UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ x ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended April 30, 2009
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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Commission File Number 1-4702
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AMREP CORPORATION
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(Exact name of registrant as specified in its Charter)
Oklahoma 59-0936128
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 Alexander Park, Suite 204
Princeton, New Jersey 08540
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 716-8200
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes No X
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Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Act").
Yes No X
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the Registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (section
229.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act.
Large accelerated filer Accelerated filer X
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Non-accelerated filer Smaller reporting company
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes No X
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As of October 31, 2008, which was the last business day of the Registrant's most
recently completed second fiscal quarter, the aggregate market value of the
Common Stock held by non-affiliates of the Registrant was $52,088,734. Such
aggregate market value was computed by reference to the closing sale price of
the Registrant's Common Stock as quoted on the New York Stock Exchange on such
date. For purposes of making this calculation only, the Registrant has defined
affiliates as including all directors and executive officers and certain persons
related to them. In making such calculation, the Registrant is not making a
determination of the affiliate or non-affiliate status of any holders of shares
of Common Stock.
As of July 10, 2009, there were 5,996,212 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this annual report on Form 10-K, portions of the
Registrant's definitive proxy statement to be filed within 120 days after the
end of the fiscal year covered by this annual report on Form 10-K are
incorporated herein by reference.
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PART I
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Item 1. Business
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GENERAL
The Company* was organized in 1961 and, through its subsidiaries, is primarily
engaged in four business segments: the Real Estate business operated by AMREP
Southwest Inc. and its subsidiaries (collectively, "AMREP Southwest"), and the
Subscription Fulfillment Services, Newsstand Distribution Services and Product
Fulfillment Services and other businesses operated by Kable Media Services, Inc.
and its subsidiaries (collectively, "Kable" or "Media Services"). Data
concerning industry segments is set forth in Note 20 of the notes to the
consolidated financial statements. The Company's foreign sales and activities
are not significant.
All references in this Item 1 to 2009, 2008 and 2007 mean the fiscal years ended
April 30, 2009, 2008 and 2007, unless otherwise qualified.
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, 2009, AMREP Southwest
had ten employees.
Properties - Rio Rancho
Rio Rancho consists of 91,049 contiguous acres in Sandoval County near
Albuquerque, of which approximately 73,810 acres have been platted into
approximately 114,680 residential and commercial lots, 16,470 acres are
dedicated to community facilities, roads and drainage and the remainder is
unplatted land. At April 30, 2009, approximately 90,450 of these residential and
commercial lots had been sold by AMREP Southwest net of lot repurchases and
those returned to AMREP Southwest by deeds in lieu of foreclosure. AMREP
Southwest currently owns approximately 17,340 acres in Rio Rancho, of which
approximately 4,460 acres are in contiguous blocks, which are being developed or
are suitable for development, and approximately 2,010 acres are in areas with a
high concentration of ownership, where AMREP Southwest owns more than 50% of the
lots in the area. These high concentration 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 AMREP Southwest 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 AMREP Southwest may offer for
sale individually or in small groups.
Development activities conducted or arranged by AMREP Southwest include the
obtaining of necessary governmental approvals ("entitlements"), installation of
utilities and necessary storm drains, and building or improving of roads. At Rio
Rancho, AMREP Southwest 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 AMREP Southwest employees
and outside firms, but development work is performed by outside contractors.
AMREP Southwest personnel market land at Rio Rancho, both directly and through
brokers. AMREP Southwest 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 80,000. It was named as the 83rd best place to live by
CNNMoney.com in 2008 for those cities in the United States with greater than
50,000 residents. The city's population grew by approximately 54% from the
calendar year 2000 through 2008. In March 2009 its unemployment rate was 5.9%.
The city has significant construction projects recently completed, ongoing or
announced, including: (i) a new central business district with a 6,500 seat
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*As used herein, "Company" includes the Registrant and its subsidiaries unless
the context requires or indicates otherwise.
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events center and a new city hall, (ii) a new second high school, (iii) the
planned opening of the University of New Mexico West Campus, (iv) construction
of a new Hewlett-Packard technical and customer support center and (v)
construction of two new hospitals. Major non-government employers include Intel
Corporation, U.S. Cotton and customer care call centers of Bank of America,
JCPenney, Victoria's Secret and Sprint PCS.
In Rio Rancho, AMREP Southwest sells both developed and undeveloped lots to
national, regional and local homebuilders, commercial and industrial property
developers and others. In the last three fiscal years, land sales in Rio Rancho
have been as follows:
Acres Revenues
Sold Revenues Per Acre
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2009:
Developed
Residential 13 $ 3,109,000 $ 239,200
Commercial 1 126,000 126,000
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Total Developed 14 3,235,000 231,100
Undeveloped 134 5,679,000 42,400
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Total 148 $ 8,914,000 $ 60,200
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2008:
Developed
Residential 30 $ 9,542,000 $ 318,100
Commercial 39 8,651,000 221,800
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Total Developed 69 18,193,000 263,700
Undeveloped 337 9,709,000 28,800
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Total 406 $ 27,902,000 $ 68,700
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2007:
Developed
Residential 138 $ 39,407,000 $ 285,600
Commercial 56 15,728,000 280,900
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Total Developed 194 55,135,000 284,200
Undeveloped 857 40,690,000 47,500
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Total 1,051 $ 95,825,000 $ 91,200
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Since early 1977, AMREP Southwest 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. Under certain of the pre-1977 lot sale contracts, if utilities
have not reached a lot when the purchaser is ready to build a home, AMREP
Southwest 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. AMREP Southwest has not incurred significant costs related to
such exchanges.
Other Properties
AMREP Southwest also owns two tracts of land in Colorado, consisting of one
residential property of approximately 160 acres planned for approximately 400
homes that AMREP Southwest 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.
SUBSCRIPTION FULFILLMENT SERVICES, NEWSSTAND DISTRIBUTION SERVICES AND PRODUCT
FULFILLMENT SERVICES AND OTHER OPERATIONS
The Company (i) through its Kable Subscription Fulfillment Services and Palm
Coast Data ("Palm Coast") subsidiaries performs subscription fulfillment and
related services for publishers and other customers, (ii) through its Kable
Newsstand Distribution Services subsidiary distributes periodicals nationally
and in Canada and, to a small degree, in other foreign countries, and (iii)
through its Kable Product Fulfillment Services, Specialty Packaging Services and
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Staffing Resources subsidiaries, distributes premium products, provides
packaging services and provides temporary staffing services. As of July 1, 2009,
Kable employed approximately 1,860 persons, of whom approximately 1,670 were
involved in subscription fulfillment activities, 100 in newsstand distribution
activities and 90 in product fulfillment services and staffing services
combined. The employment numbers do not include the temporary employees of the
staffing services business.
Subscription Fulfillment Services
Kable's Subscription Fulfillment Services business performs a number of
fulfillment and fulfillment-related activities, principally magazine
subscription fulfillment services and list services, and it accounted for 85% of
Kable's revenues in 2009.
In its magazine subscription fulfillment services operation, Kable processes new
orders, receives and accounts for payments, prepares and sends to each
publisher's printer the 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 subscription 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
for membership organizations, in addition to more standard magazine fulfillment
services that are also used by membership clients.
Kable performs subscription fulfillment services for approximately 750 different
magazine titles for approximately 230 clients and maintains databases of over 68
million active subscribers for its client publishers. In a typical month, Kable
produces approximately 77 million mailing labels for its client publishers and
also processes over 26 million pieces of outgoing mail for these clients.
There are a number of companies that perform subscription 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 subscription
fulfillment contracts with publishers. Competition for non-publisher clients is
also intense. Kable has a sales staff whose primary task is to solicit
subscription fulfillment business.
Newsstand Distribution Services
In its Newsstand Distribution Services business, Kable distributes magazines for
approximately 200 publishers. Among the titles are many special interest
magazines, including various hobbyist, celebrity, puzzle, automotive, comics,
romance and sports magazines. In a typical month, Kable distributes
approximately 52 million copies of various titles to wholesalers. Kable
coordinates the movement of the publications from its publisher clients to
approximately 90 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
Services business accounted for 9% of Kable's revenues in 2009.
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
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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 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.
During 2009, business with four of these wholesalers accounted for approximately
76% of the 2009 gross billings of the Newsstand Distribution Services business,
which is common for the industry.
During the fourth quarter of 2009, Anderson News, L.L.C. ("Anderson"), one of
the four major wholesalers referred to above and which accounted for
approximately 30% of the gross billings of the newsstand distribution industry,
ceased operations. This business closure caused a temporary disruption in the
newsstand distribution industry, and the revenues of Kable's Newsstand
Distribution Services business were adversely affected for a period of time.
Subsequently, magazines that previously had been distributed by Anderson were
allocated to other major wholesalers, and as a result, the three remaining major
wholesalers now distribute a substantial percentage of the industry product. Of
Kable's Newsstand Distribution Services aggregate accounts receivable at April
30, 2009, approximately 45% were due from these three wholesalers.
Product Fulfillment Services and Other
For some time, as an adjunct to its Subscription Fulfillment Services business,
Kable has offered product fulfillment services to its publisher clients. These
services are generally fee-based for filling orders, either paid or non-paid.
Many publishers offer premiums (a free gift) to subscribers for subscribing to
their magazines and also offer to sell (paid orders) copies of current or older
issues of their magazines as well as other items that may be offered for sale in
their magazines or on their websites. Additionally, almost all publishers want
the ability to send replacement copies to subscribers who for whatever reason do
not receive their original subscription copy. More recently, Kable has added
full customer service, web-based ordering, and the processing of external orders
(via an electronic file in most cases) to its list of services, many of which
are subcontracted from other divisions within the Company. Once developed, these
services are portable to non-publishing clients as well.
In November 2008, Kable purchased certain assets of a company engaged in the
specialty packaging business and now, as part of its Product Fulfillment
Services business, Kable provides customized packaging solutions, which may
include receiving, warehousing, packaging and shipping services to a variety of
businesses that require various degrees of packaging and order fulfillment from
bulk inventory of their products. These services are typically fee-based.
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As of May 1, 2009, the Product Fulfillment Services business, including the
specialty packaging business, is operating out of a 191,000 square foot facility
owned by the Company in Fairfield, Ohio.
In November 2008, Kable also purchased certain assets of a temporary staffing
company in Fairfield, Ohio and established a staffing company ("Kable
Staffing"). Kable Staffing operates as a separate business which provides
temporary employees to local companies, including Kable Product Fulfillment
Services. Many of its clients experience fluctuations in their businesses and
therefore choose to use temporary employees from an agency rather than trying to
manage the labor themselves. In this business, Kable Staffing hires and pays the
employees it provides to its clients, and charges its clients a rate that
includes its margin for providing this service.
Both Product Fulfillment Services and Kable Staffing operate in a very
competitive environment. Together, they accounted for 6% of Kable's revenues in
2009.
Available Information
The Company maintains an Internet website at www.amrepcorp.com. The Company's
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, are available free
of charge through the Company's website as soon as reasonably practicable after
such material is electronically filed with, or furnished to, the Securities and
Exchange Commission. The information found on the Company's website is not part
of this or any other report that the Company files with, or furnishes to, the
Securities and Exchange Commission.
Item 1A. Risk Factors
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The risks described below are among those that could materially and adversely
affect the Company's business, financial condition or results of operations.
These risks could cause actual results to differ materially from historical
experience and from results predicted by any forward-looking statements related
to conditions or events that may occur in the future. These risks are not the
only risks the Company faces, and other risks include those not presently known
as well as those that are currently considered to be less significant.
General Economic Risks
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The effects of the current global economic crisis may adversely impact the
Company's business, operating results or financial condition.
The current global economic crisis has caused a general tightening of the credit
markets, lower levels of liquidity, increases in the rates of default and
bankruptcy, and extreme volatility in credit, equity and fixed income markets.
These macroeconomic developments could negatively affect the Company's business,
operating results or financial condition in a number of ways. For example,
current or potential real estate developers may be unable to obtain financing
which could cause them to delay, decrease or cancel purchases of land from the
Company, and revenues from advertising sources may deteriorate such that
magazine publishers cease publishing certain titles and thus no longer have a
requirement for the Company's services.
The current deterioration of the credit and capital markets may adversely impact
the Company's ability to obtain financing on acceptable terms, which may hinder
or prevent the Company from meeting its future operational and capital needs.
Global financial markets have been experiencing extreme volatility and
disruption, and the debt and equity capital markets have been exceedingly
distressed. These issues have made, and will likely continue to make, it
difficult to obtain financing. Also, as a result of the concerns about the
stability of financial markets, the cost of obtaining money from the credit
markets has increased, as many lenders have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt at maturity at all
or except on terms less favorable than those of the existing debt, and reduced
or, in some cases, ceased to provide funding to borrowers. Moreover, even if
lenders are willing and able to provide adequate funding, interest rates may
rise in the future and therefore increase the cost of borrowing. As a result,
the Company may be unable to obtain adequate financing for its operating needs
or for its anticipated future capital expenditures.
Risks Related to the Company's Real Estate Operations
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The Company's real estate assets are concentrated in one market, Rio Rancho, New
Mexico, meaning the Company's results of operations and future growth may be
limited or affected by economic changes in that market.
Substantially all of the Company's real estate assets are located in Rio Rancho,
which is adjacent to Albuquerque, New Mexico. As a result of this geographic
concentration, the Company could be affected by changes in economic conditions
in this region from time to time, including economic contraction due to, among
other things, the failure or downturn of key industries and employers. The
Company's results of operations, future growth or both may be adversely affected
if the demand for residential or commercial real estate declines in the Rio
Rancho area as a result of changes in economic conditions. For example, real
estate land sales have declined from $95.8 million in 2007 to $8.9 million in
2009, as builders have slowed the pace of building on developed lots previously
purchased from the Company in Rio Rancho and delayed or cancelled the purchase
of additional developed lots.
A downturn in the business of Rio Rancho's largest employer could adversely
affect the Company's real estate development business there.
