real estate taxes included in the inventory of land and
improvements at April 30, 2006 and 2005 were $2,191,000 and $2,635,000. Real
estate taxes capitalized during 2006, 2005 and 2004 were $16,000, $18,000 and
$42,000. Previously capitalized interest costs and real estate taxes charged to
real estate cost of sales were $662,000, $883,000, and $608,000 in 2006, 2005
and 2004, 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 that region.
(5) INVESTMENT ASSETS:
------------------
Investment assets consist of:
April 30,
-------------------------------------
2006 2005
-------------- ----------------
(Thousands)
Land held for long-term investment $ 6,800 $ 6,573
-------------- ----------------
Commercial rental properties-
Land, buildings and improvements 7,051 6,839
Furniture and fixtures 216 216
-------------- ----------------
7,267 7,055
Less accumulated depreciation (2,481) (2,272)
-------------- ----------------
4,786 4,783
-------------- ----------------
$ 11,586 $ 11,356
============== ================
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 $209,000, $140,000 and $137,000
in 2006, 2005 and 2004.
(6) PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment consists of:
April 30,
------------------------------------
2006 2005
-------------- ---------------
(Thousands)
Land, buildings and improvements $ 4,397 $ 4,139
Furniture and equipment 30,117 27,317
Other 96 116
-------------- ---------------
34,610 31,572
Less accumulated depreciation (23,731) (19,972)
-------------- ---------------
$ 10,879 $ 11,600
============== ===============
Depreciation charged to operations amounted to $4,222,000, $4,001,000 and
$4,100,000 in 2006, 2005 and 2004.
32
(7) OTHER ASSETS:
-------------
Other assets consist of:
April 30,
------------------------------------
2006 2005
-------------- ---------------
(Thousands)
Software development costs $ 7,787 $ 7,296
Deferred order entry costs 3,872 3,745
Prepaid expenses 2,137 1,587
Other 3,841 3,674
-------------- ---------------
17,637 16,302
Less accumulated amortization (2,399) (3,955)
-------------- ---------------
$ 15,238 $ 12,347
============== ===============
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 related to deferred charges was $1,137,000, $1,202,000 and $778,000
in 2006, 2005 and 2004.
Amortization of Other assets for each of the next five years is estimated to be
as follows: 2007 - $2,098,000; 2008 - $2,079,000; 2009 - $1,640,000; 2010 -
$1,512,000; and 2011 - $1,148,000.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
--------------------------------------
Accounts payable and accrued expenses consist of:
April 30,
------------------------------------
2006 2005
-------------- ---------------
(Thousands)
Publisher payables, net $ 27,273 $ 27,722
Accrued expenses 4,320 6,849
Trade payables 2,602 3,827
Other 5,187 5,335
Deposit on utility company condemnation - 7,000
-------------- ---------------
$ 39,382 $ 50,733
============== ===============
(9) DEBT FINANCING:
---------------
Debt financing consists of:
April 30,
------------------------------------
2006 2005
-------------- ---------------
(Thousands)
Notes payable -
Line-of-credit borrowings -
Real estate operations and other $ - $ -
Media services operations 2,377 7,505
Other notes payable 3,639 4,549
-------------- ---------------
$ 6,016 $ 12,054
============== ===============
Maturities of principal on notes outstanding at April 30, 2006 were as follows:
2007 - $1,673,000; 2008 - $1,419,000; 2009 - $290,000; 2010 - $257,000; and 2011
- - $2,377,000.
33
Lines-of-credit and other borrowings
------------------------------------
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
rate less 0.75% or, at the borrower's option, a LIBOR-based interest rate plus
2.0%. At April 30, 2006, there were no balances outstanding under this
arrangement. The credit agreement contains certain covenants, 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.
