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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2003 Commission File Number 1-4702
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
AMREP CORPORATION
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(Exact name of registrant as specified in its Charter)
Oklahoma 59-0936128
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
641 Lexington Ave., 6th Floor
New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 705-4700
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
Aggregate market value of Common Stock held by non-affiliates of the Registrant,
computed by reference to the last sales price of such Common Stock on October
31, 2002, on the New York Stock Exchange Composite Tape - $18,443,807.
Number of shares of Common Stock, par value $.10 per share, outstanding at July
24, 2003 - 6,590,112.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the Registrant are incorporated by
reference into the indicated parts of this report: Definitive Proxy Statement
for 2003 Annual Meeting - Part III.
PART I
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Item 1. Business
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GENERAL
The Company*, through its subsidiaries, is primarily engaged in three
businesses: the Real Estate business operated by AMREP Southwest Inc. and its
subsidiaries (collectively, "AMREP Southwest"), and the Fulfillment Services and
Newsstand Distribution Services businesses operated by Kable News Company, Inc.
and its subsidiaries (collectively, "Kable").
Data concerning Industry Segments is set forth in Note 14 of Notes to
Consolidated Financial Statements. The Company's foreign sales and activities
are not significant.
Recent Developments
On April 15, 2003, the Company, through a wholly-owned subsidiary of Kable,
acquired certain tangible and intangible assets and assumed certain liabilities
constituting the subscription fulfillment business of Electronic Data Systems
Corporation and various subsidiaries ("EDS") based in Louisville, Colorado. The
business had revenues of approximately $82 million for the year ended December
31, 2002; however, because of known customer losses prior to the purchase, it is
anticipated that the annual revenues and net income of the acquired business
will be substantially reduced from historical levels. The purchase price for the
assets was approximately $10 million, and consisted of cash and the assumption
of certain liabilities. The physical assets acquired in the transaction included
principally mail processing, communications and data processing equipment
located, for the most part, in a leased facility in Louisville, Colorado at
which EDS had conducted the acquired business. Kable has entered into a sublease
with EDS for this facility, and it intends to continue to operate these assets
and conduct the acquired business at this location. As a result of this
transaction, the Company believes that it is now the second largest provider of
subscription fulfillment services to magazine publishers in the United States.
REAL ESTATE OPERATIONS
The Company conducts its real estate business through AMREP Southwest, with
these activities occurring primarily in Rio Rancho, New Mexico. As of July 1,
2003, the real estate business employed approximately 15 persons.
Land Development Operations
Rio Rancho (including the City) consists of 91,049 contiguous acres in Sandoval
County, New Mexico, near Albuquerque, of which some 72,750 acres have been
platted into approximately 112,400 homesite and commercial lots and 16,300 acres
are dedicated to community facilities, roads and drainage with the remainder
consisting of unplatted land. At April 30, 2003, approximately 84,000 of these
lots had been sold. The Company currently owns approximately 21,100 acres in Rio
Rancho, of which approximately 6,000 acres are in contiguous blocks which have
been developed or are suitable for development and approximately 2,200 acres are
in areas with a high concentration of ownership suitable for special assessment
districts or city redevelopment areas which may allow for future development
under the auspices of local government. The balance is in scattered lots which
may require the purchase of a sufficient number of adjoining lots to create
tracts suitable for development or which may be sold individually or in small
groups.
_________________
* As used herein, "Company" includes the Registrant and its subsidiaries unless
the context requires or indicates otherwise.
2
Development activities conducted or arranged by the Company include the
obtaining of necessary governmental approvals ("entitlements"), installation of
utilities and necessary storm drains, and building or improving of roads. At Rio
Rancho, the Company is developing both residential lots and sites for commercial
and industrial use as the demand warrants, and also is securing entitlements for
large development tracts for sale to homebuilders. The engineering work at Rio
Rancho is performed by both Company employees and outside firms, but development
work is performed by outside contractors. Land at Rio Rancho is marketed by
Company personnel, both directly and through brokers. The Company competes with
other owners of land in the Albuquerque area who offer for sale developed
residential lots and sites for commercial and industrial use.
