Item 1. Business ------- -------- GENERAL
The Company* was organized in 1961 and, through its subsidiaries, is primarily engaged in three business segments: the Real Estate business operated by AMREP Southwest Inc. and its subsidiaries (collectively, "AMREP Southwest"), and the Fulfillment Services and Newsstand Distribution Services businesses operated by Kable Media Services, Inc. and its subsidiaries (collectively, "Kable"). Data concerning industry segments is set forth in Note 19 of the notes to the consolidated financial statements. The Company's foreign sales and activities are not significant.
REAL ESTATE OPERATIONS
The Company conducts its Real Estate business through AMREP Southwest, with these activities occurring primarily in the City of Rio Rancho and certain adjoining areas of Sandoval County, New Mexico. References below to Rio Rancho include the City and such adjoining areas. As of July 1, 2008, AMREP Southwest employed approximately 15 persons.
Properties - Rio Rancho
Rio Rancho consists of 91,049 contiguous acres in Sandoval County near Albuquerque, of which approximately 73,750 acres have been platted into approximately 114,600 home site and commercial lots, 16,470 acres are dedicated to community facilities, roads and drainage and the remainder is unplatted land. At April 30, 2008, approximately 90,630 of these residential and commercial lots had been sold net of lot repurchases. The Company currently owns approximately 17,240 acres in Rio Rancho, of which approximately 4,500 acres are in contiguous blocks, which are being developed or are suitable for development, and approximately 1,990 acres are in areas with a high concentration of ownership, where the Company owns more than 50% of the lots in the area. These areas are suitable for special assessment districts or city redevelopment areas that may allow for future development under the auspices of local government. The balance of acres owned is in scattered lots, where the Company owns less than 50% of the lots in the area, that may require the purchase of a sufficient number of adjoining lots to create tracts suitable for development or that the Company may attempt to sell individually or in small groups.
Development activities conducted or arranged by the Company include the obtaining of necessary governmental approvals ("entitlements"), installation of utilities and necessary storm drains, and building or improving of roads. At Rio Rancho, the Company is developing both residential lots and sites for commercial and industrial use as the demand warrants, and also is securing entitlements for large development tracts for sale to homebuilders. The engineering work at Rio Rancho is performed by both Company employees and outside firms, but development work is performed by outside contractors. Company personnel market land at Rio Rancho, both directly and through brokers. The Company competes with other owners of land in the Rio Rancho and Albuquerque area that offer for sale developed residential lots and sites for commercial and industrial use.
The City of Rio Rancho is the third largest city in New Mexico with a population of approximately 75,000. It was named as the 56th best place to live by Money magazine in 2006 for those cities in the United States with greater than 50,000 residents. The city's population growth rate for the period 2000-2006 was approximately 40%, with a February 2008 unemployment rate of 3.7%. The city has significant construction projects recently completed, ongoing or announced, including: (i) a new central business district with a 6,500 seat events center and a new city hall, (ii) a planned second high school, (iii) the planned opening of the University of New Mexico West Campus, (iv) a 53 acre major motion picture studio and (v) a new hospital. Major non-government employers currently include Intel Corporation, US Cotton and customer care call centers of Bank of America, JC Penney, Victoria's Secret and Sprint PCS. -------------------- *As used herein, "Company" includes the Registrant and its subsidiaries unless the context requires or indicates otherwise.
Since early 1977, the Company has sold no individual lots without homes at Rio Rancho to consumers. A substantial number of lots without homes were sold prior to 1977, and most of these remain in areas where utilities have not yet been installed. However, under certain of the lot sale contracts, if utilities have not reached a lot when the purchaser is ready to build a home, the Company is obligated to exchange a lot in an area then serviced by water, telephone and electric utilities for the lot of the purchaser, without cost to the purchaser. The Company has not incurred significant costs related to such exchanges.
In Rio Rancho, the Company sells both developed and undeveloped lots to national, regional and local homebuilders, commercial and industrial property developers and others. In the last three fiscal years, land sales in Rio Rancho have been as follows:
Acres Revenues Sold Revenues Per Acre ---------- ----------------- --------------- 2008: Developed Residential 30 $ 9,542,000 $ 318,100 Commercial 39 8,651,000 221,800 ---------- ----------------- --------------- Total Developed 69 18,193,000 263,700 Undeveloped 337 9,709,000 28,800 ---------- ----------------- --------------- Total 406 $ 27,902,000 $ 68,700 ---------- ----------------- ---------------
2007: Developed Residential 138 $ 39,407,000 $ 285,600 Commercial 56 15,728,000 280,900 ---------- ----------------- --------------- Total Developed 194 55,135,000 284,200 Undeveloped 857 40,690,000 47,500 ---------- ----------------- --------------- Total 1,051 $ 95,825,000 $ 91,200 ---------- ----------------- ---------------
2006: Developed Residential 147 $ 31,920,000 $ 217,100 Commercial 22 6,376,000 289,800 ---------- ----------------- --------------- Total Developed 169 38,296,000 226,600 Undeveloped 746 19,514,000 26,200 ---------- ----------------- --------------- Total 915 $ 57,810,000 $ 63,200 ---------- ----------------- ---------------
Other Properties
The Company also owns two tracts of land in Colorado, consisting of one residential property of approximately 160 acres planned for approximately 350 homes that the Company intends to offer for sale upon obtaining all necessary entitlements, and one property of approximately 10 acres zoned for commercial use, which is being offered for sale.
FULFILLMENT SERVICES AND MAGAZINE DISTRIBUTION SERVICES OPERATIONS
The Company (i) through Kable and its Kable Fulfillment Services and Palm Coast Data Holdco, Inc. ("Palm Coast") subsidiaries performs fulfillment and related services for publishers and other customers and (ii) through Kable and its Kable Distribution Services subsidiary distributes periodicals nationally and in Canada and, to a small degree, in other foreign countries. As of July 1, 2008, Kable employed approximately 2,000 persons, of whom approximately 1,850 were involved in fulfillment activities and 150 in distribution activities.
Fulfillment Services
Kable's Fulfillment Services business performs a number of fulfillment and fulfillment-related activities, principally magazine subscription fulfillment services, list services and product fulfillment services, and it accounted for 91% of Kable's revenues in 2008.
In the magazine subscription fulfillment services operation, Kable processes new orders, receives and accounts for payments, prepares and sends to each publisher's printer labels or tapes containing the names and addresses of
subscribers for mailing each issue, handles subscriber telephone inquiries and correspondence, prepares renewal and statement notifications for mailing, maintains subscriber lists and databases, generates marketing and statistical reports, processes Internet orders and prints forms and promotional materials. Kable performs all of these services for many clients, but some clients utilize only certain of them. Although by far the largest number of magazine titles for which Kable performs fulfillment services are consumer publications, Kable also performs services for a number of membership organizations, trade (business) publications and government agencies that utilize the broad capabilities of Kable's extensive database systems.
Kable's lettershop and graphics departments prepare and mail statements and renewal forms for its publisher clients to use in their subscriber mailings. List services clients are also primarily publishers for whom Kable maintains client customer lists, selects names for clients who rent their lists, merges rented lists with a client's lists to eliminate duplication for the client's promotional mailings, and sorts and sequences mailing labels to provide optimum postal discounts. Kable also provides membership services to both publisher and non-publisher clients including donation processing and membership fulfillment, in addition to more standard magazine fulfillment services that are also used by membership clients. Product fulfillment services are provided for Kable's publisher clients and other direct marketers. In this activity Kable receives, warehouses, processes and ships merchandise.
Kable performs fulfillment services for approximately 920 different magazine titles for approximately 280 clients and maintains databases of over 76 million active subscribers for its client publishers. In a typical month, Kable produces approximately 90 million mailing labels for its client publishers and also processes over 29 million pieces of outgoing mail for these clients.
There are a number of companies that perform fulfillment services for publishers and with which Kable competes, including one that is larger than Kable. Since publishers often utilize only a single fulfillment company for a particular publication, there is intense competition to obtain fulfillment contracts with publishers. Competition for non-publisher clients is also intense. Kable has a sales staff whose primary task is to solicit fulfillment business.
Newsstand Distribution Services
In its Newsstand Distribution Services operation, Kable distributes magazines for approximately 240 publishers. Among the titles are many special interest magazines, including various puzzle, automotive, comics, romance and sports. In a typical month, Kable distributes approximately 57 million copies of various titles to wholesalers. Kable coordinates the movement of the publications from its publisher clients to approximately 100 independent wholesalers. The wholesalers in turn sell the publications to major retail chains and independent retail outlets. All parties generally have full return rights for unsold copies. The newsstand distribution business accounted for 9% of Kable's revenues in 2008.
While Kable may not handle all publications of an individual publisher client, it usually is the exclusive distributor into the consumer marketplace for the publications it distributes. Kable has a distribution sales and marketing force that works with wholesalers and retailers to promote magazine sales and assist in determining the appropriate number of copies of an individual magazine to be delivered to each wholesaler and ultimately each retailer serviced by that wholesaler. Kable generally does not physically handle any product. Kable generates and delivers to each publisher's printer shipping instructions with the addresses of the wholesalers and the number of copies of product to be shipped to each. All magazines have a defined "off sale" date following which the retailers return unsold copies to the wholesalers, who destroy them after accounting for returned merchandise in a manner satisfactory to and auditable by Kable.
Kable generally makes substantial cash advances to publishers against future sales that publishers may use to help pay for printing, paper and production costs prior to the product going on sale. Kable is usually not paid by wholesalers for product until some time after the product has gone on sale, and is therefore exposed to potential credit risks with both publishers and wholesalers. Kable's ability to limit its credit risk is dependent in part on its skill in estimating the number of copies of an issue that should be distributed and which will be sold, and on limiting its advances to the publisher accordingly.
Kable competes primarily with three other national distributors. Each of these competitors is owned by or affiliated with a magazine publishing company. Such companies publish a substantial portion of all magazines sold in the United States, and the competition for the distribution rights to the remaining publications is intense. In addition, there has been a major consolidation and
reduction in the number of wholesalers to whom Kable distributes magazines arising from changes within the magazine distribution industry in recent years. As a result, three of these wholesalers accounted for approximately 66% of the fiscal 2008 gross billings of the Newsstand Distribution Services operations, which is common for the industry, and approximately 42% of Kable's consolidated accounts receivable were due from these wholesalers at April 30, 2008.
Item 1A.
Item 1A. Risk Factors -------- ------------ The risks described below are among those that could materially and adversely affect the Company's business, financial condition or results of operations. These risks could cause actual results to differ materially from historical experience and from results predicted by any forward-looking statements related to conditions or events that may occur in the future. These risks are not the only risks the Company faces, and other risks include factors not presently known as well as those that are currently considered to be less significant.
Risks Related to the Company's Real Estate Operations -----------------------------------------------------
The Company's real estate assets are concentrated in one market, Rio Rancho, New Mexico, meaning the Company's results of operations and future growth may be limited or affected by economic changes in that market.
Substantially all of the Company's real estate assets are located in Rio Rancho, which is adjacent to Albuquerque, New Mexico. As a result of this geographic concentration, the Company could be affected by changes in economic conditions in this region from time to time, including economic contraction due to, among other things, the failure or downturn of key industries and employers. The Company's results of operations, future growth or both may be adversely affected if the demand for residential or commercial real estate declines in the Rio Rancho area as a result of changes in economic conditions.
A downturn in the business of Rio Rancho's largest employer could adversely affect the Company's real estate development business there.
Intel Corporation, the largest employer in Rio Rancho with approximately 3,300 full-time employees at April 30, 2008, operates a large semiconductor manufacturing facility there and has announced its plan to retool this facility. Intel Corporation had approximately 4,700 full-time employees as of April 30, 2007 and the reduction in force reflects a May 3, 2007 announcement that a workforce reduction would occur at that facility beginning in August 2007. If Intel Corporation's presence in Rio Rancho were to continue to diminish for any reason, such as in response to a downturn in its semiconductor manufacturing business, the Rio Rancho real estate market and consequently the Company's land development business located there could be adversely affected.
As Rio Rancho's population continues to grow, the Company's land development activities in that market may be subject to greater limitations than they have been historically.
When the Company acquired its core real estate inventory in Rio Rancho over 40 years ago, the area was not developed and had a low population. As of April 30, 2008, Rio Rancho was the third largest city in New Mexico and had a population of approximately 75,000. As Rio Rancho's population continues to grow, the Company may be unable to engage in development activities comparable to those the Company has engaged in historically. Local community or political groups may oppose the Company's development plans or require modification of those plans, which could cause delays or increase the cost of the Company's development projects. In addition, zoning density limitations, "slow growth" provisions or other land use regulations implemented by state, city or local governments could further restrict the Company's development activities or those of its homebuilder customers, or could adversely affect financial returns from a given project, which could adversely affect the Company's results of operations.
The Company's real estate assets are diminishing over time, meaning long-term growth in the real estate business will require the acquisition of additional real estate assets, possibly by expanding into new markets.
Substantially all of the Company's real estate revenues are derived from sales of the Company's core inventory in Rio Rancho. This property was acquired more
than 40 years ago, and each time the Company develops and sells real estate to customers in Rio Rancho, the Company's real estate assets diminish. As of April 30, 2008, the Company owned approximately 17,240 acres in Rio Rancho out of an original purchase of approximately 91,000 acres. The continuity and future growth of the Company's real estate business will require that the Company acquire new properties in or near Rio Rancho or expand to other markets to provide sufficient assets to maintain the Company's current level of operations and revenues. While the Company holds two properties in Colorado, it has not for many years made any significant attempt to identify a development opportunity similar to the one the Company has undertaken in Rio Rancho, and there can be no assurance that the Company will identify such an opportunity in another market. If the Company does not acquire new real estate assets, its real estate holdings will continue to diminish, which will adversely affect the Company's ability to continue its real estate operations at their current level.
The Company's remaining Rio Rancho real estate is not all in contiguous blocks, which may adversely affect the Company's ability to sell lots at levels comparable with the recent past.
Of the approximately 17,240 acres in Rio Rancho that the Company owned at April 30, 2008, approximately 4,500 acres were in contiguous blocks that are being developed or are suitable for development, and approximately 1,990 acres were in areas with a high concentration of ownership, where the Company owns more than 50% of the lots in the area, suitable for special assessment districts or city redevelopment areas that may allow for future development under the auspices of local government. The balance is in scattered lots, where the Company owns less than 50% of the lots in the area, that may require the purchase of a sufficient number of adjoining lots to create tracts suitable for development or that the Company may attempt to sell individually or in small groups. As the Company's land sales continue and the amount of the Company's contiguous and highly concentrated lots diminishes, the Company's ability to continue to sell lots and generate land sale revenues at the levels of the recent past may be adversely affected, which would have an adverse effect on the Company's results of operations.
The Company may not be able to acquire properties or develop them successfully.
If the Company is able to identify a development opportunity similar to the one it has undertaken in Rio Rancho, the success of the Company's real estate segment will still depend in large part upon its ability to acquire additional properties on satisfactory terms and to develop them successfully. If the Company is unable to do so, its results of operations could be adversely affected.
The acquisition, ownership and development of real estate is subject to many risks that may adversely affect the Company's results of operations, including the risks that:
- the Company may not be able to acquire a desired property because of competition from other real estate investors with greater capital than the Company has;
- the Company may not be able to obtain financing on acceptable terms, or at all;
- an adverse change in market conditions during the interval between acquisition and sale of a property may result in a lower than originally anticipated profit;
- the Company may underestimate the cost of development required to bring an acquired property up to standards established for the market position intended for that property;
- acquired properties may be located in new markets where the Company may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and
- the Company may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into its existing operations, and this could have an adverse effect on its results of operations.
The Company's real estate development activities have been primarily limited to a single market, and it may face substantially more experienced competition in acquiring and developing real estate in new markets.
Since the Company's real estate acquisition and development activities have been primarily limited to the Rio Rancho market, the Company does not have extensive experience in acquiring real estate in other markets or engaging in development activities in multiple markets simultaneously. Should the Company seek to acquire additional real estate in new markets, competition from other potential purchasers of real estate could adversely affect the Company's operations. Many of these entities may have substantially greater experience than the Company has in identifying, acquiring and developing real estate opportunities in other markets and in managing real estate developments in multiple markets. These entities may also have greater financial resources than the Company has and may be able to pay more than the Company can or accept more risk than the Company is willing to accept to acquire real estate. These entities also may be less sensitive to risks with respect to the costs or the geographic concentration of their investments. This competition may prevent the Company from acquiring the real estate assets the Company seeks, or increase the cost of properties that the Company does acquire. Competition may also reduce the number of suitable investment opportunities available to the Company or may increase the bargaining power of property owners seeking to sell.
The Company will likely compete for real estate investment opportunities with, among others, insurance companies, pension and investment funds, partnerships, real estate or housing developers, investment companies, real estate investment trusts (REITs), and owner/occupants.
Properties that the Company acquires may have defects that are unknown to the Company.
Although the Company generally performs due diligence on prospective properties before they are acquired, and on a periodic basis after acquisition, any of the properties the Company may acquire may have characteristics or deficiencies unknown to the Company that could adversely affect the property's value or revenue potential or, in the case of environmental or other factors, impose liability on the Company, which could be significant.
The Company is subject to substantial legal, regulatory and other requirements regarding the development of land and requires government approvals, which may be denied, and thus the Company may encounter difficulties in obtaining entitlements on a timely basis, which could limit its ability to sell land at levels comparable with the recent past.
There are many legal, regulatory and other requirements regarding the development of land, which may delay the start of planned development activities, increase the Company's expenses or limit the Company's customers' development activities. Development activities performed in connection with real estate sales include obtaining necessary governmental approvals, acquiring access to water supplies, installing utilities and necessary storm drains and building or improving roads. Numerous local, state and federal statutes, ordinances and rules and regulations, including those concerning zoning, resource protection and environmental laws, regulate these tasks. These regulations often provide broad discretion to the governmental authorities that regulate these matters and from whom the Company must obtain necessary approvals. The approval process can be lengthy and delays can increase the Company's costs, as well as the costs for the primary customers of the Company's real estate business (residential and commercial developers). Failure to obtain necessary approvals could significantly adversely affect the Company's real estate development activities and its results of operations.
Increases in taxes or governmental fees would increase the Company's costs. Also, adverse changes in tax laws could reduce customer demand for land for commercial and residential development.
Increases in real estate taxes and other local governmental fees, such as fees imposed on developers to fund schools, open space and road improvements or to provide low and moderate income housing, would increase the Company's costs and have an adverse effect on the Company's operations. In addition, increases in local real estate taxes or changes in income tax laws that would reduce or eliminate tax deductions or incentives could adversely affect homebuilders' potential customer demand and could adversely affect future land sales by the Company to those homebuilders.
Unless the City of Rio Rancho supplements its current water supply, development of the Company's remaining Rio Rancho land may be adversely affected.
All of the Company's future Rio Rancho land development will require water service from the City of Rio Rancho or from another source. While the city has not denied any development in the past due to a shortage of water supply, it has recently expressed concerns that its current water supply cannot support growth indefinitely. Although the city is currently pursuing various methods to supplement its water supply, if it is unsuccessful, development of the Company's remaining Rio Rancho land could be adversely affected.
The Company may be subject to environmental liability.