Kable's subsidiaries that comprise its Fulfillment Services and Newsstand
Distribution Services segments have a credit arrangement with a bank that
matures in 2010 and 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, in each case based upon a prescribed percentage
of the borrower's eligible accounts receivable. 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 (7.75% at April 30, 2006) or, at the
borrower's option, a reserve adjusted overnight or 30-day LIBOR-based interest
rate (4.94% at April 30, 2006) plus, in either case, 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, 2006, the borrowing availability of the
Fulfillment Services business was $10,216,000 against which $1,898,000 was
outstanding, the borrowing availability of the Newsstand Distribution Services
business was $7,997,000 against which $479,000 was outstanding, and the interest
rate for outstanding borrowings was 6.69% based on the overnight LIBOR rate
option. The loan agreement requires the maintenance or achievement of certain
financial ratios and contains certain covenants, 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. An additional $2,007,600 is available under this credit
arrangement for capital expenditures.
Other notes payable consist of equipment financing loans and a note payable
related to the acquisition of distribution contracts, with a weighted average
interest rate of 5.2% in 2006 and 4.8% in 2005.
In May, 2006, Kable's credit agreement was amended to provide for an additional
$10,000,000 revolving loan to a subsidiary of the Newsstand Distribution
Services business on the same terms as provided in the existing credit
agreement. The proceeds of borrowings under this arrangement may be used
exclusively for the payment of accounts payable under a magazine distribution
agreement with one of the borrower's publisher customers. Subject to such
maximum loan amount, up to 40% of the amount of the borrower's accounts
receivable from the distribution of magazines covered by the distribution
agreement with that customer may be borrowed. The amendment also provided for a
secured term loan to the Fulfillment Services business of $1,470,000, bearing
interest at the rate of 6.25% and repayable in equal monthly installments
through 2010, the proceeds of which were applied to the financing of certain
equipment.
(10) BENEFIT PLANS:
--------------
Retirement plan
---------------
The Company has a retirement plan for which accumulated benefits were frozen and
future service credits were curtailed as of March 1, 2004. Prior to that date it
had covered substantially all full-time employees and provided benefits based
upon a percentage of the employee's annual salary. The following tables
summarize the balance sheet impact as well as the benefit obligations, assets,
funded status and assumptions associated with the retirement plan.
34
Net periodic pension cost (income) for 2006, 2005 and 2004 was comprised of the
following components:
Year Ended April 30,
-----------------------------------------------------
2006 2005 2004
--------------- ---------------- ---------------
(Thousands)
Service cost (including plan expenses) $ 212 $ 124 $ 784
Interest cost on projected
benefit obligation 1,780 1,817 1,762
Expected return on assets (1,994) (2,064) (1,793)
Amortization of prior service cost - - (293)
Recognized net actuarial loss 629 426 741
--------------- ---------------- ---------------
Pension cost for normal activity 627 303 1,201
(Gain) on curtailment - - (1,686)
--------------- ---------------- ---------------
Total cost (benefit) recognized in pretax income 627 303 (485)
Cost (benefit) recognized in pretax other
comprehensive income (3,173) 2,271 (2,368)
--------------- ---------------- ---------------
$ (2,546) $ 2,574 $ (2,853)
=============== ================ ===============
Assumptions used in determining net periodic pension cost were:
Year Ended April 30,
-----------------------------------------------------------
2006 2005 2004
----------------- ----------------- -----------------
Discount rates 5.75% 5.75% 6.25%
Expected long-term rate of return
on assets 8.0% 8.0% 8.0%
The following table sets forth changes in the plan's benefit obligations and
assets, and summarizes components of amounts recognized in the Company's
consolidated balance sheets:
April 30,
-------------------------------
2006 2005
------------- --------------
(Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 31,808 $ 30,048
Interest cost 1,780 1,817
Actuarial loss 418 1,821
Benefits paid (1,847) (1,878)
------------- --------------
Benefit obligation at end of year $ 32,159 $ 31,808
------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 26,028 $ 26,842
Actual return on plan assets 4,924 1,276
Benefits paid (1,847) (1,878)
Expenses paid (180) (212)
------------- --------------
Fair value of plan assets at end of year $ 28,925 $ 26,028
------------- --------------
Funded status $ (3,234) $ (5,780)
Unrecognized net actuarial loss 6,788 9,961
------------- --------------
Net amount recognized in the balance sheets $ 3,554 $ 4,181
============= ==============
Amounts recognized on the balance sheets:
Accrued pension costs $ (3,234) $ (5,780)
Pre-tax accumulated comprehensive loss 6,788 9,961
------------- --------------
$ 3,554 $ 4,181
============= ==============
35
The average asset allocation for the retirement plan was as follows:
April 30,
-------------------------------
2006 2005
------------- --------------
Equity securities 78% 75%
Fixed income securities 19 22
Other (principally cash and cash equivalents) 3 3
------------- --------------
Total 100% 100%
============= ==============
The Company recorded other comprehensive income (loss) of $1,904,000 in 2006,
($1,362,000) in 2005 and $1,420,000 in 2004 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 2006 or 2005. The amount of future annual benefit payments is
expected to be between $2.0 million and $2.3 million in 2007 through 2011, and
an aggregate of approximately $11.5 million is expected to be paid in the five
year period 2012-2016.