The commercial areas in Rio Rancho presently include more than 500 businesses
and professional offices, as well as 15 shopping centers with approximately 1.25
million square feet of retail and office space, including a 55,000 square foot
office building owned by the Company. The industrial areas have approximately 80
buildings with over 4.2 million square feet, including a manufacturing facility
containing approximately 3.1 million square feet which is owned and occupied by
Intel Corporation, Rio Rancho's largest employer.
Since early 1977, no individual lots without homes at Rio Rancho have been sold
by the Company to consumers. Over 50,000 lots without homes were sold prior to
1977, and most of these are in areas where utilities have not yet been
installed. However, under certain of the contracts pursuant to which the lots
were sold, if utilities have not reached the respective lot when the purchaser
is ready to build a home, the Company is obligated to exchange a lot in an area
then serviced by water, telephone and electric utilities for the lot of the
purchaser, without cost to the purchaser. The Company has not incurred
significant costs related to such exchanges.
The Company owned two tracts of land in Colorado, consisting of one residential
property of approximately 160 acres planned for approximately 350 homes which is
being offered for sale subject to the Company obtaining all necessary approvals,
and one property of approximately 10 acres zoned for commercial use, which is
also being offered for sale but which may be developed by the Company.
Other Real Estate Projects
The Company developed the Eldorado at Santa Fe, New Mexico subdivision which had
approximately 2,750 homes as of April 30, 2003. The Company sold 9 lots there in
fiscal 2003, and 1 lot remained to be sold at the end of fiscal 2003. The
Company also owns and operates a water utility company which serves the
subdivision and is under contract for sale. The closing has been delayed pending
completion of the regulatory approval process and satisfaction of other
conditions, and there is no assurance that the sale will be concluded.
The Company also owned approximately 14 acres in the Orlando, Florida area at
the beginning of fiscal 2003. During fiscal 2003, approximately 1.6 acres of
this property was acquired by a governmental authority through condemnation
proceedings, and a second condemnation of approximately 6 acres is expected to
occur during fiscal 2004.
FULFILLMENT SERVICES AND NEWSSTAND DISTRIBUTION SERVICES OPERATIONS
Through Kable, the Company (i) performs fulfillment and related services for
publishers and other customers and (ii) distributes periodicals nationally and
in Canada and, to a small degree, in other foreign countries. As of July 1,
2003, Kable employed approximately 1,500 persons, of whom approximately 1,340
were involved in its fulfillment activities and 160 in distribution activities.
Fulfillment Services
Kable's Fulfillment Services business performs a number of fulfillment and
fulfillment-related activities, principally magazine subscription fulfillment
services, list services and product fulfillment services, and it accounted for
73% of Kable's total revenues in fiscal 2003.
In the magazine subscription fulfillment service operation, Kable processes new
orders, receives and accounts for payments, prepares and sends to each
publisher's printer labels or tapes containing the names and addresses of
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subscribers for mailing each issue, handles subscriber telephone inquiries and
correspondence, prepares renewal and statement notifications for mailing,
maintains subscriber lists and databases, generates marketing and statistical
reports, processes Internet orders and prints forms and promotional materials.
Kable performs all of these services for many clients, but some clients utilize
only certain of them. Although by far the largest number of magazine titles for
which Kable performs fulfillment services are consumer publications, Kable also
performs services for a number of trade (business) publications, membership
organizations and government agencies which utilize the broad capabilities of
Kable's extensive database system.
List services clients are primarily publishers. In this activity, Kable
maintains client customer lists, selects names for clients who rent their lists,
merges rented lists with a client's list to eliminate duplication for the
client's promotional mailings, and sorts and sequences mailing labels to provide
optimum postal discounts for clients.