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Intel Corporation ("Intel") is the largest employer in Rio Rancho and operates a
large semiconductor manufacturing facility there. Although Intel has made
substantial investments in the Rio Rancho plant in recent years, it has reduced
its employment there from 4,700 at April 30, 2008 to 3,000 April 30, 2009 as it
has adjusted to current business conditions. If Intel'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, 2009, Rio Rancho was the third largest city in New Mexico and had a
population of approximately 80,000. 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, 2009, the Company owned approximately 17,340 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 support a meaningful real estate development
business. 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 a significant 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 past years.
Of the approximately 17,340 acres in Rio Rancho that the Company owned at
April 30, 2009, approximately 4,460 acres were in contiguous blocks that are
being developed or are suitable for development, and approximately 2,010 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, which may require the
purchase of a sufficient number of adjoining lots to create tracts suitable for
development or that the Company may offer for sale individually or in small
groups. As the Company's land sales continue and the number of the Company's
contiguous and highly concentrated lots diminishes, the Company's ability to
continue to be in a position to sell lots and generate land sale revenues at
satisfactory levels 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 real estate development opportunities outside
of 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.
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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 who may have 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.
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 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
9
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 would 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
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 a 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 a
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 occur or 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:
- periods of general economic slowdown or recession;
- changes in government regulation;
10
- 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.
11
Risks Related to the Company's Media Services Operations
--------------------------------------------------------
If the Company cannot efficiently integrate the constituents of its Subscription
Fulfillment Services 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 subscription fulfillment
business.
In January 2007, the Company acquired Palm Coast, which is, like Kable, a
leading United States provider of subscription fulfillment services to the
magazine publishing industry. An important objective of the Company is to
consolidate the Company's two subscription 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. The Company has started this consolidation
process which is expected to continue over the next two years. This increase in
operating complexities throughout this process may have a negative near and
long-term effect on the Company's anticipated benefits resulting from the Palm
Coast acquisition.
The Company's publisher customers face business pressures from reduced
advertising revenues and increased costs for paper, printing and postal rates.
These factors could have a negative affect on their operating income, and this
in turn could negatively affect the Company's media services operations.
An important source of revenues for the magazine publishing industry, the
principal industry served by the Company, is derived from advertising sources.
As a result of the economic slowdown, there has been a well publicized reduction
in advertising at all levels which has caused a higher attrition rate of
magazine titles than has been previously experienced. In addition, 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 11, 2009.
Any continued softness in advertising revenues or 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.
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. A small number of wholesalers are responsible for a
significant percentage of the wholesale magazine distribution business in the
United States. Recently, there has been increased instability in the wholesaler
channel that has led to one major wholesaler abandoning the business and to
certain disruptions to magazine distribution. There is the possibility of
further consolidation among these wholesalers and insolvency or non-payment of
its obligations by one or more of these wholesalers, which 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, 2009, customers ultimately returned for credit approximately 70%
12
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 a subsequent period when the
actual return information becomes 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
has adversely affected 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 subscription
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 and other electronic devices for such information.
The resulting reduction in demand for traditional print media and the shift of
advertising dollars from traditional print media to online media has adversely
affected the publishing industry in general and has had a negative impact on
both the Company's Subscription Fulfillment Services and Newsstand Distribution
Services segments.
Competitive pressures may result in a decrease in the Company's revenues and
profitability.
The subscription 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 subscription fulfillment or newsstand 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 subscription fulfillment and newsstand
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 changes 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
13
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 event. 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 Subscription 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 Subscription 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.
Other Business Risks
--------------------
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
14
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. If the Company grows, 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 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 its 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 will be 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 subscription fulfillment
services 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 will require additional cash contributions.
The Company's pension plan was underfunded on a generally accepted accounting
principles basis by approximately $10.7 million at April 30, 2009. 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 annual
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 will 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.
15
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 in recent 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 $69.31
and a low of $13.18 per share during the two fiscal years ended April 30, 2009.
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, 2009 was
approximately 12,100 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
29, 2009, was approximately 124,000 shares, or approximately 2.0% 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. The
Company has not been involved in any securities class litigation, however if the
Company were to become 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 60% 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.
16
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 shareholders generally. In addition, publishing companies owned or
controlled by the Company's principal shareholder are also significant customers
of the Company's Newsstand Distribution Services business, as well as customers
of its Subscription 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 several recent fiscal years, the
Company has no regular dividend policy and offers no assurance of any future
dividends.
The Company 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. No cash dividends were paid during
fiscal year 2009.
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.
The presence of a controlling shareholder of the Company, as well as certain
provisions of Oklahoma law and the Company's organic documents may impede or
discourage a takeover, which may have a limiting effect on the market price of
the Company's common stock.
The concurrence of the Company's majority controlling shareholder is needed for
any third party to acquire control of the Company, even if a change in control
would be beneficial to the Company's other shareholders.
Furthermore, the Company is an Oklahoma corporation and even in the absence of a
controlling shareholder, the anti-takeover provisions of the Company's amended
certificate of incorporation and of Oklahoma law generally prohibit 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
17
- 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 factors 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 could have a limiting effect on the
market price of the Company's common stock.
Item 1B. Unresolved Staff Comments
-------- -------------------------
Not applicable.
Item 2. Properties
------- ----------
The Company's executive offices are located in approximately 2,600 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 Subscription
Fulfillment Services, Newsstand Distribution Services and Product Fulfillment
and other businesses are located in nineteen owned or leased facilities which,
in the aggregate, comprise approximately 800,000 square feet of space with the
principal locations being in Mt. Morris, Illinois; Palm Coast, Florida;
Louisville, Colorado; Fairfield, Ohio and New York City. The Company believes
its facilities are adequate for its current requirements.
Item 3. Legal Proceedings
------- -----------------
A. In June 2008, a lawsuit entitled Haan, etc. v. Kable News Company, Inc., et
-------------------------------------------
al was filed in the Circuit Court of the Fifteenth Judicial Circuit, Ogle
--
County, Illinois against the Company's Kable News Company, Inc. ("Kable News")
subsidiary by an insurance company as subrogee of the owner of a warehouse
building leased to the subsidiary that was destroyed in a fire in December
2007. The lawsuit also named as a defendant a temporary staffing company that
provided the subsidiary with an employee who is alleged to have had a role in
causing the fire. Plaintiff's claims specific to Kable News are based on
allegations of negligence and willful and wanton misconduct. Plaintiff's
complaint seeks damages in excess of $100,000. The Company's insurance carrier
has undertaken Kable News' defense under a reservation of rights and provides
coverage up to the policy limit, which may or may not be as much as the full
amount of plaintiff's claimed damages, which is unknown at this time. A summary
judgment motion brought by the temporary staffing company has been denied. The
Company believes Kable News has good defenses to the claims and also has
potential cross-claims against the other parties for their conduct in the
matter, and Kable News is vigorously defending the lawsuit. However, the
proceeding is at an early stage, and the Company is not in a position to predict
its outcome.
B. In November 2008, a lawsuit entitled Alpinist, et al v. Haan, et al was filed
------------------------------
in the Circuit Court of the Fifteenth Judicial Circuit, Ogle County, Illinois
against Kable News by a magazine publisher and a number of insurance companies
as the subrogees of other magazine publishers seeking damages for their property
stored by Kable News in the warehouse referred to in A. above that was destroyed
in the fire. The three defendants are the warehouse owner, Kable News and the
temporary staffing company that is a defendant in the lawsuit described in A.
above. Plaintiffs' claims specific to Kable News are based on allegations of
negligence, breach of contract and willful and wanton misconduct. The complaint
seeks damages in an amount in excess of $1,000,000. The Company believes that
Kable News has good defenses to the claims and also has potential cross-claims
against the other defendants for their conduct in the matter, and intends
vigorously to defend the lawsuit. However, the proceeding is at an early stage,
and the Company is not in a position to predict its outcome.
C. On February 9, 2009, a civil action was commenced in the United States
District Court for the Southern District of New York entitled Source Interlink
-----------------
Distribution, LLC, et al. v. American Media, Inc., et al. Source Interlink
------------------------------------------------------------
Distribution, LLC ("Source") is a wholesaler of magazines and in the lawsuit it
18
alleged that magazine publishers and distributors, including Kable Distribution
Services, Inc. ("Kable Distribution"), which is a wholly-owned subsidiary of the
Company, conspired to boycott Source to drive it out of business, and that other
wholesalers participated in this effort. Source asserted claims under Section 1
of the Sherman Act (antitrust), for defamation and for tortious interference
with its contracts with retailers. Damages were not quantified. In April 2009,
Source and Kable Distribution agreed to settle the lawsuit with each of them
denying any and all wrongdoing in connection with any claims and no payment
being required of Kable Distribution. In connection with the settlement, a
two-year agreement was entered into under which Kable Distribution will continue
to supply magazines for Source's wholesale business. In accordance with the
settlement agreement, on April 14, 2009, the lawsuit was discontinued against
Kable Distribution, with prejudice.
D. On March 10, 2009, a civil action was commenced in the United States District
Court for the Southern District of New York entitled Anderson News, L.L.C., et
--------------------------
al. v. American Media, Inc., et al. Anderson News, L.L.C. ("Anderson") was a
-----------------------------------
wholesaler of magazines. It has alleged that magazine publishers and
distributors, including Kable Distribution, conspired to boycott Anderson to
drive it out of business, and that other wholesalers participated in this
effort. It has asserted claims under Section 1 of the Sherman Act (antitrust),
for defamation, for tortious interference with its contracts with retailers, and
for civil conspiracy. Damages have not been quantified, but would presumably be
alleged to be substantial. Anderson has alleged that the distributor and
publisher defendants acted in concert to cut off Anderson from its supply of
magazines to enable them to gain control of the single-copy magazine
distribution channel. The Company believes that Kable Distribution has good
defenses to the claims and intends vigorously to defend the lawsuit. However,
the lawsuit is at an early stage, and the Company is not in a position to
predict its outcome.
E. The Company and its subsidiaries are involved in various other claims and
legal actions arising in the normal course of business. While the ultimate
results of these matters cannot be predicted with certainty, management believes
that they will not have a material adverse effect on the Company's consolidated
financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2009.
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; 72
Chairman, President and Chief Executive Officer of
AMREP Southwest Inc. since 1991.
Peter M. Pizza Vice President and Chief Financial Officer of the 58
Company since 2001; Vice President and Controller
of the Company from 1997 to 2001.
Irving Needleman Vice President, General Counsel and Secretary of the 71
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 52
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 61
19
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. 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, 2009, there were approximately 850 holders of record of
the common stock. The range of high and low sales prices of the common stock for
the last two fiscal years by quarter is presented below:
FIRST SECOND THIRD FOURTH
------------------- ------------------- ---------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- --------- -------- --------- --------
2009 $ 56.67 $ 41.12 $ 62.66 $ 26.91 $ 40.27 $ 22.01 $ 34.50 $ 13.18
2008 $ 69.31 $ 40.75 $ 41.54 $ 26.17 $ 46.34 $ 27.94 $ 58.25 $ 34.47
Dividend Policy
The Company paid special cash dividends on its common stock of $1.00 and $0.85
per share during 2008 and 2007. 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. No cash dividends were paid during fiscal year 2009.
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, 2009 (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, 2004
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.
20
Company Name / Index 2004 2005 2006 2007 2008 2009
------------------------------------------------ ----------- ----------- ----------- ----------- ---------- -----------
AMREP Corporation 100 143.34 318.89 420.39 374.64 133.55
S&P 500 Index 100 106.34 122.73 141.43 134.82 87.21
Similar Cap Issuers 100 110.01 140.12 153.58 146.21 86.98
The Similar Cap Issuers are: American Dental Partners, Inc., American Safety
Insurance Holdings, Ltd., American Software, Inc., Bank of Marin Bancorp,
Cavalier Homes, Inc., Century Bancorp, Inc., Citizens South Banking Corporation,
Combimatrix Corporation, Consolidated Water Co. Ltd., Continucare Corporation,
Emcore Corporation, FNB United Corp., Frequency Electronics, Inc., Hawaiian
Holdings, Inc., HMN Financial, Inc., HMS Holdings Corp., Indiana Community
Bancorp, Luby's Inc., Markwest Energy Partners, L.P., Multi-Color Corporation,
Northern States Financial Corporation, Olympic Steel, Inc., Oncothyreon, Inc.,
Osteotech, Inc., Pennsylvania Commerce Bancorp, Inc., Syms Corp. and Utah
Medical Products, Inc.
As a result of changes in market capitalizations from year to year, there was
one company in the Similar Cap Issuer index in the Company's 2008 Form 10-K that
met the criteria for inclusion in the Similar Cap Issuer index in this Form
10-K, Consolidated Water Co. Ltd. The other companies comprising the Similar Cap
Issuer index in the Company's 2008 Form 10-K were: 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., 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., and Vist Financial Corp.
Equity Compensation Plan Information
See Item 12 of this annual report on Form 10-K that incorporates such
information by reference from the Company's Proxy Statement for its 2009 Annual
Meeting of Shareholders.
21
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 Company's consolidated financial statements. The consolidated
financial statements have been audited by McGladrey & Pullen, LLP, independent
registered public accounting firm. The information should be read in conjunction
with the consolidated financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which is Item 7 of Part II of this annual report on Form 10-K.
These historical results are not necessarily indicative of the results to be
expected in the future.