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
$832,000, $841,000 and $389,000 in 2006, 2005 and 2004.
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 $441,000, $330,000 and $230,000 in
2006, 2005 and 2004 (15,000 shares issued in each year). At April 30, 2006,
12,500 shares remained available for grant.
Stock option plan
-----------------
The Company had in effect a stock option plan that provided for the automatic
issuance of an option to purchase 500 shares of common stock to each
non-employee director annually at the fair market value at the date of grant.
The options are exercisable in one year and expire five years after the date of
grant. The Board of Directors terminated the plan following the annual grants
that were made in September 2005.
36
A summary of activity in the Company's stock option plan is as follows:
Year Ended April 30,
-----------------------------------------------------------------------
2006 2005 2004
-------------------- ----------------------- ----------------------
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 7,000 $ 14.92 9,500 $ 9.12 9,000 $ 6.30
Granted 3,000 24.88 3,000 17.55 3,000 15.19
Exercised (2,500) 16.13 (5,500) 6.34 (2,500) 6.23
Expired or canceled (500) 17.56 - - - -
------------------- ------------------- -----------------
Options outstanding at
end of year 7,000 18.56 7,000 14.92 9,500 9.12
=================== =================== =================
Available for grant at
end of year - 12,000 15,000
=================== =================== =================
Options exercisable at
end of year 4,000 4,000 6,500
=================== =================== =================
Range of exercise prices
for options exercisable
at end of year $3.95 to $24.88 $3.95 to $17.55 $3.95 to $8.45
=================== =================== =================
Options outstanding at April 30, 2006 were 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, 2006, 2005 and 2004 was
3.9, 3.6, and 3.2 years. The weighted average fair value of options granted
during the year was $8.07 in 2006, $5.57 in 2005 and $4.82 in 2004. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2006, 2005 and 2004: expected volatility of 42%,
42% and 44%; risk-free interest rates of 5.0%, 2.8% and 2.0%; 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 plan. Further, the
amount of additional compensation disclosable under the disclosure-only
provisions of SFAS No. 123 is immaterial for all periods presented.