Product fulfillment services are provided for Kable's publisher clients and
other direct marketers. In this activity, Kable receives, warehouses, processes
and ships merchandise.
Kable plans to expand these ancillary services, including lettershop, list
services and product fulfillment services, to other, non-publisher clients.
As a result of the acquisition of the subscription fulfillment business of EDS
completed in April 2003, Kable now performs fulfillment services for
approximately 870 different magazine titles for approximately 280 clients and
maintains almost 60 million active subscriber names for its client publishers.
In a typical month, Kable produces over 80 million mailing labels for its client
publishers and also prepares approximately 18 million billing and renewal
statements for mailing.
There are a number of companies that perform fulfillment services for publishers
and with which Kable competes, including one which is much larger than Kable.
Since publishers often utilize only a single fulfillment company for a
particular publication, there is intense competition to obtain fulfillment
contracts with publishers. Competition for non-publisher clients is also
intense. Kable has a staff whose primary task is to solicit fulfillment
business.
Newsstand Distribution Services
In its Newsstand Distribution Services operation, Kable distributes magazines
for over 190 publishers. Among the titles are many special interest magazines,
including automotive, crossword puzzles, men's sophisticates, comics, romance
and sports. In a typical month, Kable distributes to wholesalers over 25 million
copies of various titles. Kable purchases the publications from its publisher
clients and sells them to approximately 50 independent wholesalers. The
wholesalers in turn sell the publications to individual retail outlets. All
parties generally have full return rights for unsold copies. The newsstand
distribution business accounted for 27% of Kable's revenues in fiscal 2003.
While Kable does not handle all publications of all of its publisher clients, it
usually is the exclusive distributor for the publications it distributes. Kable
has a distribution sales and marketing force that works with wholesalers and
retailers to promote product sales and assist in determining the number of
copies of product to be delivered to each retailer. Kable generally does not
physically handle any product. It determines, in consultation with the
wholesalers and publishers, the number of copies of each issue to be
distributed, and generates and delivers to each publisher's printer shipping
instructions with the addresses of the wholesalers and the number of copies of
product to be shipped to each. All magazines have an "off-sale" date (generally
the on-sale date of the next issue) following which the retailers return unsold
copies to the wholesalers, who destroy them after accounting for returned
merchandise in a manner satisfactory to Kable.
Kable generally makes substantial cash advances to publishers against future
sales, which publishers may use to help pay for printing, paper and production
costs prior to the product going on sale. Kable is usually not paid by
wholesalers for product until some time after the product has gone on sale, and
is therefore exposed to potential credit risks with both the publishers and the
wholesalers. Its ability to limit its credit risk and make a profit is dependent
in part on its skill in estimating the number of copies of an issue which should
be printed and distributed and on limiting its advances to the publisher
accordingly.
4
Since 1995, a significant industry consolidation in the distribution of
magazines has occurred. It was triggered by the decision of certain major
retailers with multiple outlets to sharply reduce the number of wholesalers with
whom the retailers would deal. This action led to the erosion of wholesaler
profit margins and to a substantial reduction in the number of wholesalers
through the merger of certain wholesalers, the formation by certain other
wholesalers of cooperatives to bid for the business of such retailers, the
bankruptcy of some wholesalers, and the complete retirement from the business by
a number of wholesalers. This consolidation has reduced the number of Kable's
wholesale customers by approximately 60% since fiscal 1995, which in turn has
increased the concentration of its revenue sources and trade accounts
receivable; at April 30, 2003, approximately 62% of Kable's distribution
accounts receivable were due from three customers. Management believes that the
process described above has stabilized over the past 24 months, but the
potential remains for additional industry changes that could have further
adverse consequences for publishers and their national distributors, including
Kable, with the financial failure of a major wholesaler being likely to have
significant adverse consequence to Kable if it were to occur.