Year Ended April 30,
--------------------------------------------------------------------------------
2009(a) 2008 2007 2006 2005
-------------- --------------- --------------- --------------- -------------- (In thousands, except per share amounts)
Financial Summary:
Revenues $ 145,901 $ 172,061 $ 204,839 $ 148,296 $ 134,506
Income (Loss) from Continuing
Operations $ (43,466) $ 13,762 $ 46,697 $ 22,494 $ 15,588
Income (Loss) from Discontinued
Operations, net of tax $ - $ (57) $ (1,591) $ 3,556 $ (63)
Net Income (Loss) $ (43,466) $ 13,705 $ 45,106 $ 26,050 $ 15,525
Total Assets $ 227,652 $ 284,951 $ 292,659 $ 189,041 $ 194,309
Capitalization:
Shareholders' Equity $ 96,281 $ 145,056 $ 160,004 $ 118,970 $ 117,405
Notes Payable $ 37,936 $ 25,980 $ 32,299 $ 6,016 $ 12,054
Per Share:
Earnings (Loss) from Continuing
Operations $ (7.25) $ 2.20 $ 7.02 $ 3.39 $ 2.36
Income (Loss) from
Discontinued Operations $ - $ (0.01) $ (0.24) $ 0.54 $ (0.01)
Earnings (Loss) -
Basic and Diluted $ (7.25) $ 2.19 $ 6.78 $ 3.93 $ 2.35
Book Value $ 16.06 $ 24.20 $ 24.05 $ 17.91 $ 17.72
Cash Dividend $ - $ 1.00 $ 0.85 $ 4.05 $ 0.40
Shares Outstanding, End of Year 5,996 5,995 6,654 6,644 6,626
(a) Includes a pre-tax charge of $50,246,000 related to the impairment of
goodwill (after tax $41,557,000, or $6.93 per share), see Note 10 to
the consolidated financial statements included in this annual report
on Form 10-K for further information.
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 four business
segments: the Real Estate business operated by AMREP Southwest and the
Subscription Fulfillment Services, Newsstand Distribution Services and Product
Fulfillment Services and Other businesses operated by Kable (collectively,
"Media Services"). The Company's foreign sales and activities are not
significant.
Previously, the Company reported three business segments; however, as a result
of the purchase of assets of certain businesses in November 2008 (see Note 9),
the Company has reclassified certain revenues, expenses and capital expenditures
for prior reporting periods that were previously reported as part of its
Subscription Fulfillment Services segment and has reported them with revenues,
expenses and capital expenditures of those businesses since the date of purchase
as a separate segment, "Product Fulfillment Services and Other". Data concerning
industry segments is set forth in Note 20 of the notes to the consolidated
financial statements.
22
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 2009, 2008 and 2007 mean the fiscal years ended April 30, 2009, 2008
and 2007, unless otherwise qualified.
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 returns 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) cash flow and valuation assumptions in performing asset impairment tests of
long-lived assets, goodwill impairment and assets held for sale; (v) actuarially
determined benefit obligations for pension plan accounting; (vi) risk assessment
of certain uncertain tax positions; 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 $100,000; (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) 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; (v) benefit obligations and other
pension plan accounting and disclosures are 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, 2009, 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 $41,000 per year, and the effect of every
0.25% change in the discount rate would increase or decrease the subsequent
year's pension cost by approximately $35,000; (vi) the Company assesses risk for
23
certain uncertain tax positions and recognizes the financial statement effects
of a tax position when it is more likely than not that the position will be
sustained upon examination by tax authorities; 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.
RESULTS OF OPERATIONS
---------------------
Year Ended April 30, 2009 Compared to Year Ended April 30, 2008
---------------------------------------------------------------
The Company recorded a pre-tax, non-cash impairment charge in the fourth quarter
of 2009 of $50,246,000 ($41,557,000 after tax, or $6.93 per share). This
impairment charge reflected the write-off of all of the goodwill of the
Company's Subscription Fulfillment Services segment. After giving effect to this
impairment charge, the Company had a net loss of $43,466,000, or $7.25 per
share, for fiscal 2009 compared to net income of $13,705,000, or $2.19 per
share, in 2008. Revenues for 2009 were $145,901,000 compared to $172,061,000 in
the prior year.
Results for 2009 were entirely from continuing operations, including the
impairment charge, while 2008's results included a net loss from discontinued
operations of $57,000, or $0.01 per share, that reflected 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 that
had been accrued for this matter in 2007. Excluding the impairment charge, the
net loss from continuing operations was $1,909,000, or $0.32 per share, for
2009. This included the fourth quarter write-off of a $6,500,000 receivable from
a major magazine wholesaler which recently closed its business ($4,095,000 after
tax, or $0.68 per share).
The primary reason for the fourth quarter 2009 non-cash goodwill impairment
charge was the lower than expected fiscal 2009 revenues and operating results of
the Company's Subscription Fulfillment Services segment and a change in the
Company's internally projected future cash flows from that segment based on
current industry trends. These reduced results and expectations reflected the
well-publicized decline in the magazine publishing industry during fiscal 2009,
which represents the Subscription Fulfillment Services segment's principal
customer base, as well as the deep recession which has impacted the U.S. economy
and consumers and the uncertainty about when this recession will end. The
goodwill impairment charge is a non-cash item which is not expected to affect
the day-to-day operations of the Company or its Subscription Fulfillment
Services segment.
Revenues from land sales at AMREP Southwest decreased from $27,902,000 in 2008
to $8,914,000 in 2009. AMREP Southwest continues to experience substantially
lower land sales in its principal market of Rio Rancho, New Mexico due to the
continuing severe decline in the real estate market in the greater
Albuquerque-metro and Rio Rancho areas. Total acres sold were 148 in 2009, 406
in 2008 and 1,051 in 2007. The trend of declining permits for new home
construction in the Rio Rancho area also continues, with 27% fewer single-family
residential building permits issued during 2009 than in 2008. The Company
believes that this decline has been consistent with the well-publicized problems
of the national home building industry and credit markets, including fewer sales
of both new and existing homes, an increasing number of mortgage delinquencies
and foreclosures and a tightening of mortgage availability. Faced with these
adverse conditions, builders have slowed the pace of building on developed lots
previously purchased from the Company in Rio Rancho and delayed or cancelled the
purchase of additional developed lots. These factors have also contributed to a
steep decline in the sale of undeveloped land to both builders and investors.
In Rio Rancho, the Company offers for sale both developed and undeveloped lots
to national, regional and local home builders, commercial and industrial
property developers and others. The average selling price of land sold by the
Company in Rio Rancho was $60,200 per acre in 2009, $68,700 per acre in 2008 and
$91,200 per acre in 2007, reflecting differences in the mix of the types of
properties sold in each period. 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 the Company's Media Services operations decreased 2% from
$138,696,000 for 2008 to $136,206,000 for 2009. Magazine publishers, who are the
principal customers of the Company's Media Services operations, suffered
generally from lower advertising revenues and lower subscription and newsstand
sales during both periods, which led to reduced business for the Company's Media
Services operations. Revenues from Subscription Fulfillment Services operations
decreased from $122,521,000 for 2008 to $115,964,000 for 2009, primarily
reflecting the net effect of reduced and lost business that resulted from lower
24
publisher customer volumes and higher attrition of magazine titles than has been
previously experienced, offset in part by revenue gains from new and some
existing clients. Revenues from Newsstand Distribution Services decreased from
$12,916,000 for 2008 to $12,400,000 in 2009 with the decline due in part to the
effects of a disruption in the wholesale distribution industry during the fourth
quarter of 2009 caused by the closure of a major newsstand distribution
wholesaler. Revenues from Product Fulfillment Services and other increased from
$3,259,000 for 2008 to $7,842,000 for 2009, primarily from the inclusion of a
product repackaging and fulfillment business and a temporary staffing business
from the date of their asset purchases in November 2008. Media Services
operating expenses increased by $7,303,000 for 2009 compared to 2008, primarily
attributable to the $6,500,000 write-off of an uncollectible account receivable
from the major newsstand distribution wholesaler that closed and, to a lesser
extent, higher consulting and computer systems integration costs of the
Subscription Fulfillment Services business.
Although there are multiple revenue streams in the Subscription 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 normally provide ancillary services to a
customer unless it was also providing the core service of maintaining a database
of subscriber names. Thus, variations in Subscription 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 Subscription Fulfillment Services business, and the
competition for new customers is intense in both segments, which results in a
price sensitive industry that limits the Company's ability to increase its
prices.
In January 2008, the Company announced a project to consolidate its Subscription
Fulfillment Services business operations from three locations in Colorado,
Florida and Illinois into one existing location at Palm Coast, Florida, which is
expected to streamline operations, improve service to clients and create cost
efficiencies through reduced overhead costs and the elimination of operating
redundancies. This project, which is now well underway, is expected to require
capital expenditures in the range of $9,000,000 to $12,000,000. It is scheduled
to be implemented over the next two years and may involve approximately
$6,000,000 of non-recurring cash costs for severance, training and transition,
facility closings and equipment relocation. The State of Florida and the City of
Palm Coast have agreed to provide incentives for the project, including cash and
employee training grants and tax relief, which could amount to as much as
$8,000,000, largely contingent on existing job retention, new job creation and
capital investment. Previously during 2008, the Company announced (i) one
significant workforce reduction in its Subscription Fulfillment Services
business that occurred in the third quarter, and (ii) a plan to redistribute the
work performed at the Marion, Ohio facility of its Subscription Fulfillment
Services business and the scheduled closing of that facility and the
consolidation of subscription fulfillment operations customer call centers,
which was completed in 2009. During 2009, the Company recognized $293,000 of
income for certain incentives related to the consolidation project, which are
netted with costs of $1,501,000, principally for severance. As a result, the
Company reported a net charge to operations of $1,121,000 related to the
consolidation project in 2009 compared to a net charge of $1,159,000 for 2008,
principally for severance and consulting costs. The items of income for
incentives and costs related to the consolidation project are included in
Restructuring and fire recovery costs in the Company's consolidated statements
of operations and retained earnings.
In December 2007, a warehouse of approximately 38,000 square feet leased by a
Kable subsidiary in Oregon, Illinois and its contents were totally destroyed by
fire. The warehouse was used principally to store back issues of magazines
published by certain customers for whom the Company filled back-issue orders as
part of its services. The Company was required to provide insurance for that
property of certain of those customers. Through June 30, 2009, the Company's
insurance carrier had paid approximately $263,000 to customers for lost
materials. The Company believes that the resolution of other pending or
unasserted claims related to materials of certain publishers for whom it was
required to provide insurance after taking into account the proceeds from its
property insurance claims, will not have a material effect on its consolidated
financial position, results of operations or cash flows.
The Company has filed a preliminary claim with its insurance provider for its
property loss as a result of the fire and has been advanced $500,000 for
replacement of such property. During 2009, the Company replaced a portion of the
25
fixed assets lost in the warehouse fire and recorded a $347,000 gain resulting
from the recognition of insurance proceeds, which is netted against costs
related to the fire, principally for legal and other advisory costs that were
not covered by insurance. As a result, the Company reported a net gain to
operations of $71,000 for 2009. In 2008 the Company recorded a net charge to
operations of $354,000 related to fire recovery costs. The item of income
related to insurance proceeds and the fire recovery costs are included in
Restructuring and fire recovery costs in the Company's consolidated statements
of operations and retained earnings. In addition, the Company recorded $287,000
of other income in 2009 for a business interruption claim resulting from the
fire.
Interest and other revenues decreased $4,682,000 for 2009 compared to 2008,
primarily due to a pre-tax gain from the sale of a commercial property
($1,873,000) and the forfeiture of deposits for the purchase of land by
homebuilders who did not exercise purchase options ($927,000) in 2008, with no
similar transactions occurring in 2009. In addition, interest and other revenues
were also lower in 2009 compared to 2008 due to lower cash balances to invest.
Real estate commissions and selling expenses decreased $389,000 (53%) for 2009
compared to 2008, principally due to the reduced land sales. Other operating
expenses increased $649,000 (77%) for 2009 compared to the prior year, primarily
due to a net favorable $550,000 adjustment to real estate tax expense in 2008
resulting from the finalization of a property tax valuation appeal by AMREP
Southwest.
General and administrative expenses of Media Services operations increased
$641,000 (5%) in 2009 compared to 2008, primarily due to the aforementioned
higher consulting fees and computer system integration costs associated with the
consolidation project of the Subscription Fulfillment Services business. Real
estate operations and corporate general and administrative expense decreased
$311,000 (7%) for 2009 compared to 2008, primarily due to reduced professional
fees.
The Company's effective tax rate from continuing operations was 20.0% in 2009
compared to 36.2% in 2008. The decrease from the statutory rate in 2009 was
primarily due to (i) permanent items, the most significant being the charge
against book income associated with non-amortizable goodwill, and (ii) the
recognition of previously unrecognized tax benefits associated with uncertain
tax positions due to the expiration of applicable statutes of limitations. The
decrease from the statutory rate in 2008 was primarily due to tax benefits
associated with charitable contributions of land and tax exempt interest income.
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
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 revenues were $172,061,000, a decrease of
$32,778,000 from 2007 revenues of $204,839,000. The decrease in revenues was
attributable to reduced land sales revenues from the Company's Real Estate
operations, offset in part by the increased Subscription 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. The amount accrued for the settlements in 2007, 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 from
$95,825,000 in 2007 to $27,902,000 in 2008. This 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. 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%. 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
26
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
also 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 were 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 lower valued transactions. The
average gross profit percentage on land sales decreased from 68% in 2007 to 65%
for 2008, principally attributable to lower selling prices for commercial and
undeveloped lots in 2008.
The average selling price of land sold by the Company in Rio Rancho declined
from $91,200 per acre in 2007 to $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 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.
Kable's revenues increased $38,191,000 from $100,505,000 in 2007 to $138,696,000
in 2008, principally attributable to the January 2007 acquisition of Palm Coast.
Subscription Fulfillment Services revenues increased by $39,510,000 from
$83,011,000 in 2007 to $122,521,000 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 Subscription Fulfillment Services
business that resulted from continued competitive market pressures and customer
losses. Pricing pressure from customers also had a negative effect on
Subscription 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. Product Fulfillment
Services and Other revenues were generally unchanged from 2007 to 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 revenues in other parts of Kable's Subscription Fulfillment Services
business.
The Company's project to integrate certain other aspects of the Kable and Palm
Coast subscription fulfillment operations in order to improve operating
efficiencies and customer service and also to reduce costs resulted in charges
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. There
were no similar costs in 2007.