Various laws and regulations impose liability on real property owners and operators for the costs of investigating, cleaning up and removing contamination caused by hazardous or toxic substances at the property. In the Company's role as a property owner or developer, the Company could be held liable for such costs. This liability may be imposed without regard to the legality of the original actions and without regard to whether the Company knew of, or was responsible for, the presence of the hazardous or toxic substances. If the Company fails to disclose environmental issues, it could also be liable to a buyer or lessee of the property. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs incurred in connection with the contamination. If the Company incurs any such liability that is material, its results of operations would be adversely affected.
Real estate is a cyclical industry, and the Company's results of operations could be adversely affected during cyclical downturns in the industry.
During periods of economic expansion, the real estate industry typically benefits from an increased demand for developable land. In contrast, during periods of economic contraction, the real estate industry is typically adversely affected by a decline in demand. For example, beginning in early 2007 increased defaults under sub-prime mortgages led to significant losses for the companies offering such mortgages and contributed to a severe downturn in the residential housing market that is continuing. Further, real estate development projects typically begin, and financial and other resources are committed, long before the real estate project comes to market, which could be during a time when the real estate market is depressed. There can be no assurance that an increase in demand or an economic expansion will be sustained in the Rio Rancho market, where the Company's core real estate business is based and operates, or in any other new market into which the Company expands its real estate operations. Any of the following (among other factors, including those mentioned elsewhere in this report) could cause a general decline in the demand for residential or commercial real estate which, in turn, could contribute to a severe downturn in the real estate development industry that could have an adverse effect on the Company's results of operations:
- changes in government regulation;
- periods of general economic slowdown or recession;
- rising interest rates and a decline in the general availability or affordability of mortgage financing;
- adverse changes in local or regional economic conditions;
- shifts in population away from the markets that the Company serves;
- tax law changes, including potential limits on, or elimination of, the deductibility of certain mortgage interest expense, real property taxes and employee relocation expenses; and
- acts of God, including hurricanes, earthquakes and other natural disasters.
Changing market conditions may adversely affect companies in the real estate industry, which rely upon credit in order to finance their purchases of land from the Company.
Changes in interest rates and other economic factors can dramatically affect the availability of capital for the Company's developer customers. Residential and commercial developers to whom the Company frequently sells land typically rely upon third party financing to provide the capital necessary for their acquisition of land. Changes in economic and other external market conditions
may result in a developer's inability to obtain suitable financing, which could adversely impact the Company's ability to sell land, or force the Company to sell land at lower prices, which would adversely affect its results of operations.
Changes in general economic, real estate development or other business conditions could adversely affect the Company's business and its financial results.
A significant percentage of the Company's real estate revenues are derived from customers in the residential homebuilding business, which is particularly sensitive to changes in economic conditions and factors such as the level of employment, consumer confidence, consumer income, availability of mortgage financing and interest rates. Adverse changes in any of these conditions could decrease demand for homes generally and therefore affect the pricing of homes and in turn the price of land sold to developers, which could adversely affect the Company's results of operations.
A number of contracts for individual Rio Rancho home site sales made prior to 1977 require the Company to exchange land in an area that is serviced by utilities for land in areas where utilities are not installed.
In connection with certain individual Rio Rancho home site sales made prior to 1977, if water, electric and telephone utilities have not reached the lot site when a purchaser is ready to build a home, the Company is obligated to exchange a lot in an area then serviced by such utilities for the lot of the purchaser, without cost to the purchaser. Although this has not been the case in the past, if the Company were to experience a large number of requests for such exchanges in the future, the Company's results of operations could be adversely impacted.
If subcontractors are not available to assist in completing the Company's land development projects, the Company may not be able to complete those projects on a timely basis.
The development of land on a timely basis is critical to the Company's ability to complete development projects in accordance with the Company's contractual obligations. The availability of subcontractors in the markets in which the Company operates can be affected by factors beyond the Company's control, including the general demand for these subcontractors by other developers. If subcontractors are not available when the Company requires their services, the Company may experience delays or be forced to seek alternative suppliers, which may increase costs or adversely affect the Company's ability to sell land on a timely basis.
Land investments are generally illiquid, and the Company may not be able to sell the Company's properties when it is economically or otherwise important to do so.
Land investments generally cannot be sold quickly, and the Company's ability to sell properties may be affected by market conditions. The Company may not be able to diversify or vary its portfolio promptly in accordance with its strategies or in response to economic or other conditions. The Company's ability to pay down debt, reduce interest costs and acquire properties is dependent upon its ability to sell the properties it has selected for disposition at the prices and within the deadlines the Company has established for each property.
Risks Related to the Company's Media Service Operations ------------------------------------------------------- The Company's media services operations could face increased costs and business disruption from instability in the newsstand distribution channel.
The Company extends credit to various newsstand distribution services customers, whose credit worthiness and financial position may be affected by changes in economic or other external conditions. Financial instruments that may potentially subject the Company to a significant concentration of risk primarily consist of trade accounts receivable from wholesalers in the magazine distribution industry. Due to industry consolidation, four major wholesaler groups represent over 80% of the wholesale magazine distribution business, and the insolvency of any of them could have a material adverse impact on the Company's results of operations and financial condition. In addition, due to the significant concentration, should there be a disruption in the wholesale channel, it could impede the Company's ability to distribute magazines to the retail marketplace.
Almost all of the Company's revenues in the Company's newsstand distribution services business are derived from sales made on a fully returnable basis, and an error in estimating expected returns could cause a misstatement of revenues for the period affected.
As is customary in the magazine distribution industry, almost all of the Company's revenues in its newsstand distribution services business segment are derived from sales made on a fully returnable basis, meaning that customers may return unsold copies of magazines for credit. During the Company's fiscal year ended April 30, 2008, customers ultimately returned for credit approximately 68% of the magazines initially distributed by the Company. The Company recognizes revenues from the distribution of magazines at the time of delivery to the wholesalers, less a reserve for estimated returns that is based on historical experience and recent sales data on an issue-by-issue basis. Although the Company has the contractual right to return these magazines for offsetting credits from the publishers from whom the magazines are purchased, an error in estimating the percentage of returns at the end of an accounting period could have the effect of understating or overstating revenues in the period affected, which misstatement would have to be adjusted in the subsequent period when the actual return information became known.
The introduction and increased popularity of alternative technologies for the distribution of news, entertainment and other information and the resulting shift in consumer habits and advertising expenditures from print to other media could adversely affect the Company's media services business segments.
Revenues in the Company's media services business segments are principally derived from services the Company performs for traditional publishers. Historically, a reduction in the demand for the Company's newsstand distribution services due to lower sales of magazines at newsstands has often been at least partially offset by an increase in demand for the Company's fulfillment services as consumers affected by the reduction in newsstand distribution instead sought publications through subscription. However, the distribution of news, entertainment and other information via the Internet has become increasingly popular, and consumers increasingly rely on personal computers, cellular phones or other electronic devices for such information. The resulting shift of advertising dollars from traditional print media to online media could adversely affect the publishing industry in general and have a negative impact on both the Company's fulfillment and newsstand distribution segments due to the shift in consumer demand away from print media and toward digital downloading and other delivery methods.
The Company's publisher customers face increased costs for paper, printing and postal rates. This could have a negative affect on their operating income, and this in turn could negatively affect the Company's media services operations.
The Company's publisher customers' principal raw material is paper. Paper and printing prices have fluctuated over the past several years, and significant unanticipated increases in paper prices could adversely affect a publisher customer's operating income. Postage for magazine distribution and direct solicitation is another significant operating expense of the Company's publisher customers, which primarily use the U.S. Postal Service to distribute their products. The U.S. Postal Service implemented a postal rate increase effective May 12, 2008. Any significant increases in paper costs, printing costs or postal rates that publishers are not able to offset could have a negative affect on their operating income, and this in turn could negatively affect the Company's media services operations.
Competitive pressures may result in a decrease in the Company's revenues and profitability.
The fulfillment and newsstand distribution services businesses are highly competitive, and some of the Company's competitors have financial resources that are substantially greater than the Company's. The Company experiences significant price competition in the markets in which it competes. Competition in the Company's media services businesses may come not only from other service providers, but also from the Company's customers, who may choose to develop their own internal fulfillment or distribution operations, thereby reducing demand for the Company's services. Competitive pressures could cause the Company's media services businesses to lose market share or result in significant price erosion that could have an adverse effect on the Company's results of operations.
The Company's operating results depend in part on successful research, development and marketing of new or improved services and data processing capabilities and could suffer if the Company is not able to continue to successfully implement new technologies.
The Company operates in highly competitive markets that are subject to rapid change, and must therefore continue to invest in developing technologies and to improve various existing systems in order to remain competitive. There are substantial uncertainties associated with the Company's efforts to develop new technologies and services for the magazine fulfillment and distribution markets the Company serves. The Company makes significant investments in new information processing technologies and services that may or may not prove to be profitable. Even if these developments are profitable, the operating margins resulting from their application would not necessarily result in an improvement over the Company's historical margins.
The Company may not be able to successfully introduce new services and data processing capabilities on a timely and cost-effective basis.
The success of new and improved services depends on their initial and continued acceptance by the publishers and other customers with whom the Company conducts business. The Company's media services businesses are affected, to varying degrees, by technological change and shifts in customer demand. These changes result in the transition of services provided and increase the importance of being "first to market" with new services and information processing innovations. Difficulties or delays in the development, production or marketing of new services and information processing capabilities may be experienced, and may adversely affect the Company's results of operations. These difficulties and delays could also prevent the Company from realizing a reasonable return on the investment required to bring new services and information processing capabilities to market on a timely and cost effective basis.
The Company's operations could be disrupted if its information systems fail, causing increased expenses and loss of sales.
The Company's business depends on the efficient and uninterrupted operation of its systems and communications capabilities, including the maintenance of customer databases for billing and label processing, and the Company's magazine distribution order regulation system. If a key system were to fail or experience unscheduled downtime for any reason, even if only for a short period, the Company's operations and financial results could be adversely affected. The Company's systems could be damaged or interrupted by a security breach, fire, flood, power loss, telecommunications failure or similar events. The Company has a formal disaster recovery plan in place, but this plan may not entirely prevent delays or other complications that could arise from an information systems failure. The Company's business interruption insurance may not adequately compensate the Company for losses that may occur.
The Company depends on the Internet to deliver some services, which may expose the Company to various risks.
Many of the Company's operations and services, including order taking on behalf of customers and communications with customers and suppliers, involve the use of the Internet. The Company is therefore subject to factors that adversely affect Internet usage, including the reliability of Internet service providers that, from time to time, have operational problems and experience service outages. Additionally, as the Company continues to increase the services it provides using the Internet, the Company is increasingly subject to risks related to the secure transmission of confidential information over public networks. Failure to prevent security breaches of the Company's networks or those of its customers, or a security breach affecting the Internet in general could adversely affect the Company's results of operations.
The Company is subject to extensive rules and regulations of credit card associations.
The Company processes a large number of credit card transactions on behalf of its fulfillment services customers and is thus subject to the extensive rules and regulations of the leading credit card associations. The card associations modify their rules and regulations from time to time and the Company's inability to anticipate changes in rules, regulations or the interpretation or application thereof may result in substantial disruption to its business. In the event that the card associations or the sponsoring banks determine that the manner in which the Company processes certain card transactions is not in compliance with existing rules and regulations, or if the card associations adopt new rules or regulations that prohibit or restrict the manner in which the Company processes
card transactions, the Company may be forced to modify the manner in which it operates, which may increase costs, or cease processing certain types of transactions altogether, either of which could have a negative impact on its business. As an example of the card associations amending their regulations, Kable is now required to comply with the Payment Card Industry (PCI) Data Security Standard. The Company continues to implement its plans at its fulfillment services locations where credit card transactions are processed in order to meet the compliance requirements of the PCI Data Security Standard. The Company may be subject to substantial penalties and fines if it is determined that its plans or performance do not meet the compliance requirements of the PCI Data Security Standard.
A failure to successfully migrate customers at the Company's Colorado fulfillment services location from an outsourced data processing system to an internal system may burden the Company with continued additional costs.
During fiscal 2003, Kable acquired the Colorado-based fulfillment services business of Electronic Data Systems Corporation ("EDS"). Since that time Kable has outsourced to EDS a substantial portion of the data processing required to service that business and during fiscal 2008 has migrated much of that activity to its own systems. However, under the outsourcing contract, the full outsourcing charge remains payable so long as any outsourcing services are provided. The Company anticipates completing this migration process by September 2008. The migration process is technically complex, however, and the Company continues to address issues that have delayed the complete migration. Should the Company encounter unanticipated problems that will further delay the complete migration, it may continue to be burdened with the outsourcing of this business.
If the Company cannot efficiently integrate the constituents of its fulfillment business, it may not realize the expected benefits of the acquisition of Palm Coast, and the resources and attention required for successful integration may interrupt the existing fulfillment business.
In January 2007, the Company acquired Palm Coast, which is, like Kable, a leading United States provider of fulfillment services to the magazine publishing industry. An important objective of the Company is to integrate the Company's two fulfillment businesses and thereby reduce costly duplications. There is a significant degree of difficulty involved in this process. The maintenance of ongoing operations of each business while integrating the businesses will depend on the Company's ability to retain key officers and personnel while it simultaneously proceeds to expand its operational and financial systems. This increase in operating complexities may have a negative near and long-term effect on the Company's anticipated benefits resulting from the acquisition.
Other Business Risks --------------------
The Company may be unable to obtain financing on acceptable terms, which could preclude it from continuing operations at their current levels, or from making future acquisitions.
The Company's operations depend on its ability to obtain financing for the development of land in the real estate business, for working capital and capital expenditure requirements in the media services business, and for making future acquisitions. If the Company is not able to obtain suitable financing, its costs could increase and its revenues could decrease, or the Company could be precluded from continuing its operations at current or desired levels, or from making future acquisitions. Increases in interest rates can make it more difficult and expensive to obtain the funds needed to operate the Company's businesses. The applicable interest rates on the revolving bank credit facilities that the Company has in place fluctuate based on changes in short-term interest rates. Increases in interest rates would increase the Company's interest expense and adversely affect the Company's results of operations and its ability to make acquisitions.
The Company may engage in future acquisitions and may encounter difficulties in integrating the acquired businesses, and, therefore, may not realize the anticipated benefits of the acquisitions in the time frames anticipated, or at all.
From time to time, the Company may seek to grow through strategic acquisitions intended to complement or expand one or more of its business segments, such as the acquisition of Palm Coast in January 2007, or to enable the Company to enter a new business. The success of these transactions will depend in part on the Company's ability to integrate the systems and personnel acquired in these
transactions into its existing business without substantial costs, delays or other operational or financial problems. The Company may encounter difficulties in integrating acquisitions with the Company's operations or in separately managing a new business. Furthermore, the Company may not realize the degree of benefits that the Company anticipates when first entering into a transaction, or the Company may realize benefits more slowly than it anticipates. Any of these problems or delays could adversely affect the Company's results of operations.
The Company's current management and internal systems may not be adequate to handle the Company's growth.
To manage the Company's future growth, the Company's management must continue to improve operational and financial systems and to expand, train, retain and manage the Company's employee base. As the Company continues to grow, it will also likely need to recruit and retain additional qualified management personnel, and its ability to do so will depend upon a number of factors, including the Company's results of operations and prospects and the level of competition then prevailing in the market for qualified personnel. At the same time, the Company will likely be required to manage an increasing number of relationships with various customers and other parties. If the Company's management personnel, systems, procedures and controls are inadequate to support its operations, expansion could be slowed or halted and the opportunity to gain significant additional market share could be impaired or lost. Any inability on the part of the Company's management to manage the Company's growth effectively may adversely affect its results of operations.
The Company's business could be seriously harmed if the Company's accounting controls and procedures are circumvented or otherwise fail to achieve their intended purposes.
Although the Company evaluates its internal controls over financial reporting and the Company's disclosure controls and procedures at the end of each quarter, any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's results of operations.
In addition, there can be no assurance that the Company's internal control systems and procedures, or the integration of its fulfillment businesses or any other future acquisitions and their respective internal control systems and procedures, will not result in or lead to a future material weakness in the Company's internal controls, or that the Company or its independent registered public accounting firm will not identify a material weakness in the Company's internal controls in the future. If the Company's internal controls over financial reporting are not considered adequate, the Company may experience a loss of public confidence, which could have an adverse effect on the Company's business and the price of the Company's common stock.
Further, deficiencies or weaknesses that are not yet identified by the Company could emerge and the identification and correction of those deficiencies or weaknesses could have an adverse effect on the Company's results of operations.
The Company's pension plan, which the Company froze in 2004, is currently underfunded and may require additional cash contributions.
The Company's pension plan was underfunded on a generally accepted accounting principles basis by approximately $2.0 million at April 30, 2008. The Company froze the pension plan effective March 1, 2004 so that from that date there would be no new participants in the plan and the existing participants' future compensation would not affect their pension benefits. A key assumption underlying the actuarial calculations upon which the Company's accounting and reporting obligations for the pension plan are based is an assumed investment rate of return of eight percent. If the pension plan assets do not realize the expected rate of return, or if any other assumptions are incorrect or are modified, the Company could be required to make contributions to the pension plan until the plan is fully funded, which could limit the Company's financial flexibility.
The Company's quarterly and annual operating results can fluctuate significantly.
The Company has experienced, and is likely to continue to experience, significant fluctuations in its quarterly and annual operating results, which may adversely affect the Company's stock price. Future quarterly and annual operating results may not align with past trends as a result of numerous factors, including many factors that result from the unpredictability of the nature and timing of real estate land sales, the variability in gross profit margins and competitive pressures.
Changes in the Company's income tax estimates could affect profitability.
In preparing the Company's consolidated financial statements, significant management judgment is required to estimate the Company's income taxes. The Company's estimates are based on its interpretation of federal and state tax laws and regulations. The Company estimates actual current tax due and assesses temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included in the Company's consolidated balance sheet. Adjustments may be required by a change in assessment of the Company's deferred tax assets and liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws. To the extent adjustments are required in any given period, the Company will include the adjustments in the tax provision in its financial statements. These adjustments could have an adverse effect on the Company's financial position, cash flows and results of operations.
The price of the Company's common stock over the past two years has been volatile. This volatility may make it difficult for shareholders to sell the Company's common stock, and the sale of substantial amounts of the Company's common stock could adversely affect the price of the Company's common stock.
The market price for the Company's common stock varied between a high of $149.99 and a low of $26.17 per share during the two years ended April 30, 2008. This volatility may make it difficult for a shareholder to sell the Company's common stock, and the sale of substantial amounts of the Company's common stock could adversely affect the price of the common stock. The Company's stock price is likely to continue to be volatile and subject to significant price fluctuations in response to market and other factors, including the other factors discussed in "Risk Factors," and:
- variations in the Company's quarterly and annual operating results, which could be significant;
- material announcements by the Company or the Company's competitors;
- sales of a substantial number of shares of the Company's common stock; and
- adverse changes in general market conditions or economic trends.
In addition to the factors discussed above, the Company's common stock is relatively thinly traded, which means that large transactions in the Company's common stock may be difficult to conduct in a short time frame and may cause significant fluctuations in the price of the Company's common stock. The average daily trading volume in the Company's common stock on the New York Stock Exchange over the ten-day trading period ending on April 30, 2008 was approximately 58,400 shares per day. Further, there have been, from time to time, significant "short" positions in the Company's common stock, consisting of borrowed shares sold, or shares sold for future delivery, which may not have been borrowed. The Company does not know whether any of these short positions are covered by "long" positions owned by the short sellers. The short interest in the Company's common stock, as reported by the New York Stock Exchange on May 30, 2008, was approximately 316,000 shares, or approximately 5.3% of the Company's outstanding shares. Any attempt by the short sellers to liquidate their positions over a short period of time could cause significant volatility in the price of the Company's common stock.