Kable competes primarily with four other national distributors, all of whom are
substantially larger than Kable. Each of these larger competitors is owned by or
affiliated with a magazine publishing company. Such companies publish a
substantial portion of all magazines published in the United States, and the
competition for the distribution rights to the remaining publications is
intense.
Item 2. Properties
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The Company's real estate properties are described in Item 1. Additionally, the
Company has its executive office in leased space in New York City and maintains
production, administration and sales facilities for its newsstand distribution
and fulfillment businesses in owned and leased facilities aggregating
approximately 720,000 square feet in Mt. Morris, Illinois, Marion, Ohio,
Louisville, Colorado, New York City and Cerritos, California. The Colorado
facility was leased in connection with the acquisition of the Electronic Data
System Corporation subscription fulfillment business. The Company's real estate
operations are headquartered in approximately 7,000 square feet of a
Company-owned 55,000 square foot modern office building in Rio Rancho, New
Mexico, with the excess space available for lease to commercial tenants. The
Company believes its facilities are adequate for its current and anticipated
requirements.
Item 3. Legal Proceedings
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A. On May 3, 2000, a civil action was commenced in the United States District
Court of the Southern District of New York entitled United Magazine Company, et
al. v. Murdoch Magazines Distribution, Inc., et al. The Complaint was filed by
five affiliated magazine wholesalers and a related service company (collectively
referred to as "Unimag") against Murdoch, a national distributor of magazines,
and Chas. Levy Circulating Co., a magazine wholesaler. An Amended Complaint was
filed on August 31, 2000, in which the Company's Kable subsidiary and three
other national distributors were added as defendants. Motions by the defendants
to dismiss the Amended Complaint were granted, with leave to the plaintiffs to
replead specified claims. In June 2001, a Second Amended Complaint was filed
which included two claims against Kable: (i) violation of the Robinson-Patman
Act, which generally prohibits discriminatory pricing, and (ii) breach of
fiduciary duty. Unimag sought damages in the amount of at least $275,000,000
trebled, plus punitive damages, pre-judgement interest and attorneys' fees.
The defendants moved to dismiss the Second Amended Complaint. The Court denied
the motions with respect to the Robinson-Patman Act claims but dismissed the
claims for breach of fiduciary duty. Kable answered the Second Amended
Complaint, denying the material allegations and asserting affirmative defenses.
Kable also asserted counterclaims to recover approximately $5,375,000 in unpaid
debts from Unimag. Unimag responded to the counterclaims with reply
counterclaims for compensatory and punitive damages, based on common law claims
that are similar to claims previously dismissed. The defendants moved to dismiss
the reply counterclaims. That motion was granted. Unimag is no longer in
business and does not appear to have the assets to pay if a judgment is awarded
to Kable on its counterclaims.
Pretrial discovery is being conducted. It is unlikely that a trial will be
conducted prior to fiscal 2005. An adverse outcome could materially affect the
consolidated financial position of the Company and its subsidiaries.
5
B. The Company and/or its subsidiaries are involved in various other claims and
legal actions incident to their operations which, in the opinion of management,
based in part upon advice of counsel, will not materially affect the
consolidated financial position or results of operations of the Company and its
subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not Applicable.
Executive Officers of the Registrant
Set forth below is certain information concerning persons who are the 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; 66
Chief Executive Officer of AMREP Southwest Inc.,
a wholly-owned subsidiary of the Company, since 1991.
Peter M. Pizza Vice President-Chief Financial Officer since May 2001; 52
Controller of the Company since 1995; Vice
President-Controller of the Company from 1997 to 2001.
Michael P. Duloc President and Chief Operating Officer of Kable News 46
Company, Inc. since November 2000;
President and Chief Operating Officer of Kable
Distribution Services from 1996 to November 2000.
The executive officers are elected or appointed by the Board of Directors of the
Company or its appropriate subsidiary to serve until the appointment or election
and qualification of their successors or their earlier death, resignation or
removal.