The December 5, 2007 accidental fire that totally destroyed a leased warehouse
resulted in a charge to operations of approximately $30,000 from the write-off
of gross assets of $470,000 net of $440,000 of accumulated depreciation. In
addition, the Company 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 were not covered by insurance and these costs were
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 Subscription 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
27
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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company finances its operations from internally generated funds 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. The new loan agreement consisted of a new $14,180,000 term
loan facility and an existing $25,000,000 unsecured revolving credit facility
from the secured agreement it replaced. During September 2008, the maturity date
of the revolving credit facility was extended from September 2008 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 (3.25% at April 30, 2009) less 1.00%, or (ii) the 30-day LIBOR rate
(0.45% at April 30, 2009) 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, 2009, the
outstanding balance of the revolving credit facility was $24,000,000 with a
weighted average interest rate of 2.01%. The term loan facility, which required
prepayment in an amount equal to collections on the notes receivable held as
collateral and the amount of any such receivables that experienced payment
defaults, was repaid during 2009 and that facility has been terminated. 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, 2009.
AMREP Southwest has received a written commitment from the lender, which is
subject to certain conditions including the lender's approval of the loan
documentation, which provides for the replacement of the present revolving
credit facility at its September 2009 maturity with a new $22,500,000 revolving
credit facility. The new facility will be for a term to be selected by the
borrower of either (i) 364 days, or (ii) two years with a reduction of the
maximum loan amount to $20,000,000 at the 12 month anniversary of the new
facility. Borrowings will bear interest at the greater of 5% or the 30-day LIBOR
rate plus 3.5% and will be secured by mortgages on real estate having an
appraised value of at least 2-1/2 times the amount borrowed. The new facility
will limit other borrowings and will contain a number of financial covenants,
including requirements that the borrower maintain a minimum net worth and a
specified level of debt service coverage.
On July 14, 2009, Kable and certain of its direct and indirect subsidiaries
entered into an Amended and Restated Loan and Security Agreement (the "Present
Credit Agreement") with a bank that further amended and restated an earlier
agreement with the bank's predecessor (the latter agreement, the "Prior Credit
Agreement").
The Present Credit Agreement provides for: (i) a revolving credit loan and
letter of credit facility of up to $20,000,000 ("Facility A") that may be used
for general business purposes, including the payment of expenses and other costs
associated with the consolidation of Kable's Subscription Fulfillment Services
business in Florida; and (ii) a second revolving credit loan facility of up to
$5,000,000 ("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. At the borrowers' option, up to $2,500,000 of
the bank's lending commitment for Facility D may be transferred to Facility A.
At April 30, 2009, $6,067,000 of Facility A loans and no Facility D loans were
outstanding. Additionally, term borrowings of approximately $2,800,000
("Facilities B and C") at April 30, 2009, bearing interest from 4.79% to 6.40%
per annum, that were incurred for capital expenditures under the Prior Credit
Agreement are now included in the borrowings under the Present Credit Agreement
in addition to Facilities A and D. Under the Present Credit Agreement, the
revolving credits mature on May 1, 2010 and the term borrowings are due in
28
installments through that date, as was the case under the Prior Credit
Agreement. The borrowers' obligations under the Present Credit Agreement are
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, as were the borrowers' obligations under the
Prior Credit Agreement.
The revolving loans under the Present Credit Agreement bear interest at the
borrowers' option at fluctuating rates that are either (i) a LIBOR-based rate
(0.3% at July 14, 2009) plus 3.25%, or (ii) the bank's prime rate (3.25% at July
14, 2009) plus 1.75% (the rates under the Prior Credit Agreement were either (i)
LIBOR-based plus a margin of 1.5% to 2.5% depending upon the funded debt to
EBITDA ratio, or (ii) the bank's prime rate).
The Present Credit Agreement requires the borrowers to maintain certain
financial ratios, which are changed in a number of respects from those contained
in the Prior Credit Agreement. The Present Credit Agreement, as did the Prior
Credit Agreement, also contains other 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, and that limit the annual
amount borrowers may incur for capital expenditures and other purposes and
impose certain minimum EBITDA requirements on the borrowers. The borrowers were
in compliance with the covenants of the Present Credit Agreement as of April 30,
2009.
At April 30, 2009, Other notes payable consisted of equipment financing loans
with a weighted average interest rate of 5.75% and a mortgage note payable on a
warehouse with an interest rate of 6.35%.
Consolidated notes payable outstanding at April 30, 2009 was $37,936,000
compared to $25,980,000 at April 30, 2008.
Cash Flows From Operating Activities
------------------------------------
Real estate receivables decreased from $13,124,000 at April 30, 2008 to
$3,367,000 at April 30, 2009 reflecting the net effect of (i) the
reclassification of approximately $6,979,000 to real estate inventory and
$1,125,000 to investment assets from mortgage notes receivable resulting from
the Company's acceptance of deeds in lieu of foreclosure related to delinquent
mortgage notes receivable and (ii) payments received on mortgage notes held by
AMREP Southwest offset in part by mortgages notes received by AMREP Southwest in
connection with real estate sales that closed during 2009.
Real estate inventory amounted to $81,561,000 at April 30, 2009 compared to
$70,252,000 at April 30, 2008. Inventory in the Company's core real estate
market of Rio Rancho increased from $63,215,000 at April 30, 2008 to $74,121,000
at April 30, 2009, primarily reflecting the reclassification of mortgage notes
receivable to inventory discussed above and the net effect of development
spending and land sales. The balance of real estate inventory consisted
principally of properties in Colorado in both years.
Intangible and other assets decreased from $29,913,000 at April 30, 2008 to
$26,145,000 at April 30, 2009, primarily reflecting normal amortization of these
assets. Property, plant and equipment increased from $28,914,000 at April 30,
2008 to $34,656,000 at April 30, 2009, primarily due to a purchase of an office
building in Palm Coast, Florida and a warehouse acquisition by the Company,
offset in part by normal depreciation charges.
Accounts payable and accrued expenses decreased from $98,532,000 at April 30,
2008 to $81,699,000 at April 30, 2009, primarily as a result of the timing of
payments due to publishers and vendors and lower business volumes.
The unfunded pension liability of the Company's defined benefit retirement plan
increased from $2,045,000 at April 30, 2008 to $10,665,000 at April 30, 2009,
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 a comprehensive loss of $5,324,000 in
2009 and $660,000 in 2008, 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
$5,212,000 and $5,169,000 in 2009 and 2008 and consisted principally of a
purchase of an office building in Palm Coast, Florida in 2009 and expenditures
for computer hardware and software for Kable's Subscription
29
Fulfillment Services segment in 2008. In 2008, capital expenditures for
investment assets were $1,208,000 for the purchase of additional scattered lots
in Rio Rancho in order to increase the Company's ownership in certain geographic
areas. There were no capital expenditures for investment assets in 2009. The
Company believes that it has adequate financing capability to provide for
anticipated capital expenditures in fiscal 2010.
During November 2008, in separate transactions, the Company purchased (i)
certain assets of a privately-held company engaged in the product repackaging
and fulfillment industry; (ii) certain assets of a provider of temporary
staffing services and (iii) a warehouse. The aggregate purchase price of the
assets purchased in the three transactions was approximately $8,500,000, and was
financed from working capital, bank borrowings and the assumption of a mortgage
note payable on the warehouse
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, 2009 for the items indicated (in thousands):
More
Less than 1-3 3-5 than
Contractual Obligations Total 1 year years years 5 years
----------------------- ----- ------ ----- ----- -------
Notes payable $ 37,936 $ 25,770 $ 7,740 $ 218 $ 4,208
Operating leases and other 23,344 4,919 10,125 6,112 2,188
------------- ------------ ------------ ------------ -----------
Total $ 61,280 $ 30,689 $ 17,865 $ 6,330 $ 6,396
============= ============ ============ ============ ===========
Operating leases and other includes $2,270,000 of uncertain tax positions and
related accrued interest recorded in accordance with FIN 48. Refer to Notes 8,
12, 16 and 17 to the consolidated financial statements included in this 2009
Form 10-K for additional information on long-term debt, taxes 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 a 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. In 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 did not make any repurchases of
stock during 2009.
All repurchases were funded from cash on hand and borrowings under bank credit
facilities, 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
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurement. SFAS
No. 157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under SFAS No. 157, fair
value measurements are disclosed by level within that hierarchy. In February
2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB
Statement No. 157, which permits a one-year deferral for the implementation of
SFAS No. 157 with regard to nonfinancial assets and liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company adopted SFAS No. 157 for the fiscal year beginning May 1,
2008, except for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, for which delayed application is permitted until the
30
Company's fiscal year beginning May 1, 2009. The Company is currently evaluating
the potential impact, if any, of the adoption of the remaining provisions of
SFAS No. 157 on the Company's consolidated 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 consolidated
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 occurring after April 30,
2009.
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, "Employers'
Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1)". FSP
FAS 132(R)-1 requires more detailed disclosures about employers' plan assets in
a defined benefit pension or other postretirement plan, including employers'
investment strategies, major categories of plan assets, concentrations of risk
within plan assets, and inputs and valuation techniques used to measure the fair
value of plan assets. FSP FAS 132(R)-1 also requires, for fair value
measurements using significant unobservable inputs (Level 3), disclosure of the
effect of the measurements on changes in plan assets for the period. The
disclosures about plan assets required by FSP FAS 132(R)-1 must be provided for
fiscal years ending after December 15, 2009. As this pronouncement is only
disclosure-related, it will not have an impact on the Company's consolidated
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 20 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 20 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 any of its businesses.
31
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, other filings with the Securities and Exchange Commission, 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. 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, 2009 the Company's long-term debt obligations and receivables
(excluding trade accounts) by scheduled fiscal year maturity, weighted average
interest rate and estimated fair market value ("FMV") (dollar amounts in
thousands):
There- FMV at
2010 2011 2012 2013 2014 after Total 4/30/09
---- ---- ---- ---- ---- ----- ----- -------
Fixed rate
receivables $ 3,072 $ 3 $ 3 $ 98 $ - $ - $ 3,176 $ 2,914
Weighted average
interest rate 9.4% 8.5% 8.5% 8.5% - - 9.4%
Fixed rate debt $ 1,770 $ 1,541 $ 132 $ 106 $ 112 $ 4,208 $ 7,869 $ 8,524
Weighted average
interest rate 5.7% 5.3% 5.4% 6.4% 6.4% 6.4% 6.0%
Variable rate debt $ 24,000 $ 6,067 $ - $ - $ - $ - $ 30,067 $ 30,067
Weighted average
interest rate 2.0% 2.2% - - - - 2.0%
32
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, 2009 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, 2009, internal control over
financial reporting was effective.
On November 7, 2008, the Company, through a newly-formed subsidiary of Kable
Media Services, Inc., Kable Specialty Packaging Services LLC ("KSPS"), purchased
certain assets of a privately-held company located in Fairfield, Ohio, engaged
in the product repackaging and fulfillment industry. On the same date, another
newly-formed subsidiary of Kable Media Services, Inc., Kable Staffing Resources
LLC ("KSR"), purchased certain assets of a privately-held company engaged in
providing temporary staffing services. For additional information regarding
these purchases, see Note 9 to the accompanying financial statements included in
this annual report on Form 10-K. KSPS and KSR together represented approximately
0.2% of the Company's consolidated assets and approximately 3.0% of the
Company's consolidated revenues as of and for the year ended April 30, 2009.
Management has excluded KSPS and KSR from the scope of this report on internal
controls over financial reporting for the year ended April 30, 2009. Management
is in the process of implementing the Company's internal control structure over
the operations of KSPS and KSR and expects that this effort will be completed in
fiscal 2010. The assessment and documentation of internal controls requires a
complete review of controls operating in a stable and effective environment.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting has been audited by the Company's independent auditor,
McGladrey & Pullen, LLP, an independent registered public accounting firm, as
stated in their report included herein.
33
Report of Independent Registered Public Accounting Firm
To the Board of Directors
AMREP Corporation
We have audited AMREP Corporation and Subsidiaries internal control over
financial reporting as of April 30, 2009, 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.
As described in Management's Annual Report on Internal Control Over Financial
Reporting management has excluded Kable Specialty Packaging Services LLC and
Kable Staffing Resources LLC from its assessment of internal control over
financial reporting as of April 30, 2009, because these entities were acquired
by the Company when certain assets of Service Parts Supply Corp. and Resource
One Staffing, LLC. were purchased during 2009. We have excluded the operations
of these entities from our audit of internal control over financial reporting.
The entities are a wholly owned subsidiary whose total assets and revenues
represent approximately 0.2% and 3.0%, respectively, of the consolidated
financial statement amounts as of and for the year ended April 30, 2009.
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 (a) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (b)
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 (c) 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,
2009, 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
34
AMREP Corporation and Subsidiaries as of April 30, 2009 and 2008, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended April 30, 2009 and our
report dated July 14, 2009 expressed an unqualified opinion.
/s/ McGladrey & Pullen, LLP
July 14, 2009
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, 2009 and 2008, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended April 30, 2009. 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 2009, 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, 2009,
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 14, 2009 expressed an unqualified opinion on the
effectiveness of AMREP Corporation's internal control over financial reporting.