In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If the Company becomes involved in securities class action litigation in the future, it could result in substantial costs and diversion of the Company's management's attention and resources and could harm the Company's stock price, business, prospects, results of operations and financial condition. In addition, the broader stock market has experienced significant price and volume
fluctuations in recent years. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of the Company's common stock.
The Company has a principal shareholder whose interests may conflict with other investors.
The Company has a principal shareholder, Nicholas G. Karabots, who, together with certain of his affiliates, currently owns approximately 61% of the Company's outstanding common stock. As a result, this principal shareholder exercises significant influence over the Company's major decisions, including through his ability to vote for the members of the Company's Board of Directors. Because of this voting power, the principal shareholder could influence the Company to make decisions that might run counter to the wishes of the Company's other investors generally. In addition, publishing companies owned or controlled by the Company's principal shareholder are also significant customers of the Company's distribution business, as well as customers of its fulfillment services business, and, as a result, the shareholder may have business interests with respect to the Company that differ from or conflict with those of other holders of the Company's common stock.
Although the Company has paid dividends in the preceding fiscal years, the Company has no regular dividend policy and offers no assurance of any future dividends. Any short-term return on an investment in the Company's stock will depend on its market price.
The Company has paid special cash dividends on its common stock during the five fiscal years 2004 through 2008 of $0.25, $0.40, $0.55, $0.85 and $1.00 per share, and also paid an additional special cash dividend of $3.50 per share in January 2006. The Board of Directors has stated that it may consider special dividends from time-to-time in the future in light of conditions then existing, including earnings, financial condition, cash position, and capital requirements and other needs. Notwithstanding such statement and the status of such future conditions, no assurance is given that there will be any such future dividends declared or that future dividend declarations, if any, will be commensurate in amount or frequency with past dividends.
The Company is currently a "controlled company" within the meaning of the New York Stock Exchange rules. As a result, the Company is exempt from certain corporate governance requirements and will not need to fully comply with those requirements until one year after the Company is no longer a "controlled company."
Because Nicholas G. Karabots and certain of his affiliates together currently own more than 50% of the voting power of the Company's common stock, the Company is considered a "controlled company" for the purposes of the rules and regulations of the New York Stock Exchange. As such, the Company is permitted, and has elected, to opt out of the New York Stock Exchange requirements that would otherwise require its compensation and human resources committee to consist entirely of independent directors. The Company has also opted not to have a nominating/corporate governance committee as required by the New York Stock Exchange for non-controlled companies. At such time, if any, as the Company is no longer considered a "controlled company" for purposes of the rules and regulations of the New York Stock Exchange, those rules and regulations provide for a twelve month transition period during which the Company will not need to fully comply with the otherwise applicable requirements. The Company will not be required to have entirely independent compensation and human resources and nominating/corporate governance committees until twelve months following the date on which it ceases to be a controlled company, although the Company will need to phase in independent members for each of these committees starting on the date that it ceases to be a controlled company. While the Company remains a controlled company and during any transition period following the Company's ceasing to be a controlled company, shareholders may not have the same protections afforded to shareholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.
Oklahoma law and the Company's charter documents may impede or discourage a takeover, which could cause the market price of the Company's common stock to decline.
The Company is an Oklahoma corporation, and the anti-takeover provisions of Oklahoma law impose various impediments to the ability of a third party to acquire control of the Company, even if a change in control would be beneficial to the Company's existing shareholders. The Company's amended certificate of
incorporation generally prohibits the Company from engaging in "business combinations" with an "interested shareholder" unless the holders of at least two-thirds of the Company's then outstanding common stock approve the transaction.
In addition to this restriction, some other provisions of the Company's amended certificate of incorporation and of its by-laws may discourage certain acts involving a fundamental change of the Company. For example, the Company's amended certificate of incorporation and its by-laws contain certain provisions that:
- classify the Company's Board of Directors into three classes, each of which serves for a term of three years, with one class being elected each year; and
- prohibit shareholders from calling a special meeting of shareholders.
Because the Company's Board of Directors is classified and the Company's amended certificate of incorporation and by-laws do not otherwise provide, Section 1027 of the Oklahoma General Corporation Act permits the removal of any member of the board of directors only for cause. These provisions could impede a merger, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer for the Company's common stock, which, under certain circumstances, could reduce the market price of the Company's common stock.
Item 1B.
Item 1B. Unresolved Staff Comments -------- -------------------------
Not applicable.
Item 2.
Item 2. Properties ------- ----------
The Company's executive offices are located in approximately 2,000 square feet of leased space in an office building in Princeton, New Jersey. Real Estate operations are based in approximately 5,400 square feet of leased space in an office building in Rio Rancho, New Mexico. In addition, other real estate inventory and investment properties are described in Item 1. Kable's executive offices are based in New York City, and these offices together with the production, administration, sales and other facilities for its Fulfillment Services and Newsstand Distribution Services businesses are located in sixteen owned or leased facilities which, in the aggregate, comprise approximately 800,000 square feet of space with the principal locations in Mt. Morris, Illinois; Palm Coast, Florida; Louisville, Colorado and New York City. The Company believes its facilities are adequate for its current requirements.
Item 3.
Item 3. Legal Proceedings ------- -----------------
A. A subsidiary of Kable was one of a number of defendants in a lawsuit in which the plaintiff, a former wholesaler no longer in business, alleged that the Company and other national magazine distributors and wholesalers engaged in violations of the Robinson-Patman Act (which generally prohibits discriminatory pricing) that caused it to go out of business. The plaintiff sought damages from the Kable defendant of approximately $15.2 million; any damages awarded would be trebled. In September 2005, the Court granted the motion for summary judgment of the defendants, including Kable, and judgment in favor of the defendants, including Kable, was entered. The plaintiff filed an appeal of the judgment and on March 25, 2008 the appellate court denied the appeal. All time periods for the plaintiff to seek further review of the summary judgment in favor of the defendants have expired and plaintiff's case is over.
B. In June 2008 a lawsuit was brought against the Company's Kable News Company, Inc. subsidiary by the owner of a warehouse building leased by the subsidiary that was totally destroyed in a fire in December 2007. An employment agency that provided the subsidiary with a temporary employee who is alleged to have had a role in starting the fire is also named as a defendant. Plaintiff charges the subsidiary with negligence and willful and wanton misconduct and seeks damages in excess of $50,000. The Company's liability insurance provides coverage for the negligence claim up to the policy limit, which may or may not be more than the full amount of plaintiff's claimed damages, which is unknown at this time. Additionally, the insurance carrier has indicated it intends to deny coverage of the willful and wanton misconduct claim. The Company believes it has good defenses to the charges and assertable claims against the other parties for their conduct in the matter, and intends vigorously to defend the lawsuit. However, the proceeding is in its very earliest stage and the Company is not in a position to offer a prediction as to its outcome.
C. The Company and its subsidiaries are involved in various other claims and legal actions arising in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, management believes that they will not have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ------- --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2008.
Executive Officers of the Registrant
Set forth below is certain information concerning persons who are the current executive officers of the Company.
Name Office Held / Principal Occupation for Past Five Years Age ---- ------------------------------------------------------ --- James Wall Senior Vice President of the Company since 1991; 71 Chairman, President and Chief Executive Officer of AMREP Southwest Inc. since 1991.
Peter M. Pizza Vice President and Chief Financial Officer of the 57 Company since 2001; Vice President and Controller of the Company from 1997 to 2001.
Irving Needleman Vice President, General Counsel and Secretary of the 70 Company since November 2006; Of counsel to the law firm of McElroy, Deutsch, Mulvaney & Carpenter, LLP from September 2005 to October 2006. Partner in the law firm of Jacobs Persinger & Parker for more than four years prior to September 2005.
Michael P. Duloc President and Chief Executive Officer of Kable 51 Media Services since June 1, 2007; President of Kable's Newsstand Distribution Services business since 1996 and Chief Operating Officer of that business until June 2007; President and Chief Operating Officer of Kable's Fulfillment Services business from 2000 until January 2007.
John Meneough Executive Vice President, Fulfillment Services of 60 Kable Media Services, Inc. and President and Chief Operating Officer of the Company's Fulfillment Services business since January 2007. President of Palm Coast Data Holdco, Inc. and Palm Coast Data LLC since 2002 and President of their predecessor companies since 1996.
The executive officers are elected or appointed by the Board of Directors of the Company or its appropriate subsidiary to serve until the appointment or election and qualification of their successors or their earlier death, resignation or removal.
PART II ------- Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and ------- ------------------------------------------------------------------------ Issuer Purchases of Equity -------------------------- The Company's common stock is traded on the New York Stock Exchange under the symbol "AXR". On July 1, 2008, there were approximately 900 holders of record of the common stock. The range of high and low sales prices for the last two fiscal years by quarter is presented below:
FIRST SECOND THIRD FOURTH ------------------- ------------------- ---------------------- --------------------- HIGH LOW HIGH LOW HIGH LOW HIGH LOW -------- -------- -------- -------- --------- -------- --------- -------- 2008 $ 69.31 $ 40.75 $ 41.54 $ 26.17 $ 46.34 $ 27.94 $ 58.25 $ 34.47 2007 $ 65.00 $ 34.55 $ 73.70 $ 35.84 $ 149.99 $ 57.14 $ 111.75 $ 59.00
Dividend Policy
The Company paid special cash dividends on its common stock of $1.00 and $0.85 per share during 2008 and 2007 following the end of the preceding fiscal years. The Board of Directors has stated that it may consider special dividends from time-to-time in the future in light of conditions then existing, including earnings, financial condition, cash position, and capital requirements and other needs. Notwithstanding such statement and the status of such future conditions, no assurance is given that there will be any such future dividends declared or that future dividend declarations, if any, will be commensurate in amount or frequency with past dividends.
Performance Graph
The following graph compares the cumulative total shareholder return on the Company's common stock with the cumulative total return of the Standard & Poor's 500 Index ("S&P 500 Index") and with an index comprised of the stock (or comparable equity interest) of 27 companies with market capitalizations similar to that of the Company ("Similar Cap Issuers"), for the five years ended April 30, 2008 (assuming the investment of $100 in the stock of the Company, the S&P 500 Index and the Similar Cap Issuers at the close of trading on April 30, 2003 and the reinvestment of all dividends). The Company cannot identify an index of issuers engaged in operations similar to those in which it is currently engaged and therefore has determined to use the Similar Cap Issuers for purposes of comparison.
Company Name / Index 2003 2004 2005 2006 2007 2008 ----------------------------------------------------------------------------------------------------- AMREP CORP 100 187.86 269.27 599.07 789.75 703.81 S&P 500 INDEX 100 122.88 130.67 150.81 173.79 165.66 SIMILAR CAP ISSUERS 100 258.59 293.77 400.95 402.50 275.44
The Similar Cap Issuers are: Array Biopharma Inc., ATP Oil & Gas Corporation, Avigen, Inc., Bar Harbor Bankshares, Blue Coat Systems, Inc., California Coastal Communities, Inc., Capital Senior Living Corporation, Charles & Colvard, Ltd., ChipMOS Technologies (Bermuda) Ltd., Communications Systems, Inc., Consolidated Water Co. Ltd., Dynamex Inc., Heska Corporation, Interleukin Genetics, Inc., Ladish Co., Inc., Landec Corporation, LCA-Vision Inc., Mesabi Trust, Network Engines, Inc., Peoples Community Bancorp, Inc., Performance Technologies, Incorporated, Pioneer Drilling Company, Poniard Pharmaceuticals, Inc., Sparton Corporation, Tandy Brands Accessories, Inc., USA Mobility, Inc., Vist Financial Corp.
As a result of changes in market capitalizations from year to year, none of the companies comprising the Similar Cap Issuer index in the Company's 2007 Form 10-K met the criteria for inclusion in the Similar Cap Issuer index in this Form 10-K. The companies comprising the Similar Cap Issuer index in the Company's 2007 Form 10-K were: Alvarion Ltd., American Bank Incorporated, Auburn National Bancorporation, Inc., Bioenvision, Inc., Continental Materials Corporation, Criticare Systems, Inc., Empire Resorts, Inc., Fauquier Bankshares, Inc., Focus Enhancements, Inc., Franklin Covey Co., Hi-Tech Pharmacal Co., Inc., Investors Title Company, Loud Technologies Inc., Medtox Scientific, Inc., Misonix, Inc., Mocon, Inc., Novadel Pharma Inc., NTN Buzztime, Inc., Olympic Steel, Inc., Peerless Mfg. Co., Premier Financial Bancorp, Inc., RCM Technologies, Inc., Sun Hydraulics Corporation, Tele Norte Cellular Holding Company, Telecommunication Systems, Inc., Tutogen Medical, Inc., and XETA Technologies, Inc.
Equity Compensation Plan Information
See Item 12 of Part III of this annual report on Form 10-K that incorporates such information by reference from the Company's Proxy Statement for its 2008 Annual Meeting of Shareholders.
Item 6.
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
Item 7. Management's Discussion and Analysis of Financial Condition and Results ------- ------------------------------------------------------------------------ of Operations -------------
INTRODUCTION ------------
For a description of the Company's business, refer to Item 1 of Part I of this annual report on Form 10-K.
As indicated in Item 1, the Company is primarily engaged in three business segments: the Real Estate business operated by AMREP Southwest and the Fulfillment Services and Newsstand Distribution Services businesses operated by Kable. Data concerning industry segments is set forth in Note 19 of the notes to the consolidated financial statements. The Company's foreign sales and activities are not significant.
The following provides information that management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and accompanying notes. All references in this Item 7 to 2008, 2007 and 2006 mean the fiscal years ended April 30, 2008, 2007 and 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES ------------------------------------------
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. The Company discloses its significant accounting policies in the notes to its audited consolidated financial statements.
The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of those financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Areas that require significant judgments and estimates to be made include: (i) the determination of revenue recognition for the Newsstand Distribution Services business, which is based on estimates of allowances for magazine returns to the Company from wholesalers and the offsetting return of magazines by the Company to publishers for credit; (ii) allowances for doubtful accounts; (iii) real estate cost of sales calculations, which are based on land development budgets and estimates of costs to complete; (iv) the determination of revenue recognition under the percentage-of-completion method for certain development contracts, which is determined based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the project; (v) cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, goodwill impairment and assets held for sale; (vi) actuarially determined benefit obligations for pension plan accounting; and (vii) legal contingencies. Actual results could differ from those estimates.
There are numerous critical assumptions that may influence accounting estimates in these and other areas. Management bases its critical assumptions on historical experience, third-party data and various other estimates that it believes to be reasonable under the circumstances. The most critical assumptions made in arriving at these accounting estimates include the following: (i) Newsstand Distribution Services revenues represent commissions earned from the distribution of publications for client publishers, which are recorded by the Company at the time the publications go on sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists". The publications generally are sold on a fully returnable basis, which is in accordance with prevailing trade practice. Accordingly, the Company provides for estimated returns by charges to income that are determined on an issue-by-issue basis utilizing historical experience and current sales information. The financial impact to the Company of a change in the sales estimate for magazine returns to it from its wholesalers is substantially offset by the simultaneous change in the Company's estimate of its cost of purchases since it passes on the returns to publishers for credit. As a result, the effect of a difference between the actual and estimated return rates on the Company's commission revenues is the amount of the commission attributable to the difference. The effect of an increase or decrease in the Company's estimated rate of returns of 1% during any period would be dependent upon the mix of magazines involved and the related selling prices and commission rates, but would generally result in a change in that period's net commission revenues of approximately $125,000; (ii) management determines the allowance for doubtful accounts by attempting to identify troubled accounts by analyzing the credit risk of specific customers and by using historical experience applied to the aging of accounts and, where appropriate within the real estate business, by reviewing any collateral which may secure a receivable; (iii) real estate development costs are incurred throughout the life of a project, and the costs of initial sales from a project frequently must include a portion of costs that have been budgeted based on engineering estimates or other studies, but not yet incurred; (iv) percentage-of-completion revenue recognition for certain development contracts is based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the contract. Total estimated costs, and thus contract income, are impacted by several factors including, but not limited to, changes in the costs of subcontractors, materials and equipment, productivity and scheduling; (v) asset impairment determinations (including that of goodwill, which is based on the fair value of reporting units) are based upon the intended use of assets and expected future cash flows; (vi) benefit obligations and other pension plan accounting and disclosure is based upon numerous assumptions and estimates, including the expected rate of investment return on retirement plan assets, the discount rate used to determine the present value of liabilities, and certain employee-related factors such as turnover, retirement age and mortality. As of April 30, 2008, the effect of every 0.25% change in the investment rate of return on retirement plan assets would increase or decrease the pension expense by approximately $65,000 per year, and the effect of every 0.25% change in the discount rate would increase or decrease the subsequent year's pension cost of approximately $38,000; and (vii) the Company is currently involved in legal proceedings which are described in Item 3 of this annual report on Form 10-K. It is possible that the consolidated financial position or results of operations for any particular quarterly or annual period could be materially affected by an outcome of litigation that is significantly different from the Company's assumptions.
Year Ended April 30, 2008 Compared to Year Ended April 30, 2007 ---------------------------------------------------------------
Results of Operations
Net income in 2008 was $13,705,000, or $2.19 per share, compared to 2007 net income of $45,106,000, or $6.78 per share. Results for 2008 consisted of net income from continuing operations of $13,762,000, or $2.20 per share, and a net loss from discontinued operations of $57,000, or $0.01 per share, compared to the 2007 results which consisted of net income from continuing operations of $46,697,000, or $7.02 per share, and a net loss from discontinued operations of $1,591,000, or $0.24 per share. 2008 consolidated revenues were $172,061,000, a decrease of $32,778,000 from 2007 consolidated revenues of $204,839,000. The decrease in consolidated revenues was attributable to reduced land sales revenues from the Company's Real Estate operations, offset in part by the increased Fulfillment Services revenues from the inclusion of Palm Coast's revenues for all of 2008 as compared with three and a half months in 2007. The decrease in net income from continuing operations was principally due to the reduced land sales.
The net loss from discontinued operations in 2008 was attributable to $57,000 of costs incurred in connection with the settlement of all litigation related to the Company's El Dorado, New Mexico water utility subsidiary that were in addition to costs estimated and accrued for this matter in the fourth quarter of 2007 when in June 2007, the Company settled all existing litigation involving this subsidiary. The 2007 amount accrued for the settlements, including legal fees, was $1,591,000, net of tax, and was also accounted for as a discontinued operation.