(11) INCOME TAXES:
-------------
The provision for income taxes consists of the following:
Year Ended April 30,
-------------------------------------------------------
2006 2005 2004
---------------- --------------- ---------------
(Thousands)
Current:
Federal $ 9,735 $ 5,770 $ 2,961
State and local 823 488 350
---------------- --------------- ---------------
10,558 6,258 3,311
---------------- --------------- ---------------
Deferred:
Federal 1,587 928 3,011
State and local 176 103 531
---------------- --------------- ---------------
1,763 1,031 3,542
---------------- --------------- ---------------
Total provision for income taxes $ 12,321 $ 7,289 $ 6,853
================ =============== ===============
37
The provision for income taxes has been allocated as follows:
Year Ended April 30,
-------------------------------------------------------
2006 2005 2004
---------------- --------------- ---------------
(Thousands)
Continuing operations $ 10,233 $ 7,326 $ 6,638
Discontinued operations 2,088 (37) 215
---------------- --------------- ---------------
Total provision for income taxes $ 12,321 $ 7,289 $ 6,853
================ =============== ===============
The components of the net deferred income tax liability are as follows:
April 30,
--------------------------------
2006 2005
------------ -------------
(Thousands)
Deferred income tax assets-
State tax loss carryforwards $ 3,844 $ 4,902
Accrued pension costs 1,302 2,316
Other 1,855 1,562
------------- -------------
Total deferred income tax assets 7,001 8,780
------------- -------------
Deferred income tax liabilities-
Real estate basis differences (2,097) (2,022)
Reserve for periodical returns (1,434) (1,470)
Depreciable assets (3,485) (3,369)
Deferred condemnation gain (1,450) -
Capitalized costs for financial reporting
purposes, expensed for tax (4,060) (3,281)
-------------- -------------
Total deferred income tax liabilities (12,526) (10,142)
-------------- -------------
Valuation allowance for realization of
state tax loss carry forwards (3,625) (4,755)
-------------- -------------
Net deferred income tax liability $ (9,150) $ (6,117)
============== =============
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,
--------------------------------------------------------
2006 2005 2004
----------------- --------------- ----------------
(Thousands)
Computed tax provision at
statutory rate $ 11,455 $ 8,020 $ 6,098
Increase (reduction) in tax resulting from:
State income taxes, net of federal
income tax effect 552 395 717
Real estate charitable land contribution (1,543) (1,093) (237)
Other (231) 4 60
----------------- --------------- ----------------
Actual tax provision $ 10,233 $ 7,326 $ 6,638
================= =============== ================
(12) SHAREHOLDERS' EQUITY:
---------------------
The Company recorded other comprehensive income (loss) of $1,904,000 in 2006,
($1,362,000) in 2005 and $1,420,000 in 2004 to account for the net effect of
changes to the unfunded pension liability (see note 10).
In connection with the 2002 Non-Employee Directors' Stock Plan, 15,000 shares of
common stock were issued from treasury stock in each of 2006, 2005 and 2004 to
members of the Board of Directors as partial compensation for services. As a
result, there were 773,592 and 788,592 shares held in the treasury at April 30,
2006 and 2005.
38
(13) ACQUISITION:
------------
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 note payable ($1,170,000). The
purchase price was capitalized and is included in Other Assets on the
accompanying consolidated balance sheets.
(14) COMMITMENTS AND CONTINGENCIES:
------------------------------
Land sale contracts
-------------------
As of April 30, 2006, the Company had entered into a sales contract for the sale
of approximately 400 single-family lots for a total purchase price of
approximately $18 million. This sale closed in April 2006; however, because the
Company retained an ongoing obligation to complete development of this project,
revenue is recognized under the percentage of completion method. In 2006,
billings under the contract totaled $11,945,000, of which $4,204,000 was
recognized as revenue and $7,741,000 was deferred. The balance of the revenue
will be recognized as development work is completed. See notes 1 and 3.
The Company has also entered into conditional sales contracts for the sale of
approximately 2,200 lots in Rio Rancho, New Mexico which would close at varying
times through fiscal 2009; 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. No
recognition has been given to the conditional sales contracts in the financial
statements.
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 2006, 2005 and 2004 was approximately $8,596,000,
$9,359,000 and $12,075,000.
The total minimum rental commitments for years subsequent to April 30, 2006 of
$25,055,000 are due as follows: 2007 - $5,396,000; 2008 - $3,586,000; 2009 -
$2,896,000; 2010 - $2,485,000; 2011 - $2,342,000; and thereafter - $8,350,000.
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.
(15) 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 sought damages from the Kable
defendant of approximately $15.2 million; any damages awarded would be trebled.
In September 2005, the Court granted the motion for summary judgment of the
defendants, including Kable, and judgment in favor of the defendants, including
Kable, was entered. The plaintiff has appealed the judgment. 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 based
in part upon advice of counsel, will not materially affect the consolidated
financial position or results of operations of the Company and its subsidiaries.
39
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The estimated fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The carrying
amounts of cash and cash equivalents, media services trade receivables and trade
payables approximate fair value because of the short maturity of these financial
instruments. Debt that bears variable interest rates indexed to prime or LIBOR
also approximates fair value as it reprices when market interest rates change.