/s/ McGladrey & Pullen, LLP
July 14, 2009
35
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2009 AND 2008
(Dollar amounts in thousands, except per share amount)
ASSETS 2009 2008
------ ---------------- -----------------
CASH AND CASH EQUIVALENTS $ 29,018 $ 32,608
RECEIVABLES, net:
Real estate operations 3,367 13,124
Media services operations 34,614 45,701
---------------- -----------------
37,981 58,825
TAXES RECEIVABLE 3,009 -
REAL ESTATE INVENTORY 81,561 70,252
INVESTMENT ASSETS, net 11,389 10,300
PROPERTY, PLANT AND EQUIPMENT, net 34,656 28,914
INTANGIBLE AND OTHER ASSETS, net 26,145 29,913
GOODWILL 3,893 54,139
---------------- -----------------
TOTAL ASSETS $ 227,652 $ 284,951
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 81,699 $ 98,532
NOTES PAYABLE:
Amounts due within one year 25,770 4,816
Amounts subsequently due 12,166 21,164
---------------- -----------------
37,936 25,980
TAXES PAYABLE - 980
DEFERRED INCOME TAXES 1,071 12,358
ACCRUED PENSION COST 10,665 2,045
---------------- -----------------
TOTAL LIABILITIES 131,371 139,895
---------------- -----------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
shares authorized - 20,000,000; shares issued - 7,420,704 at
April 30, 2009 and 7,419,704 at April 30, 2008 742 742
Capital contributed in excess of par value 46,100 46,085
Retained earnings 84,942 128,408
Accumulated other comprehensive loss, net (8,846) (3,522)
Treasury stock, 1,424,492 shares at April 30, 2009 and 2008, at cost (26,657) (26,657)
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 96,281 145,056
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 227,652 $ 284,951
================ =================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
36
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Year Ended April 30,
------------------------------------------------------
2009 2008 2007
--------------- --------------- ---------------
REVENUES:
Real estate land sales $ 8,914 $ 27,902 $ 95,825
Media services operations 136,206 138,696 100,505
Interest and other 781 5,463 8,509
--------------- --------------- ---------------
145,901 172,061 204,839
--------------- --------------- ---------------
COSTS AND EXPENSES:
Real estate land sales 2,156 9,760 31,154
Operating expenses:
Media services operations 127,324 120,021 85,262
Real estate commissions and selling 342 731 1,404
Restructuring and fire recovery costs 1,050 1,513 -
Other 1,489 840 1,376
General and administrative:
Media services operations 12,694 12,053 9,235
Real estate operations and corporate 4,239 4,550 5,038
Goodwill impairment 50,246 - -
Interest expense, net of capitalized amounts 715 1,012 702
--------------- --------------- ----------------
200,255 150,480 134,171
--------------- --------------- ----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (54,354) 21,581 70,668
PROVISION (BENEFIT) FOR INCOME TAXES
FROM CONTINUING OPERATIONS (10,888) 7,819 23,971
--------------- --------------- ----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (43,466) 13,762 46,697
LOSS FROM OPERATIONS OF DISCONTINUED
BUSINESS (NET OF INCOME TAXES) - (57) (1,591)
--------------- --------------- ----------------
NET INCOME (LOSS) $ (43,466) $ 13,705 $ 45,106
=============== =============== ================
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS $ (7.25) $ 2.20 $ 7.02
LOSS PER SHARE FROM
DISCONTINUED OPERATIONS - (0.01) (0.24)
--------------- --------------- ----------------
EARNINGS (LOSS) PER SHARE - BASIC AND
DILUTED $ (7.25) $ 2.19 $ 6.78
=============== =============== ================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,996 6,248 6,650
=============== =============== ================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
37
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, 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
Net loss - - - (43,466) - - (43,466)
Other comprehensive loss - - - - (5,324) - (5,324)
-----------
Total comprehensive loss (48,790)
-----------
Exercise of stock options 1 - 15 - - - 15
------- -------- --------------- ---------- ------------- ---------- -----------
BALANCE, April 30, 2009 7,421 $ 742 $ 46,100 $ 84,942 $ (8,846) $ (26,657) $ 96,281
==============================================================================================
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
38
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended April 30,
--------------------------------------------------
2009 2008 2007
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (43,466) $ 13,705 $ 45,106
Adjustments to reconcile net income
to net cash provided (used in) by operating activities:
Goodwill impairment 50,246 - -
Depreciation and amortization 10,159 10,524 7,319
Non-cash credits and charges:
Gain on disposition of assets 114 (1,679) (4,115)
Provision for doubtful accounts 6,775 (676) (227)
Pension accrual 34 (967) 26
Stock based compensation - Directors' Plan - - 339
Changes in assets and liabilities, excluding the effect of acquisitions:
Receivables 7,647 10,901 (10,901)
Real estate inventory (4,313) (19,696) 1,064
Taxes receivable (3,009) - -
Other assets (189) 272 (1,852)
Accounts payable and accrued expenses, and deferred revenue (17,520) 11,328 33,156
Taxes payable (980) 925 (4,493)
Deferred income taxes (8,025) 1,614 3,267
-------------- -------------- --------------
Net cash provided by (used in) operating activities (2,527) 26,251 68,689
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - property, plant, and equipment (5,212) (5,169) (1,797)
Capital expenditures - investment assets - (1,208) (2,870)
Proceeds from disposition of assets - 4,749 6,173
Acquisition, net of cash acquired (3,075) 195 (95,636)
-------------- -------------- --------------
Net cash used in investing activities (8,287) (1,433) (94,130)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 54,136 86,860 81,255
Principal debt payments (46,927) (93,179) (54,973)
Exercise of stock options 15 - 27
Acquisition of treasury stock - (21,363) -
Cash dividends - (6,630) (5,648)
-------------- -------------- --------------
Net cash provided by (used in) financing activities 7,224 (34,312) 20,661
-------------- -------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,590) (9,494) (4,780)
Cash and cash equivalents, beginning of year 32,608 42,102 46,882
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 29,018 $ 32,608 $ 42,102
============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 694 $ 1,085 $ 735
============== ============== ===============
Income taxes paid - net of refunds $ 1,648 $ 2,453 $ 24,261
============== ============== ===============
Non-cash transactions:
Transfer to real estate inventory from receivables $ 6,979 $ 3,892 $ -
============== ============== ===============
Transfer to real estate investment assets from receivables $ 1,125 $ - $ -
============== ============== ===============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
39
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 subsidiaries, is
primarily engaged in four 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 subscription fulfillment
services, magazine distribution services and product fulfillment services and
other 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 2009, 2008 and
2007 mean the fiscal years ended April 30, 2009, 2008 and 2007, 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 fair 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
--------------
magazine subscription fulfillment, the distribution of periodicals and other
products and activities. Revenues from Subscription Fulfillment Service
activities represent fees, which are billed and earned monthly, from the
maintenance of computer files for customers 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
40
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 the 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 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 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.
Receivables for the Newsstand Distribution Services business are 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
are 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 primarily consist of investment land, which represents vacant,
undeveloped land not held for development or sale in the normal course of
business, and is stated at the lower of cost or fair market value less the
estimated costs to sell.
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.
41
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. in 2007 (see Note 9).
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 is less than its carrying amount, including goodwill. Based on a
review completed as of April 30, 2009, the Company recorded a non-cash
impairment charge of $50,246,000 (see Note 10).
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. The Company provides a
valuation allowance against net deferred tax assets unless, based upon the
available evidence, it is more likely than not that the deferred tax assets will
be realized.
Earnings (loss) per share
-------------------------
Basic earnings (loss) 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 outstanding are anti-dilutive and therefore excluded from the
computation of earnings per share.
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 2007 (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 and fully
vested at the date of grant. Accordingly, no compensation expense has been
recognized with respect to the stock option plan in 2007. Under the provisions
of SFAS No. 123(R), the compensation expense was not material to the results of
operations for 2009, 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
42
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 impact 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.
New and Emerging Accounting Standards
-------------------------------------
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurement. SFAS No. 157 also emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy with the highest priority being quoted prices in active
markets. Under SFAS No. 157, fair value measurements are disclosed by level
within that hierarchy. In February 2008, the FASB issued FASB Staff Position No.
157-2, Effective Date of FASB Statement No. 157, which permits a one-year
deferral for the implementation of SFAS No. 157 with regard to nonfinancial
assets and liabilities that are not recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company adopted SFAS No. 157 for
the fiscal year beginning May 1, 2008, except for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis, for which delayed application is
permitted until the Company's fiscal year beginning May 1, 2009. The Company is
currently evaluating the potential impact, if any, of the adoption of the
remaining provisions of SFAS No. 157 on the Company's consolidated 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 consolidated
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 occurring after April 30,
2009.
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, "Employers'
Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1)". FSP
FAS 132(R)-1 requires more detailed disclosures about employers' plan assets in
a defined benefit pension or other postretirement plan, including employers'
investment strategies, major categories of plan assets, concentrations of risk
within plan assets, and inputs and valuation techniques used to measure the fair
value of plan assets. FSP FAS 132(R)-1 also requires, for fair value
43
measurements using significant unobservable inputs (Level 3), disclosure of the
effect of the measurements on changes in plan assets for the period. The
disclosures about plan assets required by FSP FAS 132(R)-1 must be provided for
fiscal years ending after December 15, 2009. As this pronouncement is only
disclosure-related, it will not have an impact on the Company's consolidated
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) RECEIVABLES:
-------------
Receivables consist of: April 30,
------------------------------------
2009 2008
---------------- ----------------
(Thousands)
Real estate operations:
Mortgage notes and other receivables $ 3,457 $ 13,236
Less allowance for doubtful accounts (90) (112)
---------------- ----------------
$ 3,367 $ 13,124
================ ================
Media services operations (maturing within one year):
Subscription Fulfillment Services $ 24,711 $ 28,348
Newsstand Distribution Services, net of estimated returns 8,970 18,008
Product Fulfillment Services and other 1,863 -
---------------- ----------------
35,544 46,356
Less allowance for doubtful accounts (930) (655)
---------------- ----------------
$ 34,614 $ 45,701
================ ================
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 45% and 42% of media services net accounts receivable were due
from three wholesalers at April 30, 2009 and 2008. 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 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 notes receivable bear interest at rates ranging from 8.50%
to 10.25% and result primarily from land sales. Fiscal year maturities of
principal on real estate receivables at April 30, 2009 were as follows: 2010 -
$3,072,000; 2011 - $3,000; 2012 - $3,000; 2013 - $98,000, 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 $55,212,000 in 2009 and $55,930,000 in 2008. 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
distributes the publisher's magazines under this arrangement. Accounts
receivable subject to this arrangement were netted ($28,565,000 and $22,703,000
were netted at April 30, 2009 and 2008) against the related accounts payable due
the publisher on the accompanying balance sheets. Media services operations
receivables collateralize line-of-credit arrangements utilized for Kable's
operations (see Note 8).
During the fourth quarter of 2009, Anderson News, L.L.C. ("Anderson"), a major
wholesaler customer of Kable's Newsstand Distribution Services business which
44
accounted for approximately 30% of the gross billings of the newsstand
distribution industry, ceased operations. This business closure caused a
temporary disruption in the newsstand distribution industry, and Newsstand
Distribution Services revenues were adversely affected for a period of time.
Subsequently, magazines that previously had been distributed by Anderson were
allocated to other major wholesalers, and as a result, the three remaining major
wholesalers now distribute a substantial percentage of the industry product.
At that time of the closure, Newsstand Distribution Services had estimated net
accounts receivable from Anderson of approximately $7,500,000, which amount is
subject to adjustment by subsequent magazine return activity that may differ
from the Company's estimates. No payments of accounts receivable have been
received by Newsstand Distribution Services from Anderson after January 31,
2009. Based on its estimate of the allowance for magazine returns, Newsstand
Distribution Services has recorded a charge to operations of $6,500,000 in the
fourth quarter of 2009 related to Anderson.
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 2% of consolidated revenues in 2009 and 1% in 2008 and 2007.
(3) 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, 2009 and 2008 were $3,918,000 and $3,224,000. Interest
costs capitalized during 2009, 2008 and 2007 were $697,000, $1,300,000 and
$469,000. Accumulated capitalized real estate taxes included in the real estate
inventory at April 30, 2009 and 2008 were $1,826,000 and $1,820,000. Real estate
taxes capitalized during 2009, 2008 and 2006 were $43,000, 41,000 and $18,000.
Previously capitalized interest costs and real estate taxes charged to real
estate cost of sales were $35,000, 108,000 and $357,000 in 2009, 2008 and 2007.
During 2009 and 2008, the Company accepted deeds in lieu of foreclosure related
to delinquent mortgage notes receivable on previously sold real estate inventory
totaling $6,979,000 and $3,892,000, which included accrued interest, and
recorded the assets received in exchange as real estate inventory based on
property appraisals.
A substantial majority 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.
(4) INVESTMENT ASSETS:
------------------
Investment assets consist of:
April 30,
--------------------------------
2009 2008
-------------- --------------
(Thousands)
Land held for long-term investment $ 10,879 $ 9,771
-------------- --------------
Other 794 794
Less accumulated depreciation (284) (265)
-------------- --------------
510 529
-------------- --------------
$ 11,389 $ 10,300
============== ==============
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 2009, the Company accepted deeds in lieu of foreclosure related to
delinquent mortgage notes receivable on previously sold investment assets
totaling $1,125,000, which included accrued interest.
Depreciation of investment assets charged to operations amounted to $19,000,
$117,000 and $179,000 in 2009, 2008 and 2007.
45
(5) PROPERTY, PLANT AND EQUIPMENT:
------------------------------
Property, plant and equipment consist of:
April 30,
--------------------------------
2009 2008
-------------- --------------
(Thousands)
Land, buildings and improvements $ 27,397 $ 17,875
Furniture and equipment 41,908 45,241
Other 42 59
-------------- ---------------
69,347 63,175
Less accumulated depreciation (34,691) (34,261)
-------------- ---------------
$ 34,656 $ 28,914
============== ===============
Depreciation of property, plant and equipment charged to operations amounted to
$6,182,000, $6,578,000 and $4,983,000 in 2009, 2008 and 2007.
(6) INTANGIBLE AND OTHER ASSETS:
----------------------------
Intangible and other assets consist of:
April 30, 2009 April 30, 2008
------------------------------------ ------------------------------------
(Thousands)
Accumulated Accumulated
Cost Amortization Cost Amortization
-------------- ---------------- -------------- ----------------
Software development costs $ 10,056 $ 6,156 $ 10,017 $ 3,780
Deferred order entry costs 4,835 - 5,681 -
Prepaid expenses 3,681 - 3,047 -
Customer contracts and relationships 15,000 2,863 15,000 1,613
Other 2,775 1,183 2,430 869
-------------- ---------------- -------------- ----------------
$ 36,347 $ 10,202 $ 36,175 $ 6,262
============== ================ ============== ================
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 twelve month period.
Customer contracts and relationships are amortized over twelve years.