Revenues from real estate land sales at AMREP Southwest decreased $67,923,000 from $95,825,000 in 2007 to $27,902,000 in 2008. This substantial revenue decrease was due to substantially lower land sales in the Company's principal market of Rio Rancho, New Mexico, reflecting the severe decline that occurred in this market in 2008 compared to 2007 and earlier years. As previously reported, the number of permits for new home construction was down significantly for calendar 2007 compared to 2006, with Rio Rancho showing a decrease of nearly 50%. The Company believes that this decline was generally consistent with the well-publicized problems of the national home building industry, including fewer sales of both new and existing homes, the increasing number of mortgage delinquencies and foreclosures and a tightening of mortgage availability. Faced with these adverse conditions, builders slowed the pace of building on land previously purchased from the Company in Rio Rancho and, in some cases, delayed or cancelled the purchase of additional land. These factors are also believed to have contributed to a sharp decline in sales of undeveloped land to both builders and investors. Revenues from sales of developed lots to homebuilders decreased from $39,407,000 in 2007 to $9,542,000 in 2008, principally due to a reduction in the number of lots sold. Revenues from sales of undeveloped builder lots decreased from $40,690,000 in 2007 to $9,709,000 in 2008, principally due to a reduction in the number of lots sold and, to a lesser extent, a lower average price per lot due to a greater number of lots sold from locations in Rio Rancho that are further removed from developed areas. Revenues from sales of commercial and industrial properties decreased in 2008 to $8,651,000 from $15,728,000 in 2007 as a result of fewer and smaller transactions. The average gross profit percentage on land sales decreased from 68% in 2007 to 65% for 2008, and is principally attributable to lower selling prices for commercial and undeveloped lots in the latter period.
The average selling price of land sold by the Company in Rio Rancho in recent years has fluctuated, from $63,200 per acre in 2006 to $91,200 per acre in 2007 and $68,700 per acre in 2008, reflecting differences in the mix of the types of properties sold in each period and the effects of a strong regional market in 2006 and 2007 in Rio Rancho and a much softer market in 2008. As a result of these and other factors, including the nature and timing of specific transactions, revenues and related gross profits from real estate land sales can vary significantly from period to period and prior results are not necessarily a good indication of what may occur in future periods.
Revenues from Kable's Fulfillment Services and Newsstand Distribution Services businesses (collectively, "Media Services") increased $38,191,000 from $100,505,000 in 2007 to $138,696,000 in 2008, principally attributable to the January 16, 2007 acquisition of Palm Coast. Fulfillment Services revenues increased by $39,659,000 from $86,121,000 in 2007 to $125,780,000 in 2008 due to the contribution from Palm Coast. The increase in revenues from the Palm Coast acquisition was partially offset by decreases in other parts of Kable's Fulfillment Services business that resulted from continued competitive market pressures and customer losses. Pricing pressure from customers also had a negative effect on Fulfillment Services revenues. Newsstand Distribution
Services revenues decreased by $1,468,000 from $14,384,000 in 2007 to $12,916,000 in 2008. The decrease in Newsstand Distribution Services revenues was due to reduced billings and lower commission rates, as well as the inclusion of certain revenues in the prior year that did not recur in 2008. Media Services operating expenses increased by $34,759,000 in 2008 compared to 2007, primarily attributable to the addition of operating expenses of Palm Coast, which were offset in part by decreased payroll and benefit expenses resulting from lower revenue in other parts of Kable's Fulfillment Services business.
Although there are multiple revenue streams in the Fulfillment Services business, including revenues from the maintenance of customer computer files and the performance of other fulfillment-related activities, including telephone call center support and graphic arts and lettershop services, a customer generally contracts for and utilizes all available services as a total package, and the Company would not provide its ancillary services to a customer unless it was also providing the core service of maintaining a database of subscriber names. Thus, variations in Fulfillment Services revenues are the result of fluctuations in the number and sizes of customers rather than in the demand for a particular service. This is also true in the Newsstand Distribution Services business where there is only one primary service provided, which results in one revenue source, the commissions earned on the distribution of magazines. The Company competes with other companies, including three much larger companies in the Newsstand Distribution Services business and one larger company in the Fulfillment Services business, and the competition for new customers is intense in both segments, which results in a price sensitive industry that may restrict the Company's ability to increase its prices.
During fiscal 2003, Kable acquired the Colorado-based fulfillment services business of Electronic Data Systems Corporation ("EDS"). Since that time Kable has outsourced to EDS a substantial portion of the data processing required to service that business but during fiscal 2008 has migrated much of that activity to its own systems. However, under the outsourcing contract, the full outsourcing charge remains payable so long as any outsourcing services are provided. The Company anticipates completing this migration process by September 2008. The migration process is technically complex, however, and the Company continues to address issues that have delayed the complete migration. Should the Company encounter unanticipated problems that will further delay the complete migration, it may continue to be burdened with the outsourcing of this business.
The Company has announced a project to integrate certain other aspects of the Kable and Palm Coast fulfillment operations in order to improve operating efficiencies and customer service and also to reduce costs. To date, this project has resulted in (i) one significant workforce reduction that occurred in the first quarter of 2008, (ii) an announced plan in the second quarter of 2008 to redistribute the fulfillment services work performed at the Marion, Ohio facility of its Fulfillment Services business and the scheduled closing of that facility and (iii) the consolidation of the fulfillment operations customer call center. Approximately $650,000 in severance-related costs is projected to be paid in connection with the Ohio facility closure, which is being recorded as positions are eliminated during the transitional period scheduled to end in September 2008. As of April 30, 2008, severance-related costs charged to operations totaled $486,000. Following the closure of the Ohio facility, the Company anticipates realizing annual cost savings of approximately $5,300,000 from the three actions noted above. The Company incurred costs directly related to the integration project of $1,159,000 in 2008, principally for severance and other consulting costs related to the integration, and these costs are included in the Restructuring and fire recovery costs in the Company's consolidated statement of income.
On December 5, 2007 a warehouse of approximately 38,000 square feet leased by the Company in Oregon, Illinois was totally destroyed by an accidental fire. The warehouse was used principally to store back issues of magazines published by certain customers for whom the Company fills back-issue orders as part of its services. The Company has submitted preliminary claims to its insurance provider for its property loss and for a business interruption claim consisting of its lost revenues offset by reduced expenses through April 30, 2008. While the Company has been advanced $500,000 for replacement of lost property, no insurance proceeds have been received on the business interruption claim as of April 30, 2008. In addition, the Company was required to provide insurance for certain of those customers whose property was destroyed in the warehouse fire. The Company does not believe that the net effect of the outcome of claims related to materials of certain publishers for whom it was required to provide insurance, together with any proceeds received from its property and business interruption claims, will have any material effect on its financial position, results of operations and cash flows. Due to the fire, gross assets were written down by $470,000, along with related accumulated depreciation on those assets of
about $440,000, resulting in a charge to operations of approximately $30,000. In addition, the Company has recorded other charges to operations of $324,000 related to fire recovery costs for the year ended April 30, 2008, principally due to legal and other costs that are not covered by insurance and these costs are included in the Restructuring and fire recovery costs in the Company's consolidated statement of income.
Real estate commissions and selling expenses decreased $673,000 (48%) in 2008 compared to 2007 principally attributable to the reduced volume of land sales. Other operating expenses decreased $536,000 (39%) in 2008 compared to 2007 principally due to a favorable adjustment of approximately $550,000 in the third quarter of 2008 for real estate tax expense resulting from the finalization of a property tax valuation appeal by AMREP Southwest. Media Services general and administrative expenses increased $2,818,000 (31%) in 2008 compared to 2007 as the addition of the Palm Coast expenses was only partially offset by lower costs in other Fulfillment Services operations. Real estate operations and corporate general and administrative expenses decreased $488,000 (10%) in 2008 compared to 2007 principally as a result of lower professional and consulting services costs.
Interest and other revenues decreased by $3,046,000 in 2008 compared to 2007. The decrease was partly attributable to lower cash balances to invest in 2008. In addition, during 2008, the Company sold a commercial rental property at AMREP Southwest that resulted in a pre-tax gain of $1,873,000, and it also recognized pre-tax income of $927,000 from the forfeiture of deposits for the purchase of land by homebuilders who did not exercise purchase options. During the first quarter of 2007, the Company sold certain of AMREP Southwest's investment assets, including the Company's office building in Rio Rancho, which in the aggregate contributed a pre-tax gain of $4,107,000.
The Company's effective tax rate from continuing operations was 36.2% in 2008 compared to 33.9% in 2007. The decrease from the statutory rate in both years was primarily due to tax benefits associated with charitable contributions of land and tax exempt interest income.
Year Ended April 30, 2007 Compared to Year Ended April 30, 2006 ---------------------------------------------------------------- Results of Operations
Net income in 2007 was $45,106,000, or $6.78 per share, compared to 2006 net income of $26,050,000, or $3.93 per share. Results for 2007 consisted of net income from continuing operations of $46,697,000, or $7.02 per share, and a net loss from discontinued operations of $1,591,000, or $0.24 per share, compared to the 2006 results which consisted of net income from continuing operations of $22,494,000, or $3.39 per share, and net income from discontinued operations of $3,556,000, or $0.54 per share. 2007 consolidated revenues were $204,839,000, an increase of $56,543,000 over 2006 consolidated revenues of $148,296,000. The increase in consolidated revenues was attributable to continued revenue growth achieved by the Company's real estate operations, and, to a lesser extent, the acquisition of Palm Coast by the Company's Kable Media Services, Inc. subsidiary. The increase in net income from continuing operations was attributable to higher gross profits associated with the increased real estate land sales.
Net income from discontinued operations in 2006 reflected the gain from the disposition of the primary assets of the Company's El Dorado, New Mexico water utility subsidiary, which were taken through condemnation proceedings during 2006. In June 2007, the Company settled all existing litigation involving this subsidiary and accrued for the estimated amount of the settlements, including legal fees, of approximately $1,591,000, net of tax, which was accounted for as a loss from discontinued operations in 2007.
Revenues from real estate land sales at AMREP Southwest increased $38,015,000 (66%) from $57,810,000 for 2006 to $95,825,000 in 2007. This substantial revenue increase was due to higher average selling prices and increased sales of both developed and undeveloped lots as well as commercial and industrial properties in the Company's principal market of Rio Rancho, New Mexico. An increase in revenues from additional sales in all categories of residential and commercial lots in 2007 compared to 2006 resulted from the strength of the Rio Rancho market, particularly in the first six months of the year. Revenues from sales of developed lots to homebuilders increased from $31,920,000 in 2006 to $39,407,000 in 2007. Revenues from sales of undeveloped builder lots increased from $19,514,000 in 2006 to $40,690,000, principally due to higher prices for scattered builder lots, and revenues from sales of commercial and industrial properties increased in 2007 to $15,728,000 from $6,376,000 in 2006 as a result of an increased number of and size of transactions. The average gross profit percentage on land sales increased from 54% in 2006 to 68% for 2007, reflecting higher average selling prices in 2007 and the mix of developed and undeveloped residential lots sold in each of the periods.
The average selling price of land sold by the Company in Rio Rancho increased from $63,200 per acre in 2006 to $91,200 per acre in 2007. This increase was due to a number of factors, including differences in the mix of the types of properties sold in each period and the effects of a strong regional market which resulted in three consecutive years of a record number of single-family residential housing starts in Rio Rancho, reaching a total in excess of 3,000 starts during the twelve months ending April 30, 2006. The real estate market in Rio Rancho softened during 2007, however, and there was a 55% decline in the number of housing starts in fiscal 2007 compared to fiscal 2006. In addition, in May 2007 Rio Rancho's largest employer, Intel Corporation, announced a workforce reduction starting in August 2007 of at least 1,000 jobs in Rio Rancho, which could reduce the demand for the Company's land inventory. As a result of these and other factors, including the nature and timing of specific transactions, revenues and related gross profits from real estate land sales can vary significantly from period to period and prior results are not necessarily a good indication of what may occur in future periods.
Revenues from Kable's Fulfillment Services and Newsstand Distribution Services businesses (collectively, "Media Services") increased $12,042,000 from $88,463,000 in 2006 to $100,505,000 in 2007. This increase in revenues was primarily attributable to the January 16, 2007 acquisition of Palm Coast. Newsstand Distribution Services revenues increased by $1,253,000 from $13,131,000 in 2006 to $14,384,000 in 2007, principally due to a 6% increase in revenues from new business. Fulfillment Services revenues increased by $10,789,000 from $75,332,000 in 2006 to $86,121,000 in 2007 due to the addition of Palm Coast. The increase in revenues from the Palm Coast acquisition was partially offset by decreases in core and ancillary services of customer telephone, lettershop and list services of other parts of Kable's Fulfillment Services business. The revenue decreases in core and ancillary services resulted from continued competitive market pressures and customer losses. Pricing pressure from customers due to the competitive environment for Fulfillment Services business also had a negative effect on Fulfillment Services revenues and profitability in the fourth quarter of 2007. Media Services operating expenses increased by $11,306,000 in 2007 compared to 2006, primarily attributable to (i) the addition of operating expenses of Palm Coast and (ii) an increase in Newsstand Distribution Services operating expenses, principally payroll, associated with the revenue growth of that business, offset in part by decreased payroll and benefit expenses in other parts of Kable's Fulfillment Services businesses. Media Services general and administrative expenses increased $1,549,000 in 2007 compared to 2006 as the addition of Palm Coast was only partially offset by lower costs in other Fulfillment Services businesses.
Real estate commissions and selling expenses remained generally unchanged in 2007 compared to 2006 despite the increase in land sales, primarily due to decreases in variable commissions and selling expenses. Such costs generally vary depending upon the terms of specific land sale transactions. Real estate and corporate general and administrative expenses increased $728,000 (17%) in 2007 compared to the prior year due to increased legal, real estate consulting and other consulting fees associated with Sarbanes-Oxley Act requirements.
Interest and other revenues increased by $6,486,000 in 2007 compared to the prior year, primarily as a result of increased interest income on invested cash balances as well as from the first quarter sale of certain real estate investment assets, including the Company's office building in Rio Rancho, New Mexico, which in the aggregate contributed a pre-tax gain of $4,107,000.
The Company's effective tax rate from continuing operations was 33.9% in 2007 compared to 31.3% in 2006. The decrease from the statutory rate in both years was primarily due to tax benefits associated with charitable contributions of land.
LIQUIDITY AND CAPITAL RESOURCES -------------------------------
The Company finances its operations from internally generated funds from real estate sales and magazine operations and from borrowings under its various loan agreements.
Cash Flows From Financing Activities ------------------------------------
In January 2007, AMREP Southwest entered into a loan agreement that replaced a prior loan agreement entered into in September 2006. The new loan agreement added a $14,180,000 term loan facility to the unsecured $25,000,000 revolving credit facility provided in the September 2006 agreement and was originally scheduled to mature in September 2008. During September 2007, the maturity date of the revolving credit facility was extended to September 2009, with all other terms remaining unchanged.
The revolving credit facility is used to support real estate development in New Mexico. Borrowings bear annual interest at the borrower's option at (i) the prime rate (5.0% at April 30, 2008) less 1.00%, or (ii) the 30-day LIBOR rate (2.80% at April 30, 2008) plus 1.65% for borrowings of less than $10,000,000, or plus 1.50% for borrowings of $10,000,000 or more. At April 30, 2008, the outstanding balance of the revolving credit facility was $18,000,000 with a weighted average interest rate of 4.38%. The term loan facility bears annual interest on borrowings at the 30-day LIBOR rate plus 1.75%, matures December 15, 2008 and is secured by certain of the borrower's notes receivable from real estate sales. The term loan requires prepayment in an amount equal to collections on the notes receivable held as collateral and the amount of any that have experienced payment defaults. At April 30, 2008, the outstanding balance of the term loan was $2,774,000. The loan agreement contains a number of restrictive covenants, including one that requires the borrower to maintain a minimum tangible net worth, and AMREP Southwest was in compliance with these covenants at April 30, 2008.
In connection with the completion of the acquisition of Palm Coast in January 2007, Kable and certain of its direct and indirect subsidiaries entered into a Second Amended and Restated Loan and Security Agreement with a bank (the "Credit Agreement"). During January 2008, Kable entered into a First Modification to the Credit Agreement ("First Modification"). The First Modification modified the Credit Agreement by, among other things, (a) increasing the amount that may be borrowed for capital expenditures, (b) allowing the borrowers the right to re-borrow the amounts of capital expenditure loans that have been repaid, (c) modifying the interest rate options the borrowers may select and (d) adding Kable Products Services, Inc., a recently organized member of the Kable Media Services group, as a borrower.
The credit facilities available to Kable with the execution of the First Modification consist of: (i) a revolving credit loan and letter of credit facility in an aggregate principal amount of up to $35,000,000 ("Facility A"); (ii) a secured term loan of approximately $3,000,000 that combined a number of separate borrowings for capital expenditures under the Credit Agreement ("Facility B"); (iii) a capital expenditure line of credit in an amount of up to $4,500,000 to finance new equipment ("Facility C"); and (iv) a second revolving credit loan facility of $10,000,000 ("Facility D") that may be used exclusively for the payment of accounts payable under a distribution agreement with a customer of Kable's Distribution Services business. The borrowers' obligations under the First Modification continue to be secured by substantially all of their assets other than (i) real property and (ii) any borrower's interest in the capital securities of any other borrower or any subsidiary of any borrower.
The Facility A, C and D loans mature in May 2010 and bear annual interest at fluctuating rates that, at the borrowers' option, may be either (i) reserve adjusted LIBOR rates (2.66% at April 30, 2008) plus a margin established quarterly from 1.5% to 2.5% dependent on the borrowers' funded debt to EBITDA ratio, as defined in the Credit Agreement, or (ii) the Lender's prime rate (5.00% at April 30, 2008). As of April 30, 2008, there was no outstanding balance under Facilities A or D and the outstanding balance for Facility C was $2,895,000. The Facility B loan matures December 2009 and bears annual interest at a rate of 6.4% and had an outstanding balance of $1,687,000 at April 30, 2008.
The Credit Agreement requires the borrowers to maintain certain financial ratios and contains customary covenants and restrictions, the most significant of which limit the ability of the borrowers to declare or pay dividends or make other distributions to the Company unless certain conditions are satisfied, and that limit the annual amount of indebtedness the borrowers may incur for capital expenditures and other purposes. The borrowers were in compliance with these covenants at April 30, 2008.
Other notes payable consist of equipment financing loans with a weighted average interest rate of 5.71% at April 30, 2008.
Consolidated notes payable outstanding at April 30, 2008 was $25,980,000 compared to $32,299,000 at April 30, 2007.
Cash Flows From Operating Activities ------------------------------------
Real estate inventory amounted to $70,252,000 at April 30, 2008 compared to $46,584,000 at April 30, 2007. Inventory in the Company's core real estate market of Rio Rancho increased from $39,770,000 at April 30, 2007 to $63,215,000 at April 30, 2008 primarily reflecting the net effect of development spending
and land sales. The increase in inventory is primarily the result of the start-up costs of development in several new project sites in Rio Rancho where the Company is required to perform initial development work prior to the ability to sell land. In addition, the Company reclassified approximately $3,900,000 to real estate inventory from receivables during the quarter ended January 31, 2008 resulting from the receipt of a deed in lieu of foreclosure related to a delinquent mortgage receivable. The balance of inventory principally consisted of properties in Colorado in both years.
Receivables from real estate operations decreased from $25,117,000 at April 30, 2007 to $13,124,000 at April 30, 2008, principally resulting from the net effect of payments received on mortgage notes and the reclassification of approximately $3,900,000 to real estate inventory from receivables discussed above offset in part by mortgage notes received by AMREP Southwest in connection with real estate sales that closed during 2008 .