The estimated fair value of the Company's long-term, fixed-rate mortgage
receivables was $14.1 million and $4.1 million versus carrying amounts of $14.2
million and $4.3 million at April 30, 2006 and April 30, 2005. The estimated
fair value of the Company's long-term, fixed-rate notes payable was $3.4 million
versus a carrying amount of $3.6 million as of April 30, 2006, and both the fair
value and carrying amount was $4.5 million as of April 30, 2005.
(17) 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. Real Estate operations primarily
include land sales activities, which involve the obtaining of approvals and
development of large tracts of land for sales to homebuilders, commercial users
and others, as well as investments in commercial and investment properties. The
Company's Media Services subsidiary has two identified segments, Newsstand
Distribution Services and Fulfillment Services. Fulfillment Services operations
involve the performance of subscription and product fulfillment and other
related activities on behalf of various publishers and other clients, and
Newsstand Distribution Services operations involve the national and, to a small
degree, international distribution and sale of periodicals to wholesalers.
Corporate revenues and expenses not identifiable with a specific segment are
grouped together in this presentation. Certain common expenses as well as
identifiable assets are allocated among industry segments based upon
management's estimate of each segment's absorption.
40
Summarized data relative to the industry segments in which the Company has
operations is as follows (amounts in thousands):
Newsstand
Real Estate Fulfillment Distribution
Operations Services Services Corporate Consolidated
------------- ------------ ------------ ----------- -------------
Year ended April 30, 2006:
Revenues $ 59,169 $ 75,332 $ 13,131 $ 664 $ 148,296
Expenses 30,906 70,352 11,290 2,677 115,225
Management fee (income) 995 851 144 (1,990) -
Interest expense (income), net - 452 (108) - 344
------------- ------------ ------------ ----------- -------------
Pretax income (loss) contribution
from continuing operations $ 27,268 $ 3,677 $ 1,805 $ (23) $ 32,727
============= ============ ============ =========== =============
Depreciation and amortization $ 235 $ 4,552 $ 749 $ 32 $ 5,568
Identifiable assets $ 80,456 $ 43,061 $ 28,738 $ 31,595 $ 183,850
Intangible assets $ - $ 1,298 $ 3,893 $ - $ 5,191
Capital expenditures $ 252 $ 3,500 $ 140 $ 4 $ 3,896
- ---------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2005:
Revenues $ 37,385 $ 83,896 $ 13,017 $ 208 $ 134,506
Expenses 20,995 76,228 11,603 2,106 110,932
Management fee (income) 900 784 116 (1,800) -
Interest expense, net 5 555 47 53 660
------------- ------------ ------------ ----------- -------------
Pretax income (loss) contribution
from continuing operations $ 15,485 $ 6,329 $ 1,251 $ (151) $ 22,914
============= ============ ============ =========== =============
Depreciation and amortization $ 188 $ 4,403 $ 575 $ 177 $ 5,343
Identifiable assets $ 75,571 $ 41,918 $ 38,681 $ 32,948 $ 189,118
Intangible assets $ - $ 1,298 $ 3,893 $ - $ 5,191
Capital expenditures $ 1,913 $ 3,018 $ - $ 14 $ 4,945
- ---------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2004:
Revenues $ 29,415 $ 87,629 $ 12,162 $ 85 $ 129,291
Expenses 17,022 80,786 11,036 1,568 110,412
Management fee (income) 770 592 141 (1,503) -
Interest expense, net 213 615 30 86 944
------------- ------------ ------------ ----------- -------------
Pretax income (loss) contribution
from continuing operations $ 11,410 $ 5,636 $ 955 $ (66) $ 17,935
============= ============ ============ =========== =============
Depreciation and amortization $ 225 $ 4,087 $ 459 $ 244 $ 5,015
Identifiable assets $ 76,934 $ 38,983 $ 33,917 $ 16,140 $ 165,974
Intangible assets $ - $ 1,298 $ 3,893 $ - $ 5,191
Capital expenditures $ 266 $ 3,069 $ 218 $ 115 $ 3,668
- ---------------------------------------------------------------------------------------------------------------------------
41
(18) 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,
2005 2005 2006 2006
-------------- --------------- -------------- --------------
Revenues $ 30,014 $ 34,847 $ 35,589 $ 47,846
Gross Profit 6,437 10,698 9,671 19,688
Income from continuing
operations, net of taxes 1,802 5,062 5,241 10,389
-------------- --------------- -------------- --------------
Income (loss) from operations of
discontinued business, net of
taxes 3,562 (6) - -
-------------- --------------- -------------- --------------
Net income $ 5,364 $ 5,056 $ 5,241 $ 10,389
============== =============== ============== ==============
Earnings per share - Basic
and Diluted (a):
Continuing operations $ 0.27 $ 0.76 $ 0.79 $ 1.56
Discontinued operations 0.54 - - -
-------------- --------------- -------------- --------------
Total $ 0.81 $ 0.76 $ 0.79 $ 1.56
============== =============== ============== ==============
(a) The sum of the quarters does not equal the full year earnings per share due
to rounding.