Amortization related to deferred charges was $3,958,000, $3,829,000 and
$2,157,000 in 2009, 2008 and 2007. Amortization of intangible and other assets
for each of the next five fiscal years is estimated to be as follows: 2010 -
$3,649,000; 2011 - $3,136,000; 2012 - $1,481,000; 2013 - $1,369,000; and 2014 -
$1,261,000.
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
--------------------------------------
Accounts payable and accrued expenses consist of:
April 30,
---------------------------------
2009 2008
---------------- -------------
(Thousands)
Publisher payables, net $ 63,074 $ 77,003
Accrued expenses 4,473 5,000
Trade payables 3,772 5,753
Other 10,380 10,776
-------------- --------------
$ 81,699 $ 98,532
============== ==============
46
Pursuant to an arrangement with one publisher customer of the Newsstand
Distribution Services business, the Company has netted $28,565,000 and
$22,703,000 of accounts receivable against the related accounts payable at April
30, 2009 and 2008 (see Note 2).
(8) NOTES PAYABLE:
--------------
Notes payable consist of:
April 30,
--------------------------------
2009 2008
------------ --------------
(Thousands)
Line-of-credit arrangements:
Real estate operations $ 24,000 $ 18,000
Media services operations 8,866 4,582
Real estate operations term loan - 2,774
Other notes payable 5,070 624
------------ --------------
$ 37,936 $ 25,980
============ ==============
Fiscal year maturities of principal on notes outstanding at April 30, 2009 were
as follows: 2010 - $25,770,000; 2011 - $7,608,000; 2012 - $132,000; 2013 -
$106,000; 2014 - $112,000; and thereafter - $4,208,000.
Lines-of-credit and other arrangements
--------------------------------------
Real Estate - In January 2007, AMREP Southwest entered into a loan agreement
-----------
that replaced a prior loan agreement. The new loan agreement consisted of a new
$14,180,000 term loan facility and an existing $25,000,000 unsecured revolving
credit facility from the secured agreement it replaced. During September 2008,
the maturity date of the revolving credit facility was extended from September
2008 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 (3.25% at April 30, 2009) less 1.00%, or (ii) the 30-day LIBOR rate
(0.45% at April 30, 2009) 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, 2009, the
outstanding balance of the revolving credit facility was $24,000,000 with a
weighted average interest rate of 2.01%. The term loan facility, which required
prepayment in an amount equal to collections on the notes receivable held as
collateral and the amount of any such receivables that experienced payment
defaults, was repaid during 2009 and that facility has been terminated. The loan
agreement contains a number of restrictive covenants, including one that
requires the borrower to maintain a minimum tangible net worth.
AMREP Southwest has received a written commitment from the lender, which is
subject to certain conditions including the lender's approval of the loan
documentation, which provides for the replacement of the present revolving
credit facility at its September 2009 maturity with a new $22,500,000 revolving
credit facility. The new facility will be for a term to be selected by the
borrower of either (i) 364 days, or (ii) two years with a reduction of the
maximum loan amount to $20,000,000 at the 12 month anniversary of the new
facility. Borrowings will bear interest at the greater of 5% or the 30-day LIBOR
rate plus 3.5% and will be secured by mortgages on real estate having an
appraised value of at least 2-1/2 times the amount borrowed. The new facility
will limit other borrowings and will contain a number of financial covenants,
including requirements that the borrower maintain a minimum net worth and a
specified level of debt service coverage.
Media Services - On July 14, 2009, Kable and certain of its direct and indirect
--------------
subsidiaries entered into an Amended and Restated Loan and Security Agreement
(the "Present Credit Agreement") with a bank that further amended and restated
an earlier agreement with the bank's predecessor (the latter agreement, the
"Prior Credit Agreement").
The Present Credit Agreement provides for: (i) a revolving credit loan and
letter of credit facility of up to $20,000,000 ("Facility A") that may be used
for general business purposes, including the payment of expenses and other costs
associated with the consolidation of Kable's Subscription Fulfillment Services
business in Florida; and (ii) a second revolving credit loan facility of up to
$5,000,000 ("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. At the borrowers' option, up to $2,500,000 of
47
the bank's lending commitment for Facility D may be transferred to Facility A.
At April 30, 2009, $6,067,000 of Facility A loans and no Facility D loans were
outstanding. Additionally, term borrowings of approximately $2,800,000
("Facilities B and C") at April 30, 2009, bearing interest from 4.79% to 6.40%
per annum, that were incurred for capital expenditures under the Prior Credit
Agreement are now included in the borrowings under the Present Credit Agreement
in addition to Facilities A and D. Under the Present Credit Agreement, the
revolving credits mature on May 1, 2010 and the term borrowings are due in
installments through that date, as was the case under the Prior Credit
Agreement. The borrowers' obligations under the Present Credit Agreement are
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, as were the borrowers' obligations under the
Prior Credit Agreement.
The revolving loans under the Present Credit Agreement bear interest at the
borrowers' option at fluctuating rates that are either (i) a LIBOR-based rate
(0.3% at July 14, 2009) plus 3.25%, or (ii) the bank's prime rate (3.25% at July
14, 2009) plus 1.75% (the rates under the Prior Credit Agreement were either (i)
LIBOR-based plus a margin of 1.5% to 2.5% depending upon the funded debt to
EBITDA ratio, or (ii) the bank's prime rate).
The Present Credit Agreement requires the borrowers to maintain certain
financial ratios, which are changed in a number of respects from those contained
in the Prior Credit Agreement. The Present Credit Agreement, as did the Prior
Credit Agreement, also contains other 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, and that limit the annual
amount borrowers may incur for capital expenditures and other purposes and
impose certain minimum EBITDA requirements on the borrowers.
At April 30, 2009, Other notes payable consisted of equipment financing loans
with a weighted average interest rate of 5.75% and a mortgage note payable on a
warehouse with an interest rate of 6.35%.
(9) ACQUISITIONS:
-------------
On November 7, 2008, the Company purchased, through a newly-formed subsidiary of
Kable Media Services, Inc., certain assets of Service Parts Supply Corp.
("SPS"), a privately-held company engaged in the product repackaging and
fulfillment industry located in Fairfield, Ohio. In a separate transaction,
another Company subsidiary purchased a warehouse leased to SPS. These
transactions are expected to provide benefits to many of the customers of the
Company's product fulfillment subsidiary through the combination of that
subsidiary's services with those to be provided with the purchased SPS assets.
On the same date, another newly-formed subsidiary of Kable Media Services, Inc.
purchased certain assets of Resource One Staffing, LLC, a provider of temporary
staffing services that was majority-owned by the same individual who owned SPS.
The purchase price of the assets purchased in the three transactions was
approximately $3,075,000 and was financed from working capital and bank
borrowings. The transactions have been accounted for as a business combination.
The purchase price (including closing costs and excluding cash acquired) has
been preliminarily applied as follows: Receivables - $1,565,000; Inventory -
$118,000; Property, plant and equipment - $6,826,000; Mortgage note payable -
$4,747,000, and Other liabilities - $687,000. The following unaudited pro forma
financial information reflects the consolidated results of the Company as if the
purchase of the assets had occurred as of May 1, 2007: Revenues of $151,417,000
in 2009 and $186,474,000 in 2008; Net income (loss) of ($45,628,000) in 2009 and
$14,259,000 in 2008; and Earnings (loss) per share of ($7.61) in 2009 and $2.28
in 2008. These profroma results are not necessarily an indication of what may be
expected to occur in future periods.
In January 2007, the Company, through its Kable Media Services, Inc. subsidiary,
completed the acquisition of 100% of the stock of Palm Coast Data Holdco, Inc.,
which, through its subsidiary, Palm Coast Data LLC, (collectively, "Palm
Coast"), is a major provider of subscription fulfillment services for magazine
publishers and others. The acquisition has complemented and added service
capability to the Company's subscription fulfillment services business. The
merger consideration was financed with existing cash and borrowings and totaled
approximately $95,400,000. The transaction was 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
the acquisition date, 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 -
$10,082,000; Property, plant and equipment - $22,886,000; Deferred taxes, net -
$2,075,000; Deferred order entry costs - $1,636,000; Customer contracts and
relationships - $15,000,000; Other assets - $2,445,000; Goodwill - $48,948,000,
and Accounts payable and accrued expenses - $7,631,000. The useful lives of the
intangible assets acquired are as follows: deferred order entry costs - one
year; customer contracts and relationships - twelve years; and goodwill -
indefinite. The goodwill recognition of $48,948,000 was primarily related to the
48
future earnings and cash flows of Palm Coast anticipated at the time of the
purchase. Goodwill 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" (see Note
10).
(10) GOODWILL IMPAIRMENT
-------------------
Goodwill impairment is determined using a two-step process. The first step
involves a comparison of the estimated fair value of a reporting unit to its
carrying amount, including goodwill. In performing the first step, the Company
determines the fair value of a reporting unit using a discounted cash flow
("DCF") analysis. Determining fair value requires the exercise of significant
judgments, including judgments about appropriate discount rates, perpetual
growth rates and the amount and timing of expected future cash flows. The cash
flows employed in the DCF analyses are based on the Company's most recent
budgets and business plans for years beyond the current reporting period.
Discount rate assumptions are based on an assessment of the risk inherent in the
future cash flows of the respective reporting units. In addition, when a DCF
analysis is used as the primary method for determining fair value, the Company
assesses the reasonableness of its determined fair values by reference to other
fair value indicators where available, such as comparable company public trading
values, research analyst estimates and values observed in private market
transactions. If the estimated fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not impaired and the second
step of the impairment test is not necessary. If the carrying amount of a
reporting unit exceeds its estimated fair value, then the second step of the
goodwill impairment test must be performed. The second step of the goodwill
impairment test compares the implied fair value of the reporting unit's goodwill
with its goodwill carrying amount to measure the amount of impairment loss, if
any. The implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination.
As a result of the goodwill impairment test performed as of April 30, 2009, the
Company recorded a non-cash impairment charge related to the goodwill of its
Subscription Fulfillment Services segment of $50,246,000. The deterioration of
the economy during 2009, particularly with respect to the publishing industry
that represents the Company's main customer base, has resulted in lower than
expected full year 2009 operating results due to lower customer volumes and
higher attrition than previously experienced. These operating results, along
with near-term expectations that are in line with current business trends and
significant uncertainty about when the economy will recover, caused significant
changes to projected cash flows from prior expectations, which in turn resulted
in the impairment charge.
In connection with the goodwill impairment charge, the Company recorded a
deferred income tax benefit of $8,689,000 relating to $23,483,000 of tax
deductible goodwill. The $26,763,000 of non-tax deductible goodwill created a
permanent tax difference of $9,367,000 (see Note 12).
(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 2009, 2008 and 2007 was comprised of the
following components:
Year Ended April 30,
-----------------------------------------------------
2009 2008 2007
--------------- ---------------- ---------------
(Thousands)
Interest cost on projected
benefit obligation $ 1,806 $ 1,736 $ 1,789
Expected return on assets (2,077) (2,310) (2,224)
Plan expenses 253 146 180
Recognized net actuarial loss 291 164 325
--------------- ---------------- ---------------
Total cost (benefit) recognized in pretax income 273 (264) 70
Cost (benefit) recognized in pretax other
comprehensive income 8,586 1,065 (2,017)
--------------- ---------------- ---------------
Net periodic pension cost (benefit) $ 8,859 $ 801 $ (1,947)
=============== ================ ===============
49
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 $1,160,000, $0 and $0,
respectively.
Assumptions used in determining net periodic pension cost and the benefit
obligations were:
Year Ended April 30,
-----------------------------------------------------
2009 2008 2007
-------------- --------------- ---------------
Discount rate used to determine net
periodic pension cost 6.42% 5.75% 5.75%
Discount rate used to determine pension
benefit obligation 7.08% 6.42% 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,
----------------------------------------------------
2009 2008 2007
--------------- ------------- -------------
(Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 29,270 $ 31,283 $ 32,159
Interest cost 1,806 1,736 1,789
Actuarial (gain) loss (529) (1,616) (757)
Benefits paid (2,300) (2,133) (1,908)
--------------- ------------- -------------
Benefit obligation at end of year $ 28,247 $ 29,270 $ 31,283
--------------- ------------- -------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 27,225 $ 30,040 $ 28,925
Contributions 240 - 44
Actual return on plan assets (7,393) (507) 3,125
Benefits paid (2,300) (2,133) (1,908)
Plan expenses (190) (175) (146)
--------------- ------------- -------------
Fair value of plan assets at end of year $ 17,582 $ 27,225 $ 30,040
--------------- ------------- -------------
Funded (underfunded) status: $ (10,665) $ (2,045) $ (1,243)
=============== ============= =============
Recognition of underfunded status:
Accrued pension costs $ (10,665) $ (2,045) $ (1,243)
=============== ============= =============
The following table summarizes the amounts recorded in accumulated other
comprehensive loss, which have not yet been recognized as a component of net
periodic pension expense (in thousands):
2009 2008 2007
--------------- ------------- -------------
Pre-tax accumulated comprehensive loss $ 14,423 $ 5,836 $ 4,771
--------------- ------------- -------------
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
effect on individual line items in the accompanying balance sheet, and no
adjustments of retained earnings and accumulated comprehensive income (loss)
were required.
The following table summarizes the changes in accumulated other comprehensive
loss related to the plan for the years ended April 30, 2009 and 2008 (in
thousands):
Pension Benefits
-------------------------------
Pre-tax Net of Tax
-------------- -------------
Accumulated comprehensive loss, May 1, 2007 $ 4,771 $ 2,862
Net actuarial loss 1,229 762
Amortization of net loss (164) (102)
-------------- -------------
Accumulated comprehensive loss, April 30,2008 5,836 3,522
Net actuarial loss 8,877 5,504
Amortization of net loss (290) (180)
-------------- -------------
Accumulated comprehensive loss, April 30,2009 $ 14,423 $ 8,846
============== =============
50
The average asset allocation for the retirement plan by asset category was as
follows:
April 30,
-------------------------------
2009 2008
-------------- -------------
Equity securities 68% 74%
Fixed income securities 28 23
Other (principally cash and cash equivalents) 4 3
-------------- -------------
Total 100% 100%
============== =============
The Company recorded other comprehensive income (loss), net of tax, of
($5,324,000) in 2009, ($660,000) in 2008 and $1,210,000 in 2007 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 seeking to achieve 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 requirements. The
Company made contributions to the plan for 2009, 2008 and 2007 as follows:
$240,000, none and $44,000. The Company expects to make a contribution of
approximately $1,100,000 to the retirement plan in fiscal year 2010.