Intangible and other assets decreased from $34,014,000 at April 30, 2007 to $29,913,000 at April 30, 2008, primarily reflecting normal amortization of these assets. Property, plant and equipment decreased from $30,518,000 at April 30, 2007 to $28,914,000 at April 30, 2008.
Accounts payable and accrued expenses increased from $83,557,000 at April 30, 2007 to $98,533,000 at April 30, 2008, primarily as a result of an increase in the amounts due publishers.
The unfunded pension liability of the Company's defined benefit retirement plan increased from $1,243,000 at April 30, 2007 to $2,045,000 at April 30, 2008, principally due to a decrease in the fair market value of the plan assets during the year resulting from a combination of net realized and unrealized losses from investment assets. The Company recorded comprehensive income (loss) of ($660,000) in 2008 and $1,210,000 in 2007, reflecting the change in the unfunded pension liability in each year net of the related deferred tax and unrecognized prepaid pension amounts.
Cash Flows From Investing Activities ------------------------------------
Capital expenditures for property, plant and equipment amounted to approximately $5,169,000 and $1,797,000 in 2008 and 2007 and consisted principally of expenditures for computer hardware and software for Kable's Fulfillment Services segment. In addition, capital expenditures for investment assets were $1,208,000 in 2008 and $2,870,000 in 2007 for the purchase of additional scattered lots in Rio Rancho in order to increase the Company's ownership in certain areas. The Company believes that it has adequate financing capability to provide for anticipated capital expenditures.
During January 2007, the Company, through a newly-created subsidiary of Kable, acquired Palm Coast for approximately $95,400,000. The acquisition was financed with existing cash and borrowings.
Future Payments Under Contractual Obligations ---------------------------------------------
The table below summarizes significant contractual cash obligations as of April 30, 2008 for the items indicated (in thousands):
Contractual Less than 1-3 3-5 More than Obligations Total 1 year years years 5 years ----------- ----------- ------------ ----------- ------------ -------------
Notes payable $ 25,980 $ 4,815 $ 20,548 $ 617 $ - Operating leases and other 30,536 7,925 11,719 6,434 4,458 ----------- ------------ ----------- ------------ ------------- Total $ 56,516 $ 12,740 $ 32,267 $ 7,051 $ 4,458 =========== ============ =========== ============ =============
Operating leases and other includes $2,793,000 of unrecognized tax benefits and related interest accrued in accordance with FIN 48. Refer to Notes 9, 16 and 17 to the consolidated financial statements included in this 2008 Form 10-K for additional information on long-term debt and commitments and contingencies.
Discretionary Stock Repurchase Program --------------------------------------
The Company announced on October 8, 2007 that its Board of Directors had authorized the repurchase of up to 500,000 shares of the Company's common stock, which was in addition to the previously announced 500,000 share repurchase program that was completed in early October 2007. The purchases may be made from time-to-time either in the open market or through negotiated private
transactions with non-affiliates of the Company. For the year ended April 30, 2008, the Company purchased a total of 658,400 shares under both announced programs, all in open market transactions, for a total purchase price, including commissions, of $21,363,000, or an average of $32.45 per share. The Company now has 5,995,212 shares of common stock outstanding, and the 658,400 shares repurchased equaled approximately 9.9% of the shares that were outstanding at April 30, 2007.
All repurchases were funded from cash on hand and borrowings, and the Company expects to fund any future purchases from internally generated cash or borrowings.
NEW AND EMERGING ACCOUNTING STANDARDS -------------------------------------
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS No. 157, as it relates to financial assets and financial liabilities, is effective for fiscal years beginning after November 15, 2007. On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2 "Effective Date of FASB Statement No. 157," which delays the effective date of SFAS No. 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115", which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. Certain specified items are eligible for the irrevocable fair value measurement option as established by SFAS No. 159. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51", which provides accounting and reporting standards for the noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material impact on the Company's financial position, results of operations or cash flows.
In December 2007, the FASB also issued SFAS No. 141(R), "Business Combinations (Revised)", which requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more businesses. The statement is effective for business combinations or transactions entered into for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) will affect the Company's accounting for future business combinations after the effective date and therefore has no impact on its current financial position, results of operations or cash flows.
The Company will monitor these emerging issues to assess any potential future impact on its consolidated financial statements.
SEGMENT INFORMATION -------------------
Information by industry segment is presented in Note 19 to the consolidated financial statements. This information has been prepared in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Disclosures", which requires that industry segment information be prepared in a manner consistent with the manner in which financial information is prepared and evaluated by management for making operating decisions. A number of assumptions and estimations are required to be made in the determination of segment data,
including the need to make certain allocations of common costs and expenses among segments. On an annual basis, management has evaluated the basis upon which costs are allocated, and has periodically made revisions to these methods of allocation. Accordingly, the determination of "income from continuing operations before income taxes" of each segment as summarized in Note 19 to the consolidated financial statements is presented for informational purposes, and is not necessarily the amount that would be reported if the segment were an independent company.
IMPACT OF INFLATION -------------------
Operations of the Company can be impacted by inflation. Within the industries in which the Company operates, inflation can cause increases in the cost of materials, services, interest and labor. Unless such increased costs are recovered through increased sales prices or improved operating efficiencies, operating margins will decrease. Within the land development industry, the Company encounters particular risks. A large part of the Company's real estate sales are to homebuilders who face their own inflationary concerns that rising housing costs, including interest costs, may substantially outpace increases in the income of potential purchasers and make it difficult for them to finance the purchase of a new home or sell their existing home. If this situation were to exist, the demand for the Company's land by these homebuilder customers could decrease. In general, in recent years interest rates have been at historically low levels and other price increases have been commensurate with the general rate of inflation in the Company's markets, and as a result the Company has not found the inflation risk to be a significant problem in its real estate or media services operations businesses.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS -------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral statements that are "forward-looking", including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to the Company's shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements, which constitute forward-looking statements, may be made by or on behalf of the Company. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and contingencies that are difficult to predict. These risks and uncertainties include, but are not limited to, those set forth in Item 1A above under the heading "Risk Factors". Many of the factors that will determine the Company's future results are beyond the ability of management to control or predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk -------- ---------------------------------------------------------- The primary market risk facing the Company is interest rate risk on its long-term debt and fixed rate receivables. The Company does not hedge interest rate risk using financial instruments. The Company is also subject to foreign currency risk, but this risk is not material. The following table sets forth as of April 30, 2008 the Company's long-term debt obligations and receivables (excluding trade accounts) by scheduled maturity, weighted average interest rate and estimated Fair Market Value ("FMV") (dollar amounts in thousands):
There- FMV @ 2009 2010 2011 2012 2013 after Total 4/30/08 ---- ---- ---- ---- ---- ----- ----- -------
Fixed rate receivables $ 11,530 $ 1,130 $ - $ - $ - $ - $ 12,660 $ 11,878
Weighted average interest rate 9.22% 9.50% - - - - 9.24%
Fixed rate debt $ 1,271 $ 912 $ 95 $ 33 $ - $ - $ 2,311 $ 2,358
Weighted average interest rate 6.35% 6.33% 6.54% 7.30% - - 6.37%
Variable rate debt $ 3,544 $ 18,771 $ 771 $ 583 $ - $ - $ 23,669 $ 23,669
Weighted average interest rate 4.67% 4.41% 5.08% 5.17% - - 4.49%
Item 8.
Item 8. Financial Statements and Supplementary Data ------- -------------------------------------------
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
Because of the inherent limitations of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls, material misstatements may not be prevented or detected on a timely basis. Accordingly, even internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Furthermore, projections of any evaluation of the effectiveness to future periods are subject to the risk that such controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of internal control over financial reporting as of April 30, 2008 based upon the criteria set forth in a report entitled "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management has concluded that, as of April 30, 2008, internal control over financial reporting was effective. The independent registered public accounting firm that audited the financial statements included in the annual report has issued an audit report on the effectiveness of the Company's internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Board of Directors AMREP Corporation Princeton, New Jersey
We have audited AMREP Corporation and Subsidiaries internal control over financial reporting as of April 30, 2008, based on "Criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)." AMREP Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting including the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing other such procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, AMREP Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of April 30, 2008, based on "Criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)."
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AMREP Corporation and Subsidiaries as of April 30, 2008 and 2007, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended April 30, 2008 and our report dated July 11, 2008 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP July 14, 2008
Report of Independent Registered Public Accounting Firm
To the Board of Directors AMREP Corporation Princeton, New Jersey
We have audited the consolidated balance sheets of AMREP Corporation and Subsidiaries as of April 30, 2008 and 2007, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended April 30, 2008. Our audits also included the financial statement schedule of AMREP Corporation listed in item 15(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMREP Corporation and Subsidiaries as of April 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AMREP Corporation's and Subsidiaries' internal control over financial reporting as of April 30, 2008, based on "Criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)" and our report dated July 11, 2008 expressed an unqualified opinion on the effectiveness of AMREP Corporation's internal control over financial reporting.
/s/ McGladrey & Pullen, LLP July 14, 2008
AMREP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 2008 AND 2007 (Dollar amounts in thousands)
ASSETS 2008 2007 ------ ---------------- -----------------
CASH AND CASH EQUIVALENTS $ 32,608 $ 42,102
RECEIVABLES, net: Real estate operations 13,124 25,117 Media services operations 45,701 47,825 ---------------- ----------------- 58,825 72,942
REAL ESTATE INVENTORY 70,252 46,584
INVESTMENT ASSETS, net 10,300 12,165
PROPERTY, PLANT AND EQUIPMENT, net 28,914 30,518
INTANGIBLE AND OTHER ASSETS, net 29,913 34,014
GOODWILL 54,139 54,334 ---------------- -----------------
TOTAL ASSETS $ 284,951 $ 292,659 ================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ LIABILITIES: ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 98,532 $ 83,557 DEFERRED REVENUE - 4,352
NOTES PAYABLE: Amounts due within one year 4,816 5,297 Amounts subsequently due 21,164 27,002 ---------------- ----------------- 25,980 32,299
TAXES PAYABLE 980 55 DEFERRED INCOME TAXES 12,358 11,149 ACCRUED PENSION COST 2,045 1,243 ---------------- -----------------
TOTAL LIABILITIES 139,895 132,655 ---------------- -----------------
SHAREHOLDERS' EQUITY: Common stock, $.10 par value; shares authorized - 20,000,000; shares issued - 7,419,704 at April 30, 2008 and 2007 742 742 Capital contributed in excess of par value 46,085 46,085 Retained earnings 128,408 121,333 Accumulated other comprehensive loss, net (3,522) (2,862) Treasury stock, 1,424,492 shares at April 30, 2008 and 766,092 shares at April 30, 2007, at cost (26,657) (5,294) ---------------- ----------------- TOTAL SHAREHOLDERS' EQUITY 145,056 160,004 ---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 284,951 $ 292,659 ================ =================
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts)
Year Ended April 30, ------------------------------------------------------- 2008 2007 2006 --------------- --------------- ---------------- REVENUES: Real estate land sales $ 27,902 $ 95,825 $ 57,810
Media services operations 138,696 100,505 88,463
Interest and other 5,463 8,509 2,023 --------------- --------------- ----------------
172,061 204,839 148,296 --------------- --------------- ----------------
COSTS AND EXPENSES: Real estate land sales 9,760 31,154 26,732 Operating expenses: Media services operations 120,021 85,262 73,956 Real estate commissions and selling 731 1,404 1,427 Restructuring and fire recovery costs 1,513 - - Other 840 1,376 1,114
General and administrative: Media services operations 12,053 9,235 7,686 Real estate operations and corporate 4,550 5,038 4,310 Interest expense, net of capitalized amounts 1,012 702 344 --------------- --------------- ----------------
150,480 134,171 115,569 --------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 21,581 70,668 32,727
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS 7,819 23,971 10,233 --------------- --------------- ----------------
INCOME FROM CONTINUING OPERATIONS 13,762 46,697 22,494
INCOME (LOSS) FROM OPERATIONS OF DISCONTINUED BUSINESS (NET OF INCOME TAXES) (57) (1,591) 3,556 --------------- --------------- ----------------
NET INCOME $ 13,705 $ 45,106 $ 26,050 =============== =============== ================
EARNINGS PER SHARE FROM CONTINUING OPERATIONS $ 2.20 $ 7.02 $ 3.39 EARNINGS (LOSS) PER SHARE FROM DISCONTINUED OPERATIONS (0.01) (0.24) .54 --------------- --------------- ----------------
EARNINGS PER SHARE - BASIC AND DILUTED $ 2.19 $ 6.78 $ 3.93 =============== =============== ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 6,248 6,650 6,633 =============== =============== ================
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in thousands)
Capital Accumulated Treasury Common Stock Contributed in Other Stock, ------------------- Excess of Retained Comprehensive at Shares Amount Par Value Earnings Loss Cost Total ------- -------- --------------- ---------- ------------- ---------- -----------
BALANCE, April 30, 2005 7,415 $ 741 $ 45,395 $ 82,695 $ (5,976) $ (5,450) $ 117,405
Net income - - - 26,050 - - 26,050
Other comprehensive income - - - - 1,904 - 1,904 -----------
Total comprehensive income 27,954 -----------
Cash dividend, $4.05 per share - - - (26,870) - - (26,870)
Issuance of stock under Directors' Plan - 1 336 - - 104 441
Exercise of stock options 2 - 40 - - - 40 ------- -------- --------------- ---------- ------------- ---------- ----------- BALANCE, April 30, 2006 7,417 742 45,771 81,875 (4,072) (5,346) 118,970
Net income - - - 45,106 - - 45,106
Other comprehensive income - - - - 1,210 - 1,210 ----------- Total comprehensive income 46,316 ----------- Cash dividend, $0.85 per share - - - (5,648) - - (5,648)
Issuance of stock under Directors' Plan - - 287 - - 52 339
Exercise of stock options 3 - 27 - - - 27 ------- -------- --------------- ---------- ------------- ---------- ----------- BALANCE, April 30, 2007 7,420 742 46,085 121,333 (2,862) (5,294) 160,004
Net income - - - 13,705 - - 13,705
Other comprehensive income (loss) - - - - (660) - (660) ----------- Total comprehensive income 13,045 ----------- Cash dividend, $1.00 per share - - - (6,630) - - (6,630)
Acquisition of treasury stock, 658,400 shares - - - - - (21,363) (21,363) ------- -------- --------------- ---------- ------------- ---------- ----------- BALANCE, April 30, 2008 7,420 $ 742 $ 46,085 $ 128,408 $ (3,522) $ (26,657) $ 145,056 ======= ======== =============== ========== ============= ========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended April 30, --------------------------------------------------- 2008 2007 2006 -------------- -------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,705 $ 45,106 $ 26,050 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 10,524 7,319 5,568 Non-cash credits and charges: Gain on disposition of assets (1,679) (4,115) (5,345) Provision for doubtful accounts (676) (227) (104) Pension accrual (967) 26 627 Stock based compensation - Directors' Plan - 339 441 Changes in assets and liabilities, excluding the effect of acquisitions: Receivables 10,901 (10,901) 4,202 Real estate inventory (19,696) 1,064 6,942 Other assets 272 (1,852) (4,027) Accounts payable and accrued expenses, and deferred revenue 11,328 33,156 3,400 Taxes payable 925 (4,493) 2,328 Deferred income taxes 1,614 3,267 1,764 -------------- -------------- --------------- Net cash provided by operating activities 26,251 68,689 41,846 -------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - property, plant, and equipment (5,169) (1,797) (3,683) Capital expenditures - investment assets (1,208) (2,870) (213) Proceeds from disposition of assets 4,749 6,173 4,057 Acquisition, net of cash acquired 195 (95,636) - -------------- -------------- --------------- Net cash provided by (used in) investing activities (1,433) (94,130) 161 -------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt financing 86,860 81,255 29,162 Principal debt payments (93,179) (54,973) (35,200) Exercise of stock options - 27 40 Acquisition of treasury stock (21,363) - - Cash dividends (6,630) (5,648) (26,870) -------------- -------------- --------------- Net cash provided by (used in) financing activities (34,312) 20,661 (32,868) -------------- -------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,494) (4,780) 9,139 CASH AND CASH EQUIVALENTS, beginning of year 42,102 46,882 37,743 -------------- -------------- --------------- CASH AND CASH EQUIVALENTS, end of year $ 32,608 $ 42,102 $ 46,882 ============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid - net of amounts capitalized $ 1,085 $ 735 $ 377 ============== ============== ===============
Income taxes paid - net of refunds $ 2,453 $ 24,261 $ 8,230 ============== ============== =============== Non-cash transactions: Foreclosure on land sale contract $ 3,892 $ - $ 1,795 Transfer of development costs from inventory to investment assets $ - $ - $ 262 ============== ============== ===============
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
AMREP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES: -------------------------------------------------------------------
Organization and principles of consolidation --------------------------------------------
The consolidated financial statements include the accounts of AMREP Corporation, an Oklahoma corporation, and its subsidiaries (individually and collectively, as the context requires, the "Company"). The Company, through its principal subsidiaries, is primarily engaged in three business segments. AMREP Southwest Inc. ("AMREP Southwest") operates in the real estate industry, principally in New Mexico, and Kable Media Services, Inc. ("Kable") operates in the fulfillment services and magazine distribution services businesses (collectively, "media services operations"). All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated balance sheets are presented in an unclassified format since the Company has substantial operations in the real estate industry and its operating cycle is greater than one year.
Fiscal Year -----------
The Company's fiscal year ends on April 30. All references to 2008, 2007 and 2006 mean the fiscal years ended April 30, 2008, 2007 and 2006 unless the context otherwise indicates.
Revenue recognition -------------------
Real Estate - Land sales are recognized when all elements of Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate", are met, including when the parties are bound by the terms of the contract, all consideration (including adequate cash) has been exchanged, title and other attributes of ownership have been conveyed to the buyer by means of a closing and the Company is not obligated to perform further significant development of the specific property sold. Profit is recorded either in its entirety or on the installment method depending upon, among other things, the ability to estimate the collectibility of the unpaid sales price. In the event the buyer defaults on the obligation, the property is taken back and recorded as inventory at the unpaid receivable balance, net of any deferred profit, but not in excess of fair market value less estimated costs to sell.
Cost of land sales includes all direct acquisition costs and other costs specifically identified with the property, including pre-acquisition costs and capitalized real estate taxes and interest, and an allocation of certain common development costs associated with the entire project. Common development costs include the installation of utilities and roads, and may be based upon estimates of cost to complete. The allocation of costs is based on the relative fair value of the property before development. Estimates and cost allocations are reviewed on a regular basis until a project is substantially completed, and are revised and reallocated as necessary on the basis of current estimates.
When the Company enters into certain sales that require the Company to complete specified development work subsequent to closing, sales are recorded under the percentage-of-completion method. Revenues and cost of sales are recorded as development work is performed based on the percentage that incurred costs to date bear to the Company's estimates of total costs and contract value. Cost estimates include direct and indirect costs such as labor, materials and overhead. If a contract extends over an extended period, revisions in cost estimates during the progress of work would have the effect of adjusting earnings applicable to performance in prior periods in the current period. When the current contract estimate indicates a loss, provision is made for the total anticipated loss in the current period. Consideration received in excess of amounts recognized as land sale revenues is accounted for as deferred revenue.