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------ ---------------------------------------------------------------------
The Company's common stock is traded on the New York Stock Exchange under the
symbol "AXR". On July 1, 2003, there were approximately 1,950 holders of record
of the common stock. The Company has historically not paid cash dividends;
however, on July 9, 2003, the Board of Directors declared a special dividend of
$0.25 per share payable on August 13, 2003 to shareholders of record on July 24,
2003. While this dividend is a one-time event, the Board indicated 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.
The range of high and low closing prices for the last two fiscal years by
quarter is presented below:
FIRST SECOND THIRD FOURTH
--------------- --------------- ---------------- ----------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------ ------ ------
2003 $ 8.70 $ 7.50 $ 8.85 $ 7.71 $ 8.14 $ 7.27 $ 9.42 $ 7.85
2002 $ 5.16 $ 3.75 $ 4.90 $ 3.60 $ 8.69 $ 4.40 $ 8.49 $ 7.01
Equity Compensation Plan Information
The following table sets forth information as of April 30, 2003 concerning
common stock of the Company which is issuable under its common stock based
compensation plans.
6
Equity Compensation Plan Information
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(C)
Number of securities
remaining available
(A) (B) for future issuance
Number of securities Weighted average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding (excluding
outstanding options, options, warrants securities reflected
Plan Category warrants and rights and rights in column (A))
------------- -------------------- ----------------- ---------------------
Equity compensation plans approved
by shareholders 9,000 $6.30 18,000(1)
Equity compensation plans not
approved by shareholders - - 57,500(2)
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Total 9,000 75,500
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____________________________
(1) Consists of shares available for options to be issued under the 1992
Non-Employee Directors' Option Plan, as amended.
(2) Consists of shares available for issuance under the 2002 Non-Employee
Directors' Stock Plan.
2002 Non-Employee Directors' Stock Plan
On December 5, 2002, the Board of Directors adopted the AMREP Corporation 2002
Non-Employee Directors' Stock Plan and reserved 65,000 shares of Common Stock of
the Company for issuance to the non-employee directors. Under this Plan, each
non-employee director receives a grant from the Company of 1,250 shares on each
March 15 and September 15, commencing March 15, 2003, as partial payment for
services for the preceding six months.
In accordance with this Plan, on March 15, 2003, a total of 7,500 shares were
issued to the Company's six non-employee directors. The issuance was not
registered under the Securities Act of 1933, as amended, by reason of the
exemption from registration contained in Section 4(2) of said Act.
Item 6. Selected Financial Data
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The following selected consolidated financial data of the Company is qualified
by reference to and should be read in conjunction with the consolidated
financial statements, related notes thereto and other financial data elsewhere
herein. These historical results are not necessarily indicative of the results
to be expected in the future.
(In thousands of dollars except per share amounts)
Year Ended April 30,
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2003 2002 2001 (a) 2000 1999 (b)
-------------- --------------- --------------- --------------- -------------
Revenues $ 73,791 $ 83,405 $ 73,209 $ 119,833 $ 190,291
Net Income $ 6,273 $ 3,698 $ 2,557 $ 1,169 $ 7,537
Earnings Per Share -
Basic and Diluted $ 0.95 $ 0.56 $ 0.38 $ 0.16 $ 1.02
Total Assets $ 159,346 $ 149,688 $ 164,844 $ 172,436 $ 217,777
Notes Payable $ 18,427 $ 16,619 $ 44,260 $ 46,911 $ 74,665
Shareholders' Equity $ 93,828 $ 93,479 $ 89,781 $ 91,981 $ 91,577
Cash Dividends $ - $ - $ - $ - $ -
(a) Includes a tax benefit in the amount of $3.5 million (the equivalent of
$0.52 per share) to reflect the settlement of 1993 and 1994 IRS tax
examinations.
(b) Includes a tax benefit in the amount of $2.4 million (the equivalent of
$0.33 per share) to reflect the settlement of 1990 through 1992 IRS tax
examinations.