The amount of future annual benefit payments is expected to be between
$2,200,000 and $2,500,000 in fiscal years 2010 through 2014, and an aggregate of
approximately $11,800,000 is expected to be paid in the fiscal five-year period
2015 through 2019.
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. During the
three years ending April 30, 2009, the Company matched 66.67% of eligible
employee contributions not in excess of 6% of such employee compensation.
Effective May 1, 2009, the Company suspended the matching contribution to the
plan.
The Company also has a 401(k) plan in which originally all Palm Coast employees
with more than six months of service were eligible to participate and contribute
to through salary deductions. During the period from the acquisition of Palm
Coast (see Note 9) through April 30, 2009, pursuant to a mandatory matching
provision in the plan, the Company matched 50% of the employee contributions not
in excess of 6% of eligible compensation. In April 2009, the Company amended the
plan to require an employee to have one year of service to participate and to
make the matching provision optional. Effective May 1, 2009, the Company
suspended the matching contribution to the plan.
The Company's contributions to the plans totaled approximately $1,181,000,
$1,263,000 and $981,000 in 2009, 2008 and 2007.
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 March 15 and September 15 of each year 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 in 2007
51
(7,500 shares issued in 2007). This plan was terminated in December 2006 and, as
a result, no shares were issued or expense recorded in 2009 or 2008.
Equity compensation plan
------------------------
The Company adopted the 2006 Equity Compensation 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,
2009, the Company had not issued any 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,
-----------------------------------------------------------------------
2009 2008 2007
-------------------- ----------------------- ----------------------
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 4,500 $ 20.28 7,000 $ 18.56
Granted - - - - - -
Exercised (1,000) $ 15.19 - - (2,500) $ 15.47
Expired or canceled - - - - - -
----------------- ---------------- ----------------
Options outstanding at
end of year 3,500 $ 21.74 4,500 $ 20.28 4,500 $ 20.28
================= ================ ================
Available for grant at
end of year - - -
================= ================ ================
Options exercisable at
end of year 3,500 4,500 4,500
================= ================ ================
Range of exercise
prices for options
exercisableat end of
year $17.55 to $24.88 $15.19 to $24.88 $15.19 to $24.88
================= ================ ================
Options outstanding at April 30, 2009 are presently exercisable and expire, in
part in September 2009 with the balance expiring in September 2010. The weighted
average remaining contractual lives of options outstanding at April 30, 2009,
2008 and 2007 were 1.0, 1.6 and 3.2 years.
There was no intrinsic value (the difference between the price of the underlying
shares and the exercise price) of options exercisable at April 30, 2009. The
total intrinsic value of options exercised during the years ended April 30, 2009
and 2007 was $39,000 and $122,000, determined as of the date of option exercise.
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 2009, 2008 or 2007.
52
(12) INCOME TAXES:
-------------
The provision (benefit) for income taxes consists of the following:
Year Ended April 30,
-------------------------------------------------------
2009 2008 2007
---------------- --------------- ---------------
(Thousands)
Current:
Federal $ (3,169) $ 5,511 $ 18,228
State and local 305 (812) 1,540
---------------- --------------- ---------------
(2,864) 4,699 19,768
---------------- --------------- ---------------
Deferred:
Federal (6,746) 2,777 2,940
State and local (1,278) 309 328
---------------- --------------- ---------------
(8,024) 3,086 3,268
---------------- --------------- ---------------
Total provision (benefit) for income taxes $ (10,888) $ 7,785 $ 23,036
================ =============== ===============
The provision (benefit) for income taxes has been allocated as follows:
Year Ended April 30,
-------------------------------------------------------
2009 2008 2007
---------------- --------------- ---------------
(Thousands)
Continuing operations $ (10,888) $ 7,819 $ 23,971
Discontinued operations - (34) (935)
---------------- --------------- ---------------
Total provision for income taxes $ (10,888) $ 7,785 $ 23,036
================ =============== ===============
The components of the net deferred income tax liability are as follows:
April 30,
-------------------------------------
2009 2008
--------------- ----------------
(Thousands)
Deferred income tax assets:
State tax loss carryforwards $ 3,956 $ 3,679
Accrued pension costs 3,719 785
Federal NOL carryforward 1,790 1,752
Vacation accrual 1,175 1,236
Intangibles and deductible goodwill 9,712 1,098
Other (195) (285)
--------------- ----------------
Total deferred income tax assets 20,157 8,265
--------------- ----------------
Deferred income tax liabilities:
Real estate basis differences (1,765) (1,527)
Reserve for periodical returns (1,883) (2,210)
Depreciable assets (5,772) (2,532)
Deferred gains on investment assets (5,869) (7,019)
Capitalized costs for financial reporting
purposes, expensed for tax (3,525) (4,670)
--------------- ----------------
Total deferred income tax liabilities (18,814) (17,958)
--------------- ----------------
Valuation allowance for realization of state tax
loss carryforwards (2,414) (2,665)
--------------- ----------------
Net deferred income tax liability $ (1,071) $ (12,358)
=============== ================
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:
53
Year Ended April 30,
---------------------------------------------------------
2009 2008 2007
----------------- ---------------- ---------------
(Thousands)
Computed tax provision at
statutory rate $ (19,013) $ 7,554 $ 24,734
Increase (reduction) in tax resulting from:
State income taxes, net of federal
income tax effect (631) (325) 1,296
Real estate charitable land contribution - (481) (1,419)
Adjustment for unrecognized tax benefits (481) 1,160 -
Non-deductible goodwill impairment (see Note 10) 9,367 - -
Other (130) (89) (640)
----------------- ---------------- ----------------
Actual tax provision $ (10,888) $ 7,819 $ 23,971
================= ================ ================
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. The current year reduction in the allowance relates
to the expiration of certain carryforwards that had been previously fully
reserved. The remaining net operating loss carryforwards will expire beginning
in the fiscal year ending April 30, 2010 through April 30, 2030. The deferred
tax asset of $3,956,000 related to the state net operating loss carryforwards
expires in future fiscal years, as follows: 2012 - $32,000; 2013 - $175,000;
2014 - $111,000; 2015 - $369,000; 2016 - $324,000; and thereafter - $2,945,000.
The Company has a federal net operating loss carryforward of approximately
$5,000,000 resulting from the purchase 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 9) is amortizable for tax
purposes, and remains amortizable subsequent to the goodwill impairment charge
(see Note 10).
As of May 1, 2008, 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"), which clarifies the accounting for uncertain tax
positions, prescribing a minimum recognition threshold a tax position is
required to meet before being recognized, and providing guidance on the
derecognition, measurement, classification and disclosure relating to income
taxes. The adoption of FIN 48 did not have an impact on the Company's
consolidated financial statements.
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,
2005 are no longer subject to examination.
The following table summarizes the beginning and ending gross amount of
unrecognized tax benefits (in thousands):
2009 2008
------------- -------------
Gross unrecognized tax benefits at beginning of year $ 5,223 $ 4,289
Gross increases:
Additions based on tax positions related to current year 64 54
Additions based on tax positions of prior years 589 880
Gross decreases:
Reductions based on tax positions of prior years (406) -
Reductions based on the lapse of the applicable
statute of limitations (847) -
------------- -------------
Gross unrecognized tax benefits at end of year $ 4,623 $ 5,223
============= =============
The total amount of unrecognized tax benefits at April 30, 2009 and 2008 was
$1,585,000 and $2,076,000 which, if recognized, would have an impact on the
effective tax rate. The Company believes it is reasonably possible that the
liability for unrecognized tax benefits will decrease by up to approximately
$960,000 in the next twelve months due to the expiration of the statute of
limitations.
54
The Company has elected to include interest and penalties in its income tax
expense. The total amount of interest payable recognized in the accompanying
consolidated balance sheets was $685,000 at April 30, 2009 and $717,000 at April
30, 2008. No amount has been accrued for penalties. In 2009, the Company
recognized a net credit of $32,000 to its income tax provision related to
interest, which resulted from the reduction of unrecognized tax benefits due to
the expiration of the statute of limitations, offset in part by interest accrued
for existing uncertain tax positions.
(13) SHAREHOLDERS' EQUITY:
---------------------
The Company recorded other comprehensive income (loss) of ($5,324,000) in 2009,
($660,000) in 2008 and $1,210,000 in 2007 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. The Company reacquired
658,400 shares under this authorization, all in open market transactions, for a
total purchase price, including commissions, of $21,363,000. There were no stock
repurchases by the Company in 2009 or 2007.
(14) DISCONTINUED OPERATIONS:
------------------------
Loss from discontinued operations of $57,000 and $1,591,000, net of tax, in 2008
and 2007 reflected the costs incurred in connection with the settlement of all
litigation related to the Company's El Dorado, New Mexico former water utility
subsidiary, which was taken through condemnation proceedings during fiscal year
2006.
(15) RESTRUCTURING AND FIRE RECOVERY COSTS:
--------------------------------------
In January 2008, the Company announced a project to consolidate its Subscription
Fulfillment Services business operations from three locations in Colorado,
Florida and Illinois into one existing location at Palm Coast, Florida, which is
expected to streamline operations, improve service to clients and create cost
efficiencies through reduced overhead costs and the elimination of operating
redundancies. This project, which is now well underway, is expected to require
capital expenditures in the range of $9,000,000 to $12,000,000. It is scheduled
to be implemented over the next two years and may involve approximately
$6,000,000 of non-recurring cash costs for severance, training and transition,
facility closings and equipment relocation. The State of Florida and the City of
Palm Coast have agreed to provide incentives for the project, including cash and
employee training grants and tax relief, which could amount to as much as
$8,000,000, largely contingent on existing job retention, new job creation and
capital investment. Previously during 2008, the Company announced (i) one
significant workforce reduction in its Subscription Fulfillment Services
business that occurred in the third quarter and (ii) a plan to redistribute the
work performed at the Marion, Ohio facility of its Subscription Fulfillment
Services business and the scheduled closing of that facility and the
consolidation of subscription fulfillment operations customer call centers,
which was completed in 2009. During 2009, the Company recognized $293,000 of
income for certain incentives related to the consolidation project, which are
netted with costs of $1,501,000, principally for severance. As a result, the
Company reported a net charge to operations of $1,121,000 related to the
consolidation project in 2009 compared to a net charge of $1,159,000 for 2008,
principally for severance and consulting costs. The items of income for
incentives and costs related to the consolidation project are included in
Restructuring and fire recovery costs in the Company's consolidated statements
of operations and retained earnings.
In December 2007, a warehouse of approximately 38,000 square feet leased by a
Kable subsidiary in Oregon, Illinois and its contents were totally destroyed by
fire. The warehouse was used principally to store back issues of magazines
published by certain customers for whom the Company filled back-issue orders as
part of its services. The Company was required to provide insurance for that
property of certain of those customers. Through June 30, 2009, the Company's
insurance carrier had paid approximately $263,000 to customers for lost
materials. The Company believes that the resolution of other pending or
unasserted claims related to materials of certain publishers for whom it was
required to provide insurance after taking into account the proceeds from its
property insurance claims, will not have a material effect on its consolidated
financial position, results of operations or cash flows.
The Company has filed a preliminary claim with its insurance provider for its
property loss as a result of the fire and has been advanced $500,000 for
replacement of such property. During 2009, the Company replaced a portion of the
fixed assets lost in the warehouse fire and recorded a $347,000 gain resulting
55
from the recognition of insurance proceeds, which is netted against costs
related to the fire, principally for legal and other advisory costs that were
not covered by insurance. As a result, the Company reported a net gain to
operations of $71,000 for 2009. In 2008 the Company recorded a net charge to
operations of $354,000 related to fire recovery costs. The item of income
related to insurance proceeds and the fire recovery costs are included in
Restructuring and fire recovery costs in the Company's consolidated statements
of operations and retained earnings. In addition, the Company recorded $287,000
of other income in 2009 for a business interruption claim resulting from the
fire.
(16) COMMITMENTS AND CONTINGENCIES:
------------------------------
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 2009, 2008 and 2007 was approximately $6,828,000,
$9,087,000 and $8,295,000.
The total minimum rental commitments for fiscal years subsequent to April 30,
2009 of $21,074,000 are due as follows: 2010- $4,919,000; 2011 - $4,038,000;
2012 - $3,817,000; 2013 - $3,418,000; 2014 - $2,694,000; and thereafter -
$2,188,000.
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:
-----------
In June 2008, a lawsuit entitled Haan, etc. v, Kable News Company, Inc., et al,
-----------------------------------------------
was filed in the Circuit Court of the Fifteenth Judicial Circuit, Ogle County,
Illinois against the Company's Kable News Company, Inc. ("Kable News")
subsidiary by an insurance company as subrogee of the owner of a warehouse
building leased to the subsidiary that was destroyed in a fire in December
2007. The lawsuit also named as a defendant a temporary staffing company that
provided the subsidiary with an employee who is alleged to have had a role in
causing the fire. Plaintiff's claims specific to Kable News are based on
allegations of negligence and willful and wanton misconduct. Plaintiff's
complaint seeks damages in excess of $100,000. The Company's insurance carrier
has undertaken Kable News' defense under a reservation of rights and provides
coverage up to the policy limit, which may or may not be as much as the full
amount of plaintiff's claimed damages, which is unknown at this time. A summary
judgment motion brought by the temporary staffing company has been denied. The
Company believes Kable News has good defenses to the claims and also has
potential cross-claims against the other parties for their conduct in the
matter, and Kable News is vigorously defending the lawsuit. However, the
proceeding is at an early stage, and the Company is not in a position to predict
its outcome.