Media Services - Revenues from media services operations include revenues from the distribution of periodicals and subscription fulfillment and other activities. Revenues from subscription fulfillment activities represent fees earned from the maintenance of computer files for customers, which are billed and earned monthly, and other fulfillment activities including customer telephone support, product fulfillment, and graphic arts and lettershop services, all of which are billed and earned as the services are provided. In accordance with Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", certain reimbursed postage
costs are accounted for on a net basis. Newsstand Distribution Services revenues principally represent commissions earned from the distribution of publications for client publishers and are recorded by the Company at the time the publications go on sale at the retail level, in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists". Because the publications are sold throughout the distribution chain on a fully-returnable basis in accordance with prevailing industry practice, the Company provides for estimated returns from wholesalers at the time the publications go on sale by charges to income that are based on historical experience and most recent sales data for publications on an issue-by-issue basis, and then simultaneously provides for estimated credits from publishers for the related returns. Accordingly, revenues represent the difference between the Company's estimates of its net sales to independent wholesalers and its net purchases from publisher clients. Estimates are continually reevaluated throughout the sales process, and final settlement is typically made 90 days after a magazine's "off-sale" date.
Cash and cash equivalents ------------------------- Cash equivalents consist of short-term, highly liquid investments that have an original maturity of ninety days or less and are readily convertible into cash.
Receivables ----------- Receivables are carried at original invoice or closing statement amount less estimates made for doubtful receivables and, in the case of Newsstand Distribution Services receivables, return allowances. Management determines the allowances for doubtful accounts by reviewing and identifying troubled accounts and by using historical experience applied to an aging of accounts. A receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 90 days. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.
Revenue recognition and related receivables for the Newsstand Distribution Services business is based on estimates of allowances for magazine returns to the Company from wholesalers and the offsetting return of magazines by the Company to publishers for credit and is determined on an issue-by-issue basis utilizing historical experience and current sales information.
Real estate inventory --------------------- Land and improvements on land held for future development or sale are stated at the lower of accumulated cost (except in certain instances where property is repossessed as discussed above under "Revenue recognition"), which includes the development cost, certain amenities, capitalized interest and capitalized real estate taxes, or fair market value less estimated costs to sell.
Investment assets ----------------- Investment assets consist of investment land and commercial rental properties.
Investment land represents vacant, undeveloped land not held for development or sale in the normal course of business and which is stated at the lower of cost or fair market value less the estimated costs to sell. Commercial rental properties are recorded at cost less accumulated depreciation. Depreciation of commercial rental properties is provided by the straight-line basis over the estimated useful lives, which generally are 10 years or less for leasehold improvements and 25 years for buildings.
Property, plant and equipment ----------------------------- Items capitalized as part of property, plant and equipment are recorded at cost. Expenditures for maintenance and repair and minor renewals are charged to expense as incurred, while those expenditures that improve or extend the useful life of existing assets are capitalized. Upon sale or other disposition of assets, their cost and the related accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in operations.
Depreciation and amortization of property, plant and equipment are provided principally by the straight-line method at various rates calculated to amortize the book values of the respective assets over their estimated useful lives, which generally are 10 years or less for furniture and fixtures (including equipment) and 25 to 40 years for buildings and improvements.
Goodwill --------
Goodwill is the excess of amounts paid for business acquisitions over the net fair value of the assets acquired and liabilities assumed. Goodwill arose in connection with the acquisitions of Kable News Company, Inc. in 1969 and Palm Coast Data Holdco, Inc. ("Palm Coast") in 2007 (see Note 10).
Goodwill is not amortized, but is reviewed at the reporting unit level for impairment annually or more frequently if indications of impairment exist under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". An impairment charge is generally recognized when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. Based on a review completed in April 2008, the Company believes that no goodwill impairment existed at April 30, 2008.
Long-lived assets -----------------
Long-lived assets, including real estate inventory, investment assets and property, plant and equipment, are evaluated in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and reviewed for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Provisions for impairment are recorded when undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. The amount of impairment would be equal to the difference between the carrying value of an asset and its discounted cash flows.
Income taxes ------------
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using currently enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse.
Earnings per share ------------------
Basic earnings per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is computed assuming the issuance of common shares for all dilutive stock options outstanding (using the treasury stock method) during the reporting period.
Stock options -------------
The Company adopted SFAS No. 123(R), "Share-Based Payment", effective May 1, 2006. SFAS No. 123(R) requires the Company to recognize expense related to the fair value of share-based compensation awards, including employee and director stock grants and options.
The Company had issued stock options to non-employee directors under the Non-Employee Directors Option Plan that was terminated in 2006 (see Note 11). Stock options granted prior to the adoption of SFAS No. 123(R) were issued with an exercise price at the fair market value of the Company's stock at the date of grant. Accordingly, no compensation expense has been recognized with respect to the stock option plan in the years 2006 and prior. In addition, under SFAS No. 123(R) the compensation expense was not material to the results of operations for 2008 and 2007.
Pension plan ------------ In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans", an amendment of FASB Statement Nos. 87, 88, 106 and 132R. SFAS No. 158 requires the recognition of the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in the statement of financial position and changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires the funded status of a plan be measured as of the date of its year-end statement of financial position. The Company adopted the recognition, disclosure and measurement provisions of SFAS No 158 as of April 30, 2007, which did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
Comprehensive income (loss) ---------------------------
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive income (loss) is the total of net income and other comprehensive income (loss) that, for the Company, is comprised entirely of the minimum pension liability net of the related deferred income taxes.
Management's estimates and assumptions --------------------------------------
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The significant estimates that affect the financial statements include, but are not limited to, real estate inventory valuation and related revenue recognition, allowances for magazine returns and doubtful accounts, the recoverability of long-term assets and amortization periods, goodwill impairment, pension plan assumptions for determination of pension expense and benefit obligations, and legal contingencies. The Company bases its significant estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results could differ from these estimates; however, there have been no material changes made to the Company's accounting estimates in the past three years.
New and Emerging Accounting Standards -------------------------------------
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS No. 157, as it relates to financial assets and financial liabilities, is effective for fiscal years beginning after November 15, 2007. On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2 "Effective Date of FASB Statement No. 157," which delays the effective date of SFAS No. 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115", which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. Certain specified items are eligible for the irrevocable fair value measurement option as established by SFAS No. 159. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51", which provides accounting and reporting standards for the noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material impact on the Company's financial position, results of operations or cash flows.
In December 2007, the FASB also issued SFAS No. 141(R), "Business Combinations (Revised)", which, among other provisions, requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more businesses. The statement is effective for business combinations or transactions entered into for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) will affect the Company's accounting for future business combinations after the effective date and therefore has no impact on its current financial position, results of operations or cash flows.
The Company will monitor these emerging issues to assess any potential future impact on its consolidated financial statements.
(2) ADOPTION OF FIN 48 ------------------
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"), as of May 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with FASB Statement No. 5, "Accounting for Contingencies". As required by FIN 48, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that management believes has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Unrecognized tax benefits are tax benefits claimed in the Company's tax returns that do not meet these recognition and measurement standards.
At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. The adoption of FIN 48 had no impact on the Company's financial statements. The Company's deferred income taxes and other long-term liabilities include an unrecognized tax benefit that would impact the effective tax rate was $1,354,000 at May 1, 2007, which had been previously recorded under FASB Statement No. 5 or FASB Statement No. 109. The Company's unrecognized tax benefit at April 30, 2008 was $2,076,000 that, if recognized, would have an impact on the effective tax rate.
The Company is subject to U.S. Federal income taxes, and also to various state, local and foreign income taxes. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is not currently under examination by any tax authorities with respect to its income tax returns. In nearly all jurisdictions, the tax years through the fiscal year ended April 30, 2004 are no longer subject to examination.
The total amount of unrecognized tax positions ("UTP") could increase or decrease within the next twelve months for a number of reasons, including the expiration of statutes of limitations, audit settlements, tax examinations and the recognition and measurement considerations under FIN 48. At this time, the Company estimates that it is reasonably possible that the liability for UTP will decrease by up to approximately $600,000 in the next twelve months due to either the expiration of statutes of limitations or the recognition and measurement considerations under FIN 48 related to the value of land contributions.
The Company has elected to retain its existing accounting policy with respect to the treatment of interest and penalties attributable to income taxes in accordance with FIN 48, and continues to reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of its income tax provision or benefit as well as its outstanding income tax assets and liabilities. The total amount of interest payable recognized in the accompanying consolidated balance sheets was $717,000 at April 30, 2008 and $395,000 at May 1, 2007 (date of adoption). No amount has been accrued for penalties.
(3) RECEIVABLES: ------------ Receivables consist of: April 30, ------------------------------------- 2008 2007 ---------------- ----------------- (Thousands) Real estate operations: Mortgage and other receivables $ 13,236 $ 25,165 Allowance for doubtful accounts (112) (48) ---------------- ----------------- $ 13,124 $ 25,117 ================ ================= Media services operations (maturing within one year): Fulfillment services $ 28,348 $ 29,606 Newsstand Distribution Services, net of estimated returns 18,008 19,550 ---------------- ----------------- 46,356 49,156 Allowance for doubtful accounts (655) (1,331) ---------------- ----------------- $ 45,701 $ 47,825 ================ =================
The Company extends credit to various companies in its real estate and media services businesses that may be affected by changes in economic or other external conditions. Financial instruments that may potentially subject the
Company to a significant concentration of credit risk primarily consist of trade accounts receivable from wholesalers in the magazine distribution industry. Approximately 42% and 43% of media services net accounts receivable were due from three wholesalers at April 30, 2008 and 2007. As a result of the concentration of accounts receivable in three wholesalers, the Company could be adversely affected by adverse changes in their financial condition or other factors negatively affecting these companies. As industry practices allow, the Company's policy is to manage its exposure to credit risk through credit approvals and limits and, on occasion (particularly in connection with real estate land sales), the taking of collateral. The Company also provides an allowance for doubtful accounts for potential losses based upon factors surrounding the credit risk of specific customers, historical trends and other financial and non-financial information.
Real estate mortgage receivables bear interest at rates ranging from 8.0% to 12.0% and result primarily from land sales. Real estate mortgage receivables of $2,774,000 collateralize the AMREP Southwest term loan (see Note 9). Maturities of principal on real estate receivables at April 30, 2008 were as follows: 2009 - $12,106,000; 2010 - $1,130,000; 2011 and thereafter - none.
Because the publications distributed by Kable are sold throughout the distribution chain on a fully-returnable basis in accordance with prevailing industry practice, the Company provides for estimated returns from wholesalers at the time the publications go on sale by charges to income that are based on historical experience and most recent sales data for publications on an issue-by-issue basis, and then simultaneously provides for estimated credits from publishers for the related returns. The financial impact to the Company of a change in the sales estimate for magazine returns to it from its wholesalers is substantially offset by the simultaneous change in the Company's estimate of its cost of purchases since it passes on the returns to publishers for credit. Newsstand Distribution Services accounts receivable are net of estimated magazine returns of $55,930,000 in 2008 and $52,275,000 in 2007. In addition, pursuant to an arrangement with one publisher customer of the Newsstand Distribution Services business, the publisher bears the ultimate credit risk of non-collection of amounts due from the customers to which the Company distributed the publisher's magazines under this arrangement. Accounts receivable subject to this arrangement were netted ($22,703,000 and $21,106,000 were netted at April 30, 2008 and 2007) against the related accounts payable due the publisher on the accompanying balance sheets. Media services operations receivables collateralize line-of-credit arrangements utilized for the Newsstand Distribution and Fulfillment Services operations (see Note 9).
Media Services operations provide services to publishing companies owned or controlled by a major shareholder and member of the Board of Directors. Commissions and other revenues earned on these transactions represented approximately 1% of consolidated revenues in 2008 and 2007 and 2% of consolidated revenues in 2006.
(4) REAL ESTATE INVENTORY: ----------------------
Real estate inventory consists of land and improvements held for sale or development. Accumulated capitalized interest costs included in real estate inventory at April 30, 2008 and 2007 were $3,224,000 and $2,293,000. Interest costs capitalized during 2008, 2007 and 2006 were $1,300,000, $469,000 and $21,000. Accumulated capitalized real estate taxes included in the inventory of land and improvements at April 30, 2008 and 2007 were $1,820,000 and $1,887,000. Real estate taxes capitalized during 2008, 2007 and 2006 were $41,000, $18,000 and $16,000. Previously capitalized interest costs and real estate taxes charged to real estate cost of sales were $108,000, $357,000 and $662,000 in 2008, 2007 and 2006.
Substantially all of the Company's real estate assets are located in or adjacent to Rio Rancho, New Mexico. As a result of this geographic concentration, the Company could be affected by changes in economic conditions in that region.
(5) INVESTMENT ASSETS: ------------------ Investment assets consist of: April 30, --------------------------------- 2008 2007 -------------- --------------- (Thousands)
Land held for long-term investment $ 9,771 $ 9,039 -------------- --------------- Commercial rental properties: Land, buildings and improvements 754 3,535 Furniture and fixtures 40 42 -------------- --------------- 794 3,577 Less accumulated depreciation (265) (451) -------------- --------------- 529 3,126 -------------- --------------- $ 10,300 $ 12,165 ============== ===============
Land held for long-term investment represents property located in areas that are not planned to be developed in the near term and thus has not been offered for sale. During 2008, the Company sold a commercial rental property in its real estate business with a net book value of $2,876,000.
Depreciation of investment assets charged to operations amounted to $117,000, $179,000 and $209,000 in 2008, 2007 and 2006.
(6) PROPERTY, PLANT AND EQUIPMENT: ------------------------------ Property, plant and equipment consist of: April 30, --------------------------------- 2008 2007 -------------- --------------- (Thousands) Land, buildings and improvements $ 17,875 $ 17,217 Furniture and equipment 45,241 41,778 Other 59 75 -------------- --------------- 63,175 59,070 Less accumulated depreciation (34,261) (28,552) -------------- --------------- $ 28,914 $ 30,518 ============== ===============
Depreciation of property, plant and equipment charged to operations amounted to $6,578,000, $4,983,000 and $4,222,000 in 2008, 2007 and 2006.
(7) INTANGIBLE AND OTHER ASSETS: ----------------------------
Intangible and other assets consist of:
April 30, 2008 April 30, 2007 ------------------------------------ ----------------------------------- (Thousands) Accumulated Accumulated Cost Amortization Cost Amortization -------------- ---------------- ------------- ----------------
Software development costs $ 10,017 $ 3,780 $ 9,461 $ 1,758 Deferred order entry costs 5,681 - 5,837 - Prepaid expenses 3,047 - 3,302 - Customer contracts and relationships 15,000 1,613 15,000 364 Other 2,430 869 5,118 2,582 -------------- ---------------- ------------- ---------------- $ 36,175 $ 6,262 $ 38,718 $ 4,704 ============== ================ ============= ================
Software development costs include internal and external costs of the development of new or enhanced software programs and are generally amortized over five years. Deferred order entry costs represent costs incurred in
connection with the data entry of customer subscription information to database files and are charged directly to operations over a 12-month period. Customer contracts and relationships are amortized over 12 years.
Amortization related to deferred charges was $3,829,000, $2,157,000 and $1,137,000 in 2008, 2007 and 2006. Amortization of intangible and other assets for each of the next five years is estimated to be as follows: 2009 - $3,658,000; 2010 - $3,591,000; 2011 - $3,150,000; 2012 - $2,568,000; and 2013 - $1,552,000.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES: -------------------------------------- Accounts payable and accrued expenses consist of: April 30, --------------------------------- 2008 2007 ---------------- ------------- (Thousands)
Publisher payables, net $ 77,003 $ 63,759 Accrued expenses 5,000 6,803 Trade payables 5,753 3,701 Other 10,776 9,294 -------------- -------------- $ 98,532 $ 83,557 ============== ==============
Pursuant to an arrangement with one publisher customer of the Newsstand Distribution Services business, the Company has netted $22,703,000 and $21,106,000 of accounts receivable against the related accounts payable at April 30, 2008 and 2007 (See Note 3).
(9) NOTES PAYABLE: -------------- Notes payable consist of: April 30, -------------------------------- 2008 2007 ------------ -------------- (Thousands) Line-of-credit arrangements: Real estate operations $ 18,000 $ 6,000 Media services operations 4,582 14,604 Real estate operations term loan 2,774 10,559 Other notes payable 624 1,136 ------------ -------------- $ 25,980 $ 32,299 ============ ==============
Maturities of principal on notes outstanding at April 30, 2008 were as follows: 2009 - $4,815,000; 2010 - $19,683,000; 2011 - $865,000; 2012 - $617,000; and 2013 and thereafter - none.
Lines-of-credit and other arrangements --------------------------------------
Real Estate - In January 2007, AMREP Southwest entered into a loan agreement that replaced a prior loan agreement entered into in September 2006. The new loan agreement added a $14,180,000 term loan facility to the unsecured $25,000,000 revolving credit facility provided in the September 2006 agreement and was originally scheduled to mature in September 2008. During September 2007, the maturity date of the revolving credit facility was extended to September 2009, with all other terms remaining unchanged.
The revolving credit facility is used to support real estate development in New Mexico. Borrowings bear annual interest at the borrower's option at (i) the prime rate (5.0% at April 30, 2008) less 1.00%, or (ii) the 30-day LIBOR rate (2.80% at April 30, 2008) plus 1.65% for borrowings of less than $10,000,000, or plus 1.50% for borrowings of $10,000,000 or more. At April 30, 2008, the outstanding balance of the revolving credit facility was $18,000,000 with a weighted average interest rate of 4.38%. The term loan facility bears annual interest on borrowings at the 30-day LIBOR rate plus 1.75%, matures December 15, 2008 and is secured by certain of the borrower's notes receivable from real estate sales. The term loan requires prepayment in an amount equal to collections on the notes receivable held as collateral and the amount of any that have experienced payment defaults. At April 30, 2008, the outstanding balance of the term loan was $2,774,000. The loan agreement contains a number of restrictive covenants, including one that requires the borrower to maintain a minimum tangible net worth, and AMREP Southwest was in compliance with these covenants at April 30, 2008.
Media Services - In connection with the completion of the acquisition of Palm Coast in January 2007 (see Note 10), Kable and certain of its direct and indirect subsidiaries entered into a Second Amended and Restated Loan and Security Agreement with a bank (the "Credit Agreement"). During January 2008, Kable entered into a First Modification to the Credit Agreement ("First Modification"). The First Modification modified the Credit Agreement by, among other things, (a) increasing the amount that may be borrowed for capital expenditures, (b) allowing the borrowers the right to re-borrow the amounts of capital expenditure loans that have been repaid, (c) modifying the interest rate options the borrowers may select and (d) adding Kable Products Services, Inc., a recently organized member of the Kable Media Services group, as a borrower.
The credit facilities available to Kable with the execution of the First Modification consist of: (i) a revolving credit loan and letter of credit facility in an aggregate principal amount of up to $35,000,000 ("Facility A"); (ii) a secured term loan of approximately $3,000,000 that combined a number of separate borrowings for capital expenditures under the Credit Agreement ("Facility B"); (iii) a capital expenditure line of credit in an amount of up to $4,500,000 to finance new equipment ("Facility C"); and (iv) a second revolving credit loan facility of $10,000,000 ("Facility D") that may be used exclusively for the payment of accounts payable under a distribution agreement with a customer of Kable's Distribution Services business. The borrowers' obligations under the First Modification continue to be secured by substantially all of their assets other than (i) real property and (ii) any borrower's interest in the capital securities of any other borrower or any subsidiary of any borrower.