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking", including statements contained in this
report and other filings with the Securities and Exchange Commission and in
reports to the Company's shareholders and news releases. All statements that
express expectations, estimates, forecasts and projections are forward-looking
statements within the meaning of the Act. In addition, other written or oral
statements which constitute forward-looking statements may be made by or on
behalf of the Company. Words such as "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates", "projects", "forecasts", "may",
"should", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in or suggested by such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
A wide range of factors could materially affect the Company's future performance
and financial and competitive position, including the following: (i) the level
of demand for land in Rio Rancho, the principal market in which the Company's
real estate subsidiary sells land; (ii) the possibility of further adverse
changes in the magazine distribution system for magazines which the Company's
Kable distribution subsidiary distributes, including the financial failure of a
major wholesaler; (iii) the existing United Magazine lawsuit described in Item 3
of this Form 10-K and possible future litigation and governmental proceedings;
(iv) the availability of financing and financial resources in the amounts, at
the times and on the terms required to support the Company's future business,
including possible acquisitions; (v) changes in U.S. financial markets,
including significant interest rate fluctuations; (vi) the failure to carry out
marketing and sales plans; (vii) the effect of or the failure to successfully
integrate the acquisition of the subscription fulfillment business completed in
April 2003 and described in Note 2 to the financial statements, or other
acquired businesses, if any, into the Company without substantial costs, delays
or other operational or financial problems; (viii) the ability to renew customer
contracts within the magazine operations business segments on favorable terms
and conditions; and (ix) changes in economic or business conditions, including
general economic and business conditions that are less favorable than expected.
This list of factors that may affect the Company's future performance and its
financial and competitive position and also the accuracy of forward-looking
statements is illustrative, but by no means exhaustive. Accordingly, all
forward-looking statements should be evaluated with the understanding of their
inherent uncertainty.
RESULTS OF OPERATIONS
Year Ended April 30, 2003 ("2003") Compared to Year Ended April 30, 2002
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("2002")
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Consolidated revenues for the year ended April 30, 2003 were $73.8 million
compared to $83.4 million for the year ended April 30, 2002. The decrease in
consolidated revenues in 2003 was principally due to a decrease in revenues from
real estate operations from $30.9 million in 2002 to $16.0 million in 2003,
which was partly offset by an increase in revenues from Kable's operations.
Total revenues from Kable's fulfillment services, newsstand distribution and
other operations (collectively, "magazine operations") were approximately $54.1
million in 2003 compared to $49.2 million in 2002. Revenues from the Fulfillment
Services business increased to approximately $39.2 million in 2003 from $34.0
million in 2002, and revenues from the Newsstand Distribution Services business
decreased from approximately $15.3 million in 2002 to approximately $14.8
million in 2003. The 15% increase in revenues in the Fulfillment business
resulted in part from revenues derived for the period subsequent to the date of
acquisition (April 15, 2003) of the subscription fulfillment business in
8
Colorado described in Note 2 which are included in the consolidated financial
statements, as well as from an expansion of product fulfillment services.
Revenues in the Newsstand Distribution business decreased 3% because, although
gross billings increased slightly in line with industry results, there was a
decrease in Kable's net sales rate due in part to the effects of many special
event publications issued throughout the prior year which increased revenues in
2002.
Revenues from real estate land sales decreased from $30.2 million in 2002 to
$16.0 million in 2003 principally as the result of certain land sales that
occurred in the prior year in accordance with the Company's plan to sell its
landholdings outside of New Mexico as part of a restructuring of its real estate
operations. During 2002, two sales of large tracts of land in Colorado and
California contributed aggregate revenues of $13.6 million whereas there were no
land sales in these markets in 2003. Revenues from land sales in New Mexico were
comparable on a year-to-year basis, approximating $15.4 million in both years.