In November 2008, a lawsuit entitled Alpinist, et al v. Haan, et al was filed in
------------------------------
the Circuit Court of the Fifteenth Judicial Circuit, Ogle County, Illinois
against Kable News by a magazine publisher and a number of insurance companies
as the subrogees of other magazine publishers seeking damages for their property
stored by Kable News in the warehouse referred to in the previous paragraph that
was destroyed in the fire. The three defendants are the warehouse owner, Kable
News and the temporary staffing company that is a defendant in the lawsuit
described in the previous paragraph. Plaintiffs' claims specific to Kable News
are based on allegations of negligence, breach of contract and willful and
wanton misconduct. The complaint seeks damages in an amount in excess of
$1,000,000. The Company believes that Kable News has good defenses to the claims
and also has potential cross-claims against the other defendants for their
conduct in the matter, and intends vigorously to defend the lawsuit. However,
the proceeding is at an early stage, and the Company is not in a position to
predict its outcome.
On February 9, 2009, a civil action was commenced in the United States District
Court for the Southern District of New York entitled Source Interlink
-----------------
Distribution, LLC, et al. v. American Media, Inc., et al. Source Interlink
------------------------------------------------------------
Distribution, LLC ("Source") is a wholesaler of magazines and in the lawsuit it
56
alleged that magazine publishers and distributors, including Kable Distribution
Services, Inc. ("Kable Distribution"), which is a wholly-owned subsidiary of the
Company, conspired to boycott Source to drive it out of business, and that other
wholesalers participated in this effort. Source asserted claims under Section 1
of the Sherman Act (antitrust), for defamation and for tortious interference
with its contracts with retailers. Damages were not quantified. In April 2009,
Source and Kable Distribution agreed to settle the lawsuit with each of them
denying any and all wrongdoing in connection with any claims and no payment
being required of Kable Distribution. In connection with the settlement, a
two-year agreement was entered into under which Kable Distribution will continue
to supply magazines for Source's wholesale business. In accordance with the
settlement agreement, on April 14, 2009, the lawsuit was discontinued against
Kable Distribution, with prejudice.
On March 10, 2009, a civil action was commenced in the United States District
Court for the Southern District of New York entitled Anderson News, L.L.C., et
--------------------------
al. v. American Media, Inc., et al. Anderson News, L.L.C. was a wholesaler of
-----------------------------------
magazines. It has alleged that magazine publishers and distributors, including
Kable Distribution, conspired to boycott Anderson to drive it out of business,
and that other wholesalers participated in this effort. It has asserted claims
under Section 1 of the Sherman Act (antitrust), for defamation, for tortious
interference with its contracts with retailers, and for civil conspiracy.
Damages have not been quantified, but would presumably be alleged to be
substantial. Anderson has alleged that the distributor and publisher defendants
acted in concert to cut off Anderson from its supply of magazines to enable them
to gain control of the single-copy magazine distribution channel. The Company
believes that Kable Distribution has good defenses to the claims and intends
vigorously to defend the lawsuit. However, the lawsuit is at an early stage, and
the Company is not in a position to predict 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, liquidity or results of operations of the Company and its
subsidiaries.
(18) SUBSEQUENT EVENTS:
------------------
On June 9, 2009, the Company's Subscription Fulfillment Services operations
received $3,000,000 pursuant to an agreement with the State of Florida as part
of certain incentives made available to the Company with the announced project
to consolidate its magazine subscription, membership and direct mail fulfillment
services locations into one location at Palm Coast, Florida (see Note 15). These
funds will be used to further the consolidation project primarily by funding
anticipated capital expenditures.
(19) 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 $2,916,000 and $11,878,000 versus carrying amounts of $3,176,000
and $12,660,000 at April 30, 2009 and 2008. The estimated fair value of the
Company's long-term, fixed-rate notes payable was $8,524,000 and $2,358,000
versus carrying amounts of $7,869,000 and $2,311,000 at April 30, 2009 and 2008.
(20) INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT INDUSTRY SEGMENTS:
--------------------------------------------------------------------------
The Company has identified four 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 business has three identified segments: (i) Subscription Fulfillment
Services, (ii) Newsstand Distribution Services and (iii) Product Fulfillment
Services and Other. Subscription Fulfillment Services operations involve the
performance of subscription fulfillment and other related activities on behalf
of various publishers and other clients. Newsstand Distribution Services
operations involve the national and, to a small degree, international
distribution and sale of periodicals to wholesalers. Product Fulfillment
Services and Other involve the performance of product fulfillment, packaging and
temporary staffing activities. Certain common expenses as well as identifiable
57
assets are allocated among industry segments based upon management's estimate of
each segment's absorption. Corporate and Other revenues and expenses not
identifiable with a specific segment are shown as a separate segment in this
presentation.
As a result of the purchase of assets of certain businesses in November 2008
(see Note 9), the Company reclassified for 2009, 2008 and 2007 certain revenues,
expenses and capital expenditures previously reported as part of its
Subscription Fulfillment Services segment and has reported them with revenues,
expenses and capital expenditures of those businesses since the date of purchase
as a separate segment, "Product Fulfillment Services and Other".
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):
Product
Real Estate Subscription Newsstand Fulfillment
Operations Fulfillment Distribution Services and Corporate
Services Services Other and Other Consolidated
------------------------------------------------------------------------------------------
Year ended April 30, 2009 (a):
Revenues $ 9,621 $ 115,964 $ 12,400 $ 7,842 $ 74 $ 145,901
Income (loss) from continuing operations 2,565 (43,839) (3,510) 304 1,014 (43,466)
Provision (benefit) for income taxes from
continuing operations 465 (10,490) (1,786) 223 700 (10,888)
Interest expense (income), net (b) 73 2,855 (1,050) 31 (1,194) 715
Depreciation and amortization 39 9,423 564 56 77 10,159
Goodwill impairment - 50,246 - - - 50,246
------------------------------------------------------------------------------------------
EBITDA (c) $ 3,142 $ 8,195 $ (5,782) $ 614 $ 597 $ 6,766
------------------------------------------------------------------------------------------
Goodwill $ - $ - $ 3,893 $ - $ - $ 3,893
Total assets $ 97,970 $ 56,111 $ 55,918 $ 4,618 $ 13,035 $ 227,652
Capital expenditures $ 3,114 $ 1,698 $ 10 $ 326 $ 64 $ 5,212
---------------------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2008 (a):
Revenues $ 33,073 $ 122,521 $ 12,916 $ 3,259 $ 292 $ 172,061
Income (loss) from continuing operations 12,187 (1,554) 1,293 141 1,695 13,762
Provision (benefit) for income taxes from
continuing operations 6,932 (830) 812 75 830 7,819
Interest expense (income), net (b) - 5,041 (1,571) - (2,458) 1,012
Depreciation and amortization 135 9,434 872 77 6 10,524
------------------------------------------------------------------------------------------
EBITDA (c) $ 19,254 $ 12,091 $ 1,406 $ 293 $ 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 $ 83,011 $ 14,384 $ 3,110 $ 1,486 $ 204,839
Income from continuing operations 43,190 49 2,009 105 1,344 46,697
Provision (benefit) for income taxes from
continuing operations 22,688 44 1,226 94 (81) 23,971
Interest expense (income), net (b) - 2,202 (716) - (784) 702
Depreciation and amortization 201 6,001 953 159 5 7,319
------------------------------------------------------------------------------------------
EBITDA (c) $ 66,079 $ 8,296 $ 3,472 $ 358 $ 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
(a) Segment information reported above does not include net income (loss)
from discontinued operations of $0, ($57,000) and ($1,591,000) in
2009, 2008 and 2007.
(b) Interest expense, net includes inter-segment interest income that is
eliminated in consolidation.
58
(c) The Company uses EBITDA (defined for this purpose as income from
continuing operations before interest expense, net, income taxes,
depreciation, amortization and goodwill impairment) in addition to
income as key measures of profit or loss for segment performance and
evaluation purposes.
(21) SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
----------------------------------------------
(In thousands of dollars, except per share amounts)
Quarter Ended
---------------------------------------------------------------
Year ended April 30, 2009: July 31, October 31, January 31, April 30,
2008 2008 2009 2009 (b)
-------------- --------------- -------------- --------------
Revenues $ 35,570 $ 40,290 $ 35,720 $ 34,321
Gross profit 4,201 9,443 4,131 (3,893)
Net income (loss) $ 71 $ 2,895 $ (100) $ (46,332)
============== =============== ============== ==============
Earnings (loss) per share - basic and diluted (a) $ .01 $ .48 $ (.02) $ (7.73)
============== =============== ============== ==============
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
============== =============== ============== ==============
(a) The sum of the quarters does not equal the full year earnings per
share due to rounding in 2009 and changes in outstanding shares during
2008.
(b) Includes a pre-tax charge of $50,246,000 related to the impairment of
goodwill (after tax $41,557,000, or $6.93 per share), see Note 10.
Item 9. Changes in and Disagreements with Accountants on Accounting and
------- -----------------------------------------------------------------------
Financial Disclosure
--------------------
None
Item 9A. Controls and Procedures
-------- -----------------------
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's chief
financial officer and the other executive officers whose certifications
accompany this annual report, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
59
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 Management's Annual Report on Internal Control Over Financial
Reporting, included in Part II, "Item 8. Financial Statements and Supplementary
Data" of this report. The attestation report called for by Item 308(b) of
Regulation S-K is incorporated herein by reference to Report of Independent
Public Accounting Firm on Internal Control Over Financial Reporting, included in
Part II, "Item 8. Financial Statements and Supplementary Data" of this report.
No change in the Company's system of internal control over financial reporting
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
Item 9B. Other Information
-------- -----------------
None
PART III
--------
Item 10. Directors, Executive Officers and Corporate Governance
-------- ------------------------------------------------------
The information set forth under the headings "Election of Directors", "The Board
of Directors and its Committees" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 2009 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
(the "2009 Proxy Statement") is incorporated herein by reference. In addition,
information concerning the Company's executive officers is included in Part I
above under the caption "Executive Officers of the Registrant".
Item 11. Executive Compensation
-------- ----------------------
The information set forth under the headings "Compensation of Executive
Officers" and "Compensation of Directors" and the subheadings "Report of the
Compensation and Human Resources Committee" and "Compensation Committee
Interlocks and Insider Participation" in the 2009 Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
-------- ----------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information set forth under the headings "Common Stock Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information" in
the 2009 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director
--------- ---------------------------------------------------------------------
Independence
------------
The information set forth under the headings "The Board of Directors and its
Committees" and "Certain Transactions" and the subheading "Compensation
Committee Interlocks and Insider Participation" in the 2009 Proxy Statement is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
-------- --------------------------------------
The information set forth under the subheadings "Audit Fees" and "Pre-Approval
Policies and Procedures" in the 2009 Proxy Statement is incorporated herein by
reference.
60
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
-------- ------------------------------------------
(a) 1. Financial Statements. The following consolidated financial statements and
--------------------
supplementary financial information are filed as part of this report:
AMREP Corporation and Subsidiaries:
- Management's Annual Report on Internal Control Over Financial
Reporting
- Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting dated July 14, 2009 - McGladrey &
Pullen, LLP
- Report of Independent Registered Public Accounting Firm dated July 14,
2009 - McGladrey & Pullen, LLP
- Consolidated Balance Sheets - April 30, 2009 and 2008
- Consolidated Statements of Operations for the Three Years Ended April
30, 2009
- Consolidated Statements of Shareholders' Equity for the Three Years
Ended April 30, 2009
- Consolidated Statements of Cash Flows for the Three Years Ended April
30, 2009
- 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.
(b) Exhibits. See (a)3 above.
--------
(c) Financial Statement Schedules. See (a)2 above.
-----------------------------
61
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, 2009 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, 2009
Officer and Principal
Accounting Officer*
Dated: July 14, 2009
/s/ Edward B. Cloues II /s/ Samuel N. Seidman
------------------------ --------------------------
Edward B. Cloues II Samuel N. Seidman
Director Director
Dated: July 14, 2009 Dated: July 14, 2009
/s/ Lonnie A. Coombs /s/ James Wall
------------------------ --------------------------
Lonnie A. Coombs James Wall
Director Director*
Dated: July 14, 2009 Dated: July 14, 2009
/s/ Jonathan B, Weller
------------------------ --------------------------
Nicholas G. Karabots Jonathan B, Weller
Director Director
Dated: July __, 2009 Dated: July 14, 2009
/s/ Michael P. Duloc
--------------------------
Michael P. Duloc
President, Kable Media Services, Inc.*
Dated: July 14, 2009
-----------------
*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.
62
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, 2009:
Allowance for doubtful accounts
(included in receivables - real
estate operations on the
consolidated balance sheet) $ 112 $ - $ - $ 22 $ 90
Allowance for estimated returns and
doubtful accounts (included in
receivables - media services
operations on the consolidated
balance sheet) $ 56,585 $ (264) $ - $ 184 $ 56,137
---------------- --------------- ---------------- -------------- --------------
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 - media services
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 - media services
operations on the consolidated
balance sheet) $ 55,606 $ (1,447) $ - $ 553 $ 53,606
--------------- --------------- ---------------- -------------- --------------
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.
63
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 Second Modification to Loan Documents dated effective as of October 1,
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 as the same were amended by the First Modification to
Loan Documents - Incorporated by reference to Exhibit 10.1 to
Registrant's Current Report on Form 8-K filed November 13, 2008.
4.4 Third Modification to Loan Documents dated effective as of April 27,
2009, 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 as the same were amended by the First Modification to
Loan Documents and the Second Modification to Loan Documents - Filed
herewith.
4.5 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.
4.6 $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.
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 filed July 27, 2006.**
10.3 Amended and Restated Distribution Agreement dated as of July 1, 2008
between Kappa Publishing Group, Inc. and Kable Distribution Services,
Inc. - Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q filed March 12, 2009.**
10.4 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.*
64
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.
65