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
============== =============== ============== ==============
42
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- -----------------------------------------------------------
and Financial Disclosure
------------------------
None
Item 9A. Controls and Procedures
- -------- -----------------------
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief
financial officer and the other executive officers whose certifications
accompany this annual report, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. As a result of such evaluation, the chief financial officer and such
other executive officers have concluded that such disclosure controls and
procedures are effective to provide reasonable assurance that the information
required to be disclosed in the reports the Company files or submits under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and (ii) accumulated and communicated to
management, including the Company's principal executive and principal financial
officers or persons performing such functions, as appropriate, to allow timely
decisions regarding disclosure. The Company believes that a control system, no
matter how well designed and operated, cannot provide absolute assurance that
the objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
Changes in Internal Control over Financial Reporting
No change in the Company's system of internal control over financial reporting
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
Item 9B. Other Information
- -------- -----------------
None
43
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
The information set forth under the headings "Election of Directors", "The Board
of Directors and its Committees" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 2006 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
(the "2006 Proxy Statement") is incorporated herein by reference. In addition,
information concerning the Company's executive officers is included in Part I
above under the caption "Executive Officers of the Registrant".
Item 11. Executive Compensation
- -------- ----------------------
The information set forth under the headings "Executive Compensation" and "The
Board of Directors and its Committees" in the 2006 Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
- -------- ---------------------------------------------------
Management and Related Stockholder Matters
------------------------------------------
The information set forth under the heading "Common Stock Ownership of Certain
Beneficial Owners and Management" and under the subheading "Equity Compensation
Plan Information" in the 2006 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information set forth under the heading "Compensation Committee Interlocks
and Insider Participation" in the 2006 Proxy Statement is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services
- -------- --------------------------------------
The information set forth under the subheadings "Audit Fees" and "Pre-Approval
Policies and Procedures" in the 2006 Proxy Statement is incorporated herein by
reference.
44
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
- -------- ------------------------------------------
(a) 1. Financial Statements. The following consolidated financial
----------------------
statements and supplementary financial information are filed as part of this
report:
AMREP Corporation and Subsidiaries:
o Report of Independent Registered Public Accounting Firm
dated June 13, 2006 - McGladrey & Pullen, LLP
o Consolidated Balance Sheets - April 30, 2006 and 2005
o Consolidated Statements of Income for the Three Years
Ended April 30, 2006
o Consolidated Statements of Shareholders' Equity for the
Three Years Ended April 30, 2006
o Consolidated Statements of Cash Flows for the Three
Years Ended April 30, 2006
o Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following financial
-----------------------------
statement schedule is filed as part of this report:
AMREP Corporation and Subsidiaries:
o Schedule II - Valuation and Qualifying Accounts
Financial statement schedules not included in this annual
report on Form 10-K have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. Exhibits.
---------
The exhibits filed in this report are listed in the Exhibit
Index.