The Facility A, C and D loans mature in May 2010 and bear annual interest at fluctuating rates that, at the borrowers' option, may be either (i) reserve adjusted LIBOR rates (2.66% at April 30, 2008) plus a margin established quarterly from 1.5% to 2.5% dependent on the borrowers' funded debt to EBITDA ratio, as defined in the Credit Agreement, or (ii) the Lender's prime rate (5.00% at April 30, 2008). As of April 30, 2008, there was no outstanding balance under Facilities A or D and the outstanding balance for Facility C was $2,895,000. The Facility B loan matures December 2009 and bears annual interest at a rate of 6.4% and had an outstanding balance of $1,687,000 at April 30, 2008.
The Credit Agreement requires the borrowers to maintain certain financial ratios and contains customary covenants and restrictions, the most significant of which limit the ability of the borrowers to declare or pay dividends or make other distributions to the Company unless certain conditions are satisfied, and that limit the annual amount of indebtedness the borrowers may incur for capital expenditures and other purposes. The borrowers were in compliance with these covenants at April 30, 2008.
Other notes payable consist of equipment financing loans with a weighted average interest rate of 5.71% at April 30, 2008.
(10) ACQUISITION: ------------
During January 2007, the Company, through its Kable Media Services, Inc. subsidiary, completed the acquisition of 100% of the stock of Palm Coast, which, through its subsidiary, Palm Coast Data LLC, is a major provider of fulfillment services for magazine publishers and others. The acquisition has complemented and added service capability to the Company's fulfillment services business. The merger consideration was financed with existing cash and borrowings and totaled approximately $95,400,000. The transaction has been accounted for as a purchase, and the results of operations of Palm Coast have been included in the consolidated financial statements since the date of acquisition.
The allocation of the purchase price of Palm Coast to net tangible and identifiable intangible assets was based on their estimated fair values as of January 16, 2007, determined using valuations and other studies. The excess of the purchase price plus estimated fees and expenses related to the acquisition over the net tangible and identifiable intangible assets was allocated to goodwill. The purchase price allocation reflects a post-closing price adjustment of $195,000 during 2008 in accordance with FASB Statement No. 141, "Business Combinations" and was as follows (in thousands):
Receivables $ 10,082 Property, plant and equipment 22,886 Deferred taxes, net 2,075 Deferred order entry costs 1,636 Customer contracts and relationships 15,000 Goodwill 48,948 Accounts payable and accrued expenses (7,631) Other assets 2,445 ----------- $ 95,441 ===========
The useful lives of the intangible assets acquired are as follows: deferred order entry costs - one year; customer contracts and relationships - 12 years; and goodwill - indefinite. The goodwill recognition of $48,948,000 is primarily related to the anticipated future earnings and cash flows of Palm Coast.
(11) BENEFIT PLANS: --------------
Retirement plan --------------- The Company has a retirement plan for which accumulated benefits were frozen and future service credits were curtailed as of March 1, 2004. Prior to that date it had covered substantially all full-time employees and provided benefits based upon a percentage of the employee's annual salary. The following tables summarize the balance sheet impact as well as the benefit obligations, assets, funded status and assumptions associated with the retirement plan.
Net periodic pension cost (benefit) for 2008, 2007 and 2006 was comprised of the following components:
Year Ended April 30, ----------------------------------------------------- 2008 2007 2006 --------------- ---------------- --------------- (Thousands) Interest cost on projected benefit obligation $ 1,736 $ 1,789 $ 1,780 Expected return on assets (2,310) (2,224) (1,994) Plan expenses 146 180 212 Recognized net actuarial loss 164 325 629 --------------- ---------------- --------------- Total cost (benefit) recognized in pretax income (264) 70 627 Cost (benefit) recognized in pretax other comprehensive income 1,065 (2,017) (3,173) --------------- ---------------- --------------- $ 801 $ (1,947) $ (2,546) =============== ================ ===============
The estimated net loss, transition obligation and prior service cost for the plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $291,000, $0 and $0, respectively.
Assumptions used in determining net periodic pension cost and the benefit obligations were:
Year Ended April 30, ----------------------------------------------------- 2008 2007 2006 -------------- --------------- ---------------
Discount rate used to determine net periodic pension cost 5.75% 5.75% 5.75% Discount rate used to determine pension benefit obligation 6.42% 5.75% 5.75% Expected long-term rate of return on assets 8.0% 8.0% 8.0%
The following table sets forth changes in the plan's benefit obligations and assets, and summarizes components of amounts recognized in the Company's consolidated balance sheets:
April 30, --------------------------------------------------- 2008 2007 2006 ------------- ------------- -------------- (Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 31,283 $ 32,159 $ 31,808 Interest cost 1,736 1,789 1,780 Actuarial (gain) loss (1,616) (757) 418 Benefits paid (2,133) (1,908) (1,847) ------------- ------------- -------------- Benefit obligation at end of year $ 29,270 $ 31,283 $ 32,159 ------------- ------------- --------------
Change in plan assets: Fair value of plan assets at beginning of year $ 30,040 $ 28,925 $ 26,028 Contributions - 44 - Actual return on plan assets (507) 3,125 4,924 Benefits paid (2,133) (1,908) (1,847) Plan expenses (175) (146) (180) ------------- ------------- -------------- Fair value of plan assets at end of year $ 27,225 $ 30,040 $ 28,925 ------------- ------------- --------------
Funded status: Benefit obligation in excess of plan assets $ (2,045) $ (1,243) $ (3,234) Unrecognized net actuarial loss 5,836 4,771 6,788 ------------- ------------- -------------- Net asset (liability) recognized in the balance sheets $ (3,791) $ (3,528) $ 3,554 ============= ============= ==============
Amounts recognized on the balance sheets: Accrued pension costs $ (2,045) $ (1,243) $ (3,234) Pre-tax accumulated comprehensive loss 5,836 4,771 6,788 ------------- ------------- -------------- $ (3,791) $ (3,528) $ 3,554 ============= ============= ==============
Due to the adoption of SFAS No. 158 as of April 30, 2007, the funded status of the plan is equal to the net liability recognized in the consolidated balance sheet. As a result of applying SFAS No. 158, there was minimal incremental affect on individual line items in the accompanying balance sheet, and no adjustments of retained earnings and accumulated comprehensive income (loss) was required.
The average asset allocation for the retirement plan by asset category was as follows:
April 30, ------------------------------- 2008 2007 -------------- ------------- Equity securities 74% 79% Fixed income securities 23 19 Other (principally cash and cash equivalents) 3 2 -------------- ------------- Total 100% 100% ============== =============
The Company recorded other comprehensive income (loss), net of tax, of $(660,000) in 2008, $1,210,000 in 2007 and $1,904,000 in 2006 to account for the net effect of changes to the unfunded pension liability.
The investment mix between equity securities and fixed income securities is based upon achieving a desired return by balancing more volatile equity securities and less volatile fixed income securities. Plan assets are invested in portfolios of diversified public-market equity and fixed income securities. Investment allocations are made across a range of markets, industry sectors, capitalization sizes and, in the case of fixed income securities, maturities and credit quality. The plan holds no securities of the Company.
The expected return on assets for the retirement plan is based on management's expectation of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, management considers historical and expected returns for the asset classes in which the plan is invested, as well as current economic and market conditions.
The Company funds the retirement plan according to IRS funding limitations. The Company made contributions to the plan for 2008, 2007 and 2006 as follows: none, $44,000 and none. No mandatory contributions are expected to be made by the Company to the retirement plan in fiscal 2009.
The amount of future annual benefit payments is expected to be between $2.2 million and $2.4 million in 2008 through 2012, and an aggregate of approximately $11.5 million is expected to be paid in the five-year period 2013 through 2017.
Savings and salary deferral plans ----------------------------------
The Company has a Savings and Salary Deferral Plan, commonly referred to as a 401(k) plan, in which all full-time employees (other than Palm Coast employees) with more than one year of service are eligible to participate and contribute to through salary deductions. The Company may make discretionary matching contributions, subject to the approval of its Board of Directors. For each of the three years ended April 30, 2008, the Company matched 66.67% of eligible employee contributions not in excess of 6% of such employee compensation.
The Company also has a 401(k) plan in which all Palm Coast employees with more than six months of service are eligible to participate and contribute to through salary deductions. Employees may defer 1% to 20% of pretax wages to the allowed federal maximum each calendar year. The Company currently matches 50% of the employee contributions not in excess of 6% of eligible compensation.
The Company's contributions to the plans amounted to approximately $1,263,000, $981,000 and $832,000 in 2008, 2007 and 2006.
Directors' stock plan --------------------- During 2003, the Company adopted the AMREP Corporation 2002 Non-Employee Directors' Stock Plan and reserved 65,000 shares of common stock for issuance to non-employee directors. Under the plan, each non-employee director received 1,250 shares of stock on each March 15 and September 15 as partial payment for services rendered. The expense recorded based upon the fair market value of the stock at time of issuance under this plan was $339,000 and $441,000 in 2007 and 2006 (7,500 shares issued in 2007 and 15,000 shares issued in each of 2006). This plan was terminated in December 2006 and, as a result, no shares were issued or expense recorded in fiscal 2008.
Equity compensation plan ------------------------ The Company adopted the 2006 Equity Compensation Plan (the "Plan") in September 2006 that provides for the issuance of up to 400,000 shares of common stock of the Company pursuant to options, grants or other awards made under the Plan. As of April 30, 2008, the Company issued no options, grants or other awards under the Plan.
Stock option plan ----------------- The Company had in effect a stock option plan that provided for the automatic issuance of an option to purchase 500 shares of common stock to each non-employee director annually at the fair market value at the date of grant. The options are exercisable in one year and expire five years after the date of grant. The Board of Directors terminated the plan following the annual grants that were made in September 2005. Options exercised resulted in the issuance of new shares of common stock.
A summary of activity in the Company's stock option plan is as follows:
Year Ended April 30, ----------------------------------------------------------------------- 2008 2007 2006 -------------------- ----------------------- ---------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Options outstanding at beginning of year 4,500 $ 20.28 7,000 $ 18.56 7,000 $ 14.92
Granted - - - - 3,000 24.88 Exercised - - (2,500) 15.47 (2,500) 16.13 Expired or canceled - - - - (500) 17.56 ----------------- ----------------- --------------- Options outstanding at end of year 4,500 $ 20.28 4,500 $ 20.28 7,000 $ 18.56 ================= ================= ===============
Available for grant at end of year - - - ================= ================= ===============
Options exercisable at end of year 4,500 4,500 4,000 ================= ================= ===============
Range of exercise prices for options exercisable at end of year $15.19 to $24.88 $15.19 to $24.88 $3.95 to $24.88 ================= ================= ===============
Options outstanding at April 30, 2008 were exercisable over a four-year period beginning one year from date of grant. The weighted average remaining contractual lives of options outstanding at April 30, 2008, 2007 and 2006 were 1.6, 3.2 and 3.9 years. The weighted average fair value per option share of options granted in 2006 was $8.07. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2006: dividend yield 2.2%; expected volatility of 42%; risk-free interest rate of 5.0%; and expected life of 4 years.
The intrinsic value (the difference between the price of the underlying shares and the exercise price) of options exercisable at April 30, 2008 was $143,400. The total intrinsic value of options exercised during the years ended April 30, 2007 and 2006 was $122,000 and $25,000. There were no options exercised in 2008.
Stock options granted were issued with an exercise price at the fair market value of the Company's stock at the date of grant. Accordingly, no compensation expense was recognized with respect to the stock option plan in 2006. In addition, under SFAS No. 123(R) the compensation expense was not material to the results of operations for 2008.
(12) INCOME TAXES: -------------
The provision for income taxes consists of the following:
Year Ended April 30, ------------------------------------------------------- 2008 2007 2006 ---------------- --------------- --------------- (Thousands) Current: Federal $ 5,511 $ 18,228 $ 9,735 State and local (812) 1,540 823 ---------------- --------------- --------------- $ 4,699 19,768 10,558 ---------------- --------------- ---------------
Deferred: Federal $ 2,777 2,940 1,587 State and local 309 328 176 ---------------- --------------- --------------- 3,086 3,268 1,763 ---------------- --------------- --------------- Total provision for income taxes $ 7,785 $ 23,036 $ 12,321 ================ =============== ===============
The provision for income taxes has been allocated as follows:
Year Ended April 30, ------------------------------------------------------- 2008 2007 2006 ---------------- --------------- --------------- (Thousands)
Continuing operations $ 7,819 $ 23,971 $ 10,233 Discontinued operations (34) (935) 2,088 ---------------- --------------- --------------- Total provision for income taxes $ 7,785 $ 23,036 $ 12,321 ================ =============== ===============
The components of the net deferred income tax liability are as follows:
April 30, ------------------------------------- 2008 2007 --------------- ---------------- (Thousands) Deferred income tax assets: State tax loss carryforwards $ 3,679 $ 3,359 Accrued pension costs 785 450 Federal NOL carryforward 1,752 2,895 Vacation accrual 1,236 1,236 Other (285) 1,097 --------------- ---------------- Total deferred income tax assets $ 7,167 9,037 --------------- ----------------
Deferred income tax liabilities: Real estate basis differences $ (1,527) (2,181) Reserve for periodical returns (2,210) (1,888) Depreciable assets (2,532) (4,680) Deferred gains on investment assets (7,019) (5,150) Capitalized costs for financial reporting purposes, expensed for tax (3,572) (3,624) --------------- ---------------- Total deferred income tax liabilities (16,860) (17,523) --------------- ----------------
Valuation allowance for realization of state tax loss carry forwards (2,665) (2,663) --------------- ---------------- Net deferred income tax liability $ (12,358) $ (11,149) =============== ================
The following table reconciles taxes computed at the U.S. federal statutory income tax rate from continuing operations to the Company's actual tax provision:
Year Ended April 30, -------------------------------------------------------- 2008 2007 2006 ----------------- --------------- --------------- (Thousands) Computed tax provision at statutory rate $ 7,554 $ 24,734 $ 11,455 Increase (reduction) in tax resulting from: State income taxes, net of federal income tax effect (325) 1,296 552 Real estate charitable land contribution (481) (1,419) (1,543) Other 1,071 (640) (231) ----------------- --------------- ---------------- Actual tax provision $ 7,819 $ 23,971 $ 10,233 ================= =============== ================
Other in 2008 principally includes additions related to unrecognized tax benefits and related interest from tax positions of prior years.
The Company has a federal net operating loss carryforward of approximately $5,000,000 resulting from the purchase price allocation of Palm Coast, which will begin to expire in the fiscal year ending April 30, 2024. In addition, $23,483,000 of goodwill associated with the Palm Coast acquisition (see Note 10) is amortizable for tax purposes.
A valuation allowance is provided when it is considered more likely than not that certain deferred tax assets will not be realized. The valuation allowance relates entirely to net operating loss carryforwards in states where the Company has no current operations. These net operating loss carryforwards will expire beginning in the fiscal year ending April 30, 2010 through April 30, 2029. The deferred tax asset of $3,679,000 related to the state net operating loss carryforwards expires as follows: 2010 - $42,000; 2011 - $17,000; 2012 - $32,000; 2013 - $304,000; 2014 - $208,000; and thereafter - $3,076,000.
The Company adopted the provisions of FIN 48 effective May 1, 2007 (see Note 2). The implementation of FIN 48 did not have an impact on the Company's financial statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest, is as follows (in thousands):
Gross unrecognized tax benefits at May 1, 2007 $ 4,289 Gross increases: Additions based on tax positions related to current year 54 Additions based on tax positions of prior years 880 ----------- Gross unrecognized tax benefits at April 30, 2008 $ 5,223 ===========
(13) SHAREHOLDERS' EQUITY: --------------------- The Company recorded other comprehensive income (loss) of ($660,000) in 2008, $1,210,000 in 2007 and $1,904,000 in 2006 to account for the net effect of changes to the unfunded pension liability (see Note 11).
The Company from time to time reacquired its shares to be held as treasury stock as part of a stock repurchase program. During 2008, the Board of Directors authorized the repurchase of up to 1,000,000 shares. As a result, the Company reacquired 658,400 shares, all in open market transactions, for a total purchase price, including commissions, of $21,363,000. There were no treasury stock repurchases in 2007 or 2006.
(14) DISCONTINUED OPERATIONS: ------------------------ Income from discontinued operations in 2006 of $3,556,000, net of tax, reflects the gain from the disposition of the primary assets of the Company's El Dorado, New Mexico water utility subsidiary, which were taken through condemnation proceedings during 2006. In June 2007, the Company settled all existing litigation involving this subsidiary and accrued the estimated costs of settlement of $1,591,000, net of tax, in the fourth quarter of 2007. In 2008, additional costs of $57,000, net of tax, were incurred.
(15) RESTRUCTURING AND FIRE RECOVERY COSTS: --------------------------------------
The Company has announced a project to integrate certain aspects of the Kable and Palm Coast fulfillment services operations in order to improve operating efficiencies and customer service and also to reduce costs. This project has resulted in one significant workforce reduction that occurred in the first quarter of 2008 together with an announced plan in the second quarter to redistribute the fulfillment services work performed at the Marion, Ohio facility. The Company incurred costs directly related to the integration project of $1,159,000 for the year ended April 30, 2008, principally related to severance and other consulting costs related to the integration.
On December 5, 2007 a warehouse of approximately 38,000 square feet leased by the Company in Oregon, Illinois was totally destroyed by an accidental fire. The warehouse was used principally to store back issues of magazines published by certain customers for whom the Company fills back-issue orders as part of its services.
The Company has submitted preliminary claims to its insurance provider for its property and for a business interruption claim principally consisting of its lost revenues offset by reduced expenses through April 30, 2008. While the Company has been advanced $500,000 for replacement of lost property, no insurance proceeds have been received on the business interruption claim as of April 30, 2008. In addition, the Company was required to provide insurance for certain of those customers whose property was destroyed in the warehouse fire. The Company does not believe the net effect of the outcome of claims related to materials of certain publishers for whom it was required to provide insurance, together with any proceeds received from its property and business interruption claims, will have any material effect on its financial position, results of operations and cash flows. Due to the fire, gross assets were written down by $470,000, along with associated accumulated depreciation on those assets of about $440,000, resulting in a charge to operations of approximately $30,000. In addition, the Company has recorded other charges to operations of $324,000 related to fire recovery costs for the year ended April 30, 2008, principally related to legal and other costs that are not covered by insurance.
(16) COMMITMENTS AND CONTINGENCIES: ------------------------------
Land sale contracts -------------------
From time-to-time, the Company has obligations to complete development work under certain sales that are accounted for under the percentage-of-completion method (see Note 1). At April 30, 2008, there were no revenues deferred pending completion of development work.
Non-cancelable leases ---------------------
The Company is obligated under long-term, non-cancelable leases for equipment and various real estate properties. Certain real estate leases provide that the Company will pay for taxes, maintenance and insurance costs and include renewal options. Rental expense for 2008, 2007 and 2006 was approximately $9,087,000, $8,295,000 and $8,596,000.
The total minimum rental commitments for years subsequent to April 30, 2008 of $27,743,000 are due as follows: 2009 - $7,925,000; 2010 - $5,378,000; 2011 - $3,548,000; 2012 - $3,388,000; 2013 - $3,046,000; and thereafter - $4,458,000.
Lot exchanges -------------
In connection with certain individual home site sales made prior to 1977 at Rio Rancho, New Mexico, if water, electric and telephone utilities have not reached the lot site when a purchaser is ready to build a home, the Company is obligated to exchange a lot in an area then serviced by such utilities for the lot of the purchaser, without cost to the purchaser. The Company has not incurred significant costs related to the exchange of lots.
(17) LITIGATION: -----------
A subsidiary of Kable was one of a number of defendants in a lawsuit in which the plaintiff, a former wholesaler no longer in business, alleged that the Company and other national magazine distributors and wholesalers engaged in violations of the Robinson-Patman Act (which generally prohibits discriminatory pricing) that caused it to go out of business. The plaintiff sought damages from the Kable defendant of approximately $15.2 million; any damages awarded would be trebled. In September 2005, the Court granted the motion for summary judgment of the defendants, including Kable, and judgment in favor of the defendants, including Kable, was entered. The plaintiff filed an appeal of the judgment and on March 25, 2008 the appellate court denied the appeal. All time periods for the plaintiff to seek further review of the summary judgment in favor of the defendants have expired and plaintiff's case is over.
In June 2008 a lawsuit was brought against the Company's Kable News Company, Inc. subsidiary by the owner of a warehouse building leased by the subsidiary that was totally destroyed in a fire in December 2007. An employment agency that provided the subsidiary with a temporary employee who is alleged to have had a role in starting the fire is also named as a defendant. Plaintiff charges the subsidiary with negligence and willful and wanton misconduct and seeks damages in excess of $50,000. The Company's liability insurance provides coverage for the negligence claim up to the policy limit, which may or may not be more than the full amount of plaintiff's claimed damages, which is unknown at this time. Additionally, the insurance carrier has indicated it intends to deny coverage of the willful and wanton misconduct claim. The Company believes it has good defenses to the charges and assertable claims against the other parties for their conduct in the matter, and intends vigorously to defend the lawsuit. However, the proceeding is in its very earliest stage and the Company is not in a position to offer a prediction as to its outcome.
The Company and its subsidiaries are involved in various other claims and legal actions incident to their operations which, in the opinion of management based in part upon advice of counsel, will not materially affect the consolidated financial position or results of operations of the Company and its subsidiaries.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS: ------------------------------------
The estimated fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The carrying amounts of cash and cash equivalents, media services trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments. Debt that bears variable interest rates indexed to prime or LIBOR also approximates fair value as it reprices when market interest rates change. The estimated fair value of the Company's long-term, fixed-rate mortgage receivables was $11,878,000 and $24,420,000 versus carrying amounts of $12,660,000 and $24,711,000 at April 30, 2008 and April 30, 2007. The estimated fair value of the Company's long-term, fixed-rate notes payable was $2,358,000 and $3,834,000 versus carrying amounts of $2,311,000 and $3,835,000 at April 30, 2008 and April 30, 2007.
(19) INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT ------------------------------------------------------- INDUSTRY SEGMENTS: ------------------ The Company has identified three reportable segments in which it currently has business operations. Real Estate operations primarily include land sales activities, which involve the obtaining of approvals and development of large tracts of land for sales to homebuilders, commercial users and others, as well as investments in commercial and investment properties. The Company's Media Services subsidiary has two identified segments, Newsstand Distribution Services and Fulfillment Services. Fulfillment Services operations involve the performance of subscription and product fulfillment and other related activities on behalf of various publishers and other clients, and Newsstand Distribution Services operations involve the national and, to a small degree, international distribution and sale of periodicals to wholesalers. Certain common expenses as well as identifiable assets are allocated among industry segments based upon management's estimate of each segment's absorption. Corporate revenues and expenses not identifiable with a specific segment are shown as a separate segment in this presentation.
The accounting policies of the segments are the same as those described in Note 1. Summarized data relative to the industry segments in which the Company has continuing operations is as follows (amounts in thousands):
Newsstand Real Estate Fulfillment Distribution Operations Services Services Corporate Consolidated ------------- ------------ ------------ ------------ ------------- Year ended April 30, 2008 (a): Revenues $ 33,073 $ 125,780 $ 12,916 $ 292 $ 172,061 Income from continuing operations 12,187 (1,413) 1,293 1,695 13,762 Provision (benefit) for income taxes from continuing operations 6,932 (755) 812 830 7,819 Interest expense (income), net (b) - 5,041 (1,571) (2,458) 1,012 Depreciation and amortization 135 9,511 872 6 10,524 ------------- ------------ ------------ ------------ ------------- EBITDA (c) $ 19,254 $ 12,384 $ 1,406 $ 73 $ 33,117 ------------- ------------ ------------ ------------ -------------
Goodwill $ - $ 50,246 $ 3,893 $ - $ 54,139 Total assets $ 94,610 $ 135,335 $ 51,297 $ 3,709 $ 284,951 Capital expenditures $ 1,312 $ 4,888 $ 174 $ 3 $ 6,377
---------------------------------------------------------------------------------------------------------------------------- Year ended April 30, 2007 (a): Revenues $ 102,848 $ 86,121 $ 14,384 $ 1,486 $ 204,839 Income from continuing operations 43,190 154 2,009 1,344 46,697 Provision (benefit) for income taxes from continuing operations 22,688 138 1,226 (81) 23,971 Interest expense (income), net (b) - 2,202 (716) (784) 702 Depreciation and amortization 201 6,160 953 5 7,319 ------------- ------------ ------------ ------------ ------------- EBITDA (c) $ 66,079 $ 8,654 $ 3,472 $ 484 $ 78,689 ------------- ------------ ------------ ------------ -------------
Goodwill $ - $ 50,441 $ 3,893 $ - $ 54,334 Total assets $ 88,756 $ 142,563 $ 39,214 $ 22,126 $ 292,659 Capital expenditures $ 2,871 $ 1,779 $ - $ 17 $ 4,667
---------------------------------------------------------------------------------------------------------------------------- Year ended April 30, 2006 (a): Revenues $ 59,169 $ 75,332 $ 13,131 $ 664 $ 148,296 Income from continuing operations 18,856 2,289 1,113 236 22,494 Provision (benefit) for income taxes from continuing operations 8,412 1,388 692 (259) 10,233 Interest expense (income), net (b) - 452 (108) - 344 Depreciation and amortization 235 4,552 749 32 5,568 ------------- ------------ ------------ ------------ ------------- EBITDA (c) $ 27,503 $ 8,681 $ 2,446 $ 9 $ 38,639 ------------- ------------ ------------ ------------ -------------
Goodwill $ - $ 1,298 $ 3,893 $ - $ 5,191 Total assets $ 80,456 $ 44,359 $ 32,631 $ 31,595 $ 189,041 Capital expenditures $ 252 $ 3,500 $ 140 $ 4 $ 3,896
(a) Segment information reported above does not include net income (loss) from discontinued operations of ($57,000) in 2008, ($1,591,000) in 2007 and $3,556,000 in 2006.
(b) Interest expense, net includes inter-segment interest income that is eliminated in consolidation.
(c) The Company uses EBITDA (which AMREP Corporation defines as income from continuing operations before interest expense, net, income taxes and depreciation and amortization) in addition to income as key measures of profit or loss for segment performance and evaluation purposes.
(20) SELECTED QUARTERLY FINANCIAL DATA (Unaudited): ----------------------------------------------
(In thousands of dollars, except per share amounts) Quarter Ended ---------------------------------------------------------------
Year ended April 30, 2008: July 31, October 31, January 31, April 30, 2007 2007 2008 2008 -------------- --------------- -------------- -------------- Revenues $ 51,359 $ 42,090 $ 43,435 $ 35,177
Gross profit 15,057 9,829 10,529 4,893
Income from continuing operations 6,320 3,467 3,446 529
Loss from operations of discontinued business, net of taxes (57) - - - -------------- --------------- -------------- -------------- Net income $ 6,263 $ 3,467 $ 3,446 $ 529 ============== =============== ============== ==============
Earnings per share - Basic and Diluted: (a) Continuing operations $ .95 $ .55 $ .57 $ .09 Discontinued operations (.01) - - - -------------- --------------- -------------- -------------- Total $ .94 $ .55 $ .57 $ .09 ============== =============== ============== ==============
Year ended April 30, 2007: July 31, October 31, January 31, April 30, 2006 2006 2007 2007 -------------- --------------- -------------- -------------- Revenues $ 58,269 $ 56,055 $ 42,189 $ 48,326
Gross Profit 28,313 29,150 14,948 14,636
Income from continuing operations 15,804 16,062 6,930 7,901 -------------- --------------- -------------- --------------
Income(loss) from operations of discontinued business, net of taxes - - - (1,591) -------------- --------------- -------------- --------------
Net income $ 15,804 $ 16,062 $ 6,930 $ 6,310 ============== =============== ============== ==============
Earnings per share - Basic and Diluted: (a) Continuing operations $ 2.38 $ 2.42 $ 1.04 $ 1.19 Discontinued operations - - - (0.24) -------------- --------------- -------------- -------------- Total $ 2.38 $ 2.42 $ 1.04 $ 0.95 ============== =============== ============== ==============
(a) The sum of the quarters does not equal the full year earnings per share due to the change in outstanding shares throughout the year in 2008 and due to rounding in 2007.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and ------- --------------------------------------------------------------- Financial Disclosure -------------------- None
Item 9A.
Item 9A. Controls and Procedures -------- -----------------------
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief financial officer and the other executive officers whose certifications accompany this annual report, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. As a result of such evaluation, the chief financial officer and such other executive officers have concluded that such disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to management, including the Company's principal executive and principal financial officers or persons performing such functions, as appropriate, to allow timely decisions regarding disclosure. The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Report of Management on Internal Control Over Financial Reporting, included in Part II, "Item 8. Financial Statements and Supplementary Data" of this report. The attestation report called for by Item 308(b) of Regulation S-K is incorporated herein by reference to Report of Independent Public Accounting Firm on Internal Control Over Financial Reporting, included in Part II, "Item 8. Financial Statements and Supplementary Data" of this report.
No change in the Company's system of internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
Item 9B.
Item 9B. Other Information -------- ----------------- None
PART III --------
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance -------- ------------------------------------------------------
The information set forth under the headings "Election of Directors", "The Board of Directors and its Committees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for its 2008 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission (the "2008 Proxy Statement") is incorporated herein by reference. In addition, information concerning the Company's executive officers is included in Part I above under the caption "Executive Officers of the Registrant".
Item 11.
Item 11. Executive Compensation -------- ---------------------- The information set forth under the headings "Compensation of Executive Officers" and "Compensation of Directors" and the subheadings "Report of the Compensation and Human Resources Committee" and "Compensation Committee Interlocks and Insider Participation" in the 2008 Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and -------- ---------------------------------------------------------------------- Related Stockholder Matters ---------------------------
The information set forth under the headings "Common Stock Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the 2008 Proxy Statement is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director --------- --------------------------------------------------------------------- Independence ------------ The information set forth under the headings "The Board of Directors and its Committees" and "Certain Transactions" and the subheading "Compensation Committee Interlocks and Insider Participation" in the 2008 Proxy Statement is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services -------- -------------------------------------- The information set forth under the subheadings "Audit Fees" and "Pre-Approval Policies and Procedures" in the 2008 Proxy Statement is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules -------- ------------------------------------------
(a) 1. Financial Statements. The following consolidated financial statements and --------------------- supplementary financial information are filed as part of this report:
AMREP Corporation and Subsidiaries:
- Management's Report on Internal Control Over Financial Reporting
- Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting dated July 14, 2008 - McGladrey & Pullen, LLP
- Report of Independent Registered Public Accounting Firm dated July 14, 2008 - McGladrey & Pullen, LLP
- Consolidated Balance Sheets - April 30, 2008 and 2007
- Consolidated Statements of Income for the Three Years Ended April 30, 2008
- Consolidated Statements of Shareholders' Equity for the Three Years Ended April 30, 2008
- Consolidated Statements of Cash Flows for the Three Years Ended April 30,
- Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following financial statement schedule ------------------------------ is filed as part of this report:
AMREP Corporation and Subsidiaries:
- Schedule II - Valuation and Qualifying Accounts
Financial statement schedules not included in this annual report on Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits. ---------
The exhibits filed in this report are listed in the Exhibit Index.
The Registrant agrees, upon request of the Securities and Exchange Commission, to file as an exhibit each instrument defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries which has not been filed for the reason that the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis.
(b) Exhibits. See (a)3 above. ---------
(c) Financial Statement Schedules. See (a)2 above. ------------------------------
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMREP CORPORATION (Registrant)
Dated: July 14, 2008 By /s/ Peter M. Pizza ------------------------ Peter M. Pizza Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
/s/ Peter M. Pizza /s/ Albert V. Russo ------------------------- -------------------------- Peter M. Pizza Albert V. Russo Vice President and Chief Financial Director Officer Principal Financial Dated: July 14, 2008 Officer and Principal Accounting Officer* Dated: July 14, 2008
/s/ Edward B. Cloues II /s/ Samuel N. Seidman ------------------------ -------------------------- Edward B. Cloues II Samuel N. Seidman Director Director Dated: July 14, 2008 Dated: July 14, 2008
/s/ Lonnie A. Coombs /s/ James Wall ------------------------ -------------------------- Lonnie A. Coombs James Wall Director Director* Dated: July 14, 2008 Dated: July 14, 2008
/s/ Nicholas G. Karabots /s/ Jonathan B, Weller ------------------------ -------------------------- Nicholas G. Karabots Jonathan B, Weller Director Director Dated: July 14, 2008 Dated: July 14, 2008
/s/ Michael P. Duloc -------------------------- Michael P. Duloc President, Kable Media Services, Inc.* Dated: July 14, 2008
----------------- *The Registrant is a holding company that does substantially all of its business through two indirect wholly-owned subsidiaries (and their subsidiaries). Those indirect wholly-owned subsidiaries are AMREP Southwest Inc. ("ASW") and Kable Media Services, Inc. ("Kable"). James Wall is the principal executive officer of ASW, and Michael P. Duloc is the principal executive officer of Kable. The Registrant has no chief executive officer. Its executive officers include James Wall, Senior Vice President and Peter M. Pizza, Vice President and Chief Financial Officer, and Michael P. Duloc, who may be deemed an executive officer by reason of his position with Kable.
AMREP CORPORATION AND SUBSIDIARIES ---------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------- (Thousands)
Additions -------------------------------- Charges Charged Balance at (Credits) to (Credited) to Beginning Costs and Other Balance at End Description of Period Expenses Accounts Deductions of Period ----------- --------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED APRIL 30, 2008: Allowance for doubtful accounts (included in receivables - real estate operations on the consolidated balance sheet) $ 48 $ 64 $ - $ - $ 112 ---------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and doubtful accounts (included in receivables - magazine circulation operations on the consolidated balance sheet) $ 53,606 $ 3,521 $ - $ 542 $ 56,585 --------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED APRIL 30, 2007: Allowance for doubtful accounts (included in receivables - real estate operations on the consolidated balance sheet) $ 96 $ - $ - $ 48 $ 48 --------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and doubtful accounts (included in receivables - magazine circulation operations on the consolidated balance sheet) $ 55,606 $ (1,447) $ - $ 553 $ 53,606 --------------- --------------- ---------------- -------------- --------------
FOR THE YEAR ENDED APRIL 30, 2006: Allowance for doubtful accounts (included in receivables - real estate operations on the consolidated balance sheet) $ 96 $ - $ - $ - $ 96 --------------- --------------- ---------------- -------------- --------------
Allowance for estimated returns and doubtful accounts (included in receivables - magazine circulation operations on the consolidated balance sheet) $ 59,165 $ (3,483) $ - $ 76 $ 55,606 --------------- --------------- ---------------- -------------- --------------
Note: Charges (credits) recorded in magazine circulation operations include a reserve for the estimate of magazine returns from wholesalers, which are substantially offset by offsetting credits related to the return of these magazines to publishers.
EXHIBIT INDEX -------------
NUMBER ITEM ------ ----
2.1 Agreement and Plan of Merger by and among AMREP Corporation, Kable Media Services, Inc., Glen Garry Acquisition, Inc., Palm Coast Data Holdco, Inc., Palm Coast Data LLC and the Sellers set forth on the signature page thereto, dated as of November 7, 2006 - Incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K filed January 19, 2007.
3.1 Certificate of Incorporation, as amended - Incorporated by reference to Exhibit 3.1 to Registrant's Registration Statement on Form S-3 filed March 21, 2007.
3.2 By-Laws, as amended- Incorporated by reference to Exhibit 3 (b) to Registrant's Quarterly Report on Form 10-Q filed December 14, 2006.
4.1 Second Amended and Restated Loan and Security Agreement dated as of January 16, 2007 among Kable Media Services, Inc., Kable News Company, Inc., Kable Distribution Services, Inc., Kable News Export, Ltd., Kable News International, Inc., Kable Fulfillment Services, Inc., Kable Fulfillment Services of Ohio, Inc., Palm Coast Data Holdco, Inc. and Palm Coast Data LLC and LaSalle Bank National Association - Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed January 19, 2007.
4.2 First Modification to Loan Documents dated as of January 18, 2008, modifying the Second Amended and Restated Loan and Security Agreement dated as of January 16, 2007 among Kable News Company, Inc., Kable Distribution Services, Inc., Kable News Export, Ltd., Kable News International, Inc., Kable Fulfillment Services, Inc., Kable Fulfillment Services of Ohio, Inc., Palm Coast Data Holdco, Inc. and Palm Coast Data LLC, and LaSalle Bank National Association and related loan documents - Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed February 5, 2008.
4.3 Loan Agreement dated January 8, 2007 between AMREP Southwest Inc. and Compass Bank - Incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed January 12, 2007.
4.4 $25,000,000 Promissory Note (Revolving Line of Credit) dated September 18, 2006 of AMREP Southwest Inc. payable to the order of Compass Bank - Incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed September 21, 2006.
4.5 $14,180,455 Promissory Note (Term Note) dated January 8, 2007 of AMREP Southwest Inc. payable to the order of Compass Bank - Incorporated by reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K filed January 12, 2007.
10.1 Non-Employee Directors Option Plan, as amended - Incorporated by reference to Exhibit 10 (i) to Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1997.*
10.2 Amended and Restated Distribution Agreement dated as of April 30, 2006 between Kappa Publishing Group, Inc. and Kable Distribution Services, Inc. - Incorporated by reference to Exhibit 10 (d) to Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 2006.**
10.3 2006 Equity Compensation Plan - Incorporated by reference to Appendix B to the Registrant's Proxy Statement for its 2006 Annual Meeting of Shareholders forming a part of Registrant's Definitive Schedule 14A filed August 14, 2006.*
21 Subsidiaries of Registrant - Filed herewith.
23 Consent of McGladrey & Pullen, LLP - Filed herewith.
31.1 Certification required by Rule 13a - 14 (a) under the Securities Exchange Act of 1934 - Filed herewith.
31.2 Certification required by Rule 13a - 14 (a) under the Securities Exchange Act of 1934 - Filed herewith.
31.3 Certification required by Rule 13a - 14 (a) under the Securities Exchange Act of 1934 - Filed herewith.
32.1 Certification required by Rule 13a - 14 (b) under the Securities Exchange Act of 1934 - Filed herewith.
----------------------- * Management contract or compensatory plan or arrangement in which directors or officers participate.
** Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934.