The Registrant agrees, upon request of the Securities
and Exchange Commission, to file as an exhibit each instrument defining the
rights of holders of long-term debt of the Registrant and its consolidated
subsidiaries which has not been filed for the reason that the total amount of
securities authorized thereunder does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
(b) Exhibits. See (a)3 above.
--------
(c) Financial Statement Schedules. See (a)2 above.
-----------------------------
45
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: July 27, 2006 By /s/ Peter M. Pizza
------------------------
Peter M. Pizza
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the dates indicated.
/s/ Peter M. Pizza /s/ Nicholas G. Karabots
- ------------------------- --------------------------
Peter M. Pizza Nicholas G. Karabots
Vice President and Chief Financial Director
Officer Principal Financial Dated: July 27, 2006
Officer and Principal
Accounting Officer*
Dated: July 27, 2006
/s/ Edward B. Cloues II /s/ Albert V. Russo
- ------------------------ --------------------------
Edward B. Cloues II Albert V. Russo
Director Director
Dated: July 27, 2006 Dated: July 27, 2006
/s/ Lonnie A. Coombs /s/ Samuel N. Seidman
- ------------------------ --------------------------
Lonnie A. Coombs Samuel N. Seidman
Director Director
Dated: July 27, 2006 Dated: July 27, 2006
/s/ Elmer F. Hansen, Jr /s/ James Wall
- ------------------------ --------------------------
Elmer F. Hansen, Jr. James Wall
Director Director*
Dated: July 27, 2006 Dated: July 27, 2006
/s/ Michael P. Duloc
--------------------------
Michael P. Duloc
President, Kable Media Services, Inc.*
Dated: July 27, 2006
- -----------------
*The Registrant is a holding company which does substantially all of its
business through two wholly-owned subsidiaries (and their subsidiaries). Those
wholly-owned subsidiaries are AMREP Southwest Inc. ("ASW") and Kable Media
Services, Inc. ("Kable"). James Wall is the principal executive officer of ASW,
and Michael P. Duloc is the principal executive officer of Kable. The Registrant
has no chief executive officer. Its executive officers include James Wall,
Senior Vice President and Peter M. Pizza, Vice President and Chief Financial
Officer, and Michael P. Duloc, who may be deemed an executive officer by reason
of his position with Kable.
46
AMREP CORPORATION AND SUBSIDIARIES
----------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(Thousands)
Additions
Charges Charged
Balance at (Credits) to (Credited) to
Beginning Costs and Other Balance at End
Description of Period Expenses Accounts Deductions of Period
----------- --------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2006:
Allowance for doubtful accounts
(included in receivables - real
estate operations on the
consolidated balance sheet) $ 96 $ - $ - $ - $ 96
--------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and
doubtful accounts (included in
receivables - magazine circulation
operations on the consolidated
balance sheet)
$ 59,165 $ (3,483) $ - $ 76 $ 55,606
--------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2005:
Allowance for doubtful accounts
(included in receivables - real
estate operations on the
consolidated balance sheet) $ 192 $ - $ - $ 96 $ 96
--------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and
doubtful accounts (included in
receivables - magazine circulation
operations on the consolidated
balance sheet) $ 55,620 $ 3,825 $ - $ 280 $ 59,165
--------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2004:
Allowance for doubtful accounts
(included in receivables - real
estate operations on the
consolidated balance sheet) $ 280 $ 7 $ - $ 95 $ 192
--------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and
doubtful accounts (included in
receivables - magazine circulation
operations on the consolidated
balance sheet)
$ 65,811 $ (10,015) $ - $ 176 $ 55,620
--------------- --------------- ---------------- -------------- --------------
Note: Charges (credits) recorded in magazine circulation operations include
a reserve for the estimate of magazine returns from wholesalers, which are
substantially offset by offsetting credits related to the return of these
magazines to publishers.
47
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) First Amendment dated as of April 27, 2006 to 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 24,
2006.
4 (c) 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 (d) 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.*
10 (d) Amended and Restated Distribution Agreement dated as of April 30, 2006
between Kappa Publishing Group, Inc. and Kable Distribution Services,
Inc.- Filed herewith. **
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.
** Portions of this exhibit have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934.
48