The gross profit percentage on land sales increased from 24% in 2002 to 54% in
2003 primarily because the two large land sales outside of New Mexico in 2002
contributed a significant amount of cash but only a very slight gross profit.
The average gross profit percentage on land sales in the Company's principal
market of Rio Rancho, New Mexico was 43% in 2002 and 55% in 2003, varying based
on the specific sales prices and costs of the specific properties sold in each
year. Revenues and related gross profits from land sales can vary from period to
period as a result of many factors, including the nature and timing of specific
transactions, and thus prior results are not necessarily an indication of what
may be expected to occur in future periods. In addition, the Company completed
the wind-down of all homebuilding activities during 2002 and realized revenues
in connection therewith of approximately $600,000 (representing 3 homes
delivered).
Operating expenses for magazine operations increased 10%, from $38.6 million in
2002 to $42.5 million in 2003 primarily as a result of the operating costs
associated with the acquisition of the subscription fulfillment business
discussed above and with the product fulfillment expansion. Total magazine
operating expenses were 78.7% of related revenues in 2003 compared to 78.5% in
2002. With respect to real estate business expenses, commissions and selling
expenses decreased from $1.0 million in 2002 to $.8 million in 2003 and
generally vary depending upon the terms of specific sale transactions. Real
estate and corporate general and administrative expenses also decreased from
$3.2 million in 2002 to $3.1 million in 2003 as the Company continued to control
costs related to administrative functions. General and administrative costs of
magazine operations remained comparable at approximately $6.9 million in each
year, but decreased as a percentage of sales from 14.0% in 2002 to 12.9% in 2003
due in part to the expansion of operations with the Colorado acquisition.
Interest expense-net decreased from $1.3 million to $.6 million due to reduced
average borrowing requirements in all segments of the Company's operations and
lower interest rates.
Revenues associated with interest and other operations increased from $3.3
million in 2002 to $3.8 million in 2003 primarily due to various nonrecurring
revenue items in the first and second quarters of 2003, including an interest
refund from the Internal Revenue Service, an insurance settlement and the sale
of certain real estate impact fee credits. Costs of other operations remained
comparable at $2.6 million in 2002 and $2.5 million in 2003.
The Company's effective income tax rate decreased from 40.0% in 2002 to 36.4% in
2003 due in part to the effect of a tax benefit associated with a charitable
contribution of certain land made by the real estate business in the fourth
quarter of 2003.
Year Ended April 30, 2002 ("2002") Compared to Year Ended April 30, 2001
- --------------------------------------------------------------------------------
("2001")
--------
Consolidated revenues for the year ended April 30, 2002 were $83.4 million
compared to $73.2 million for the year ended April 30, 2001. The increase in
consolidated revenues in 2002 was principally due to an increase in revenues
from real estate operations from $21.0 million in 2001 to $30.9 million in 2002,
as well as a slight increase in revenues from magazine operations.
Total revenues from magazine operations were approximately $49.2 million in 2002
compared to $48.6 million in 2001. Revenues from the Fulfillment Services
business were approximately $34.0 million in 2002 compared to $34.7 million in
2001, and revenues from the Newsstand Distribution Services business increased
from approximately $13.9 million in 2001 to approximately $15.3 million in 2002.
The decrease in revenues in the Fulfillment business was principally due to the
loss of sweepstakes processing work for one customer in the first quarter of the
9
prior year; otherwise, revenues in this business were comparable on a
year-to-year basis. Revenues in the Newsstand Distribution Services business
increased because, although gross billings declined slightly in line with
industry results, there was an increase in the net sales rate due in part to the
effects of many special event publications issued throughout the year.
Revenues from real estate land and home sales increased from $21.0 million in
2001 to $30.9 million in 2002 principally as the result of land sales in 2002
made in accordance with the Company's plan to sell its landholdings outside of
New Mexico. During 2002, two sales of large tracts of land in Colorado and
California contributed aggregate revenues of $13.6 million whereas there were no
sales in these markets in 2001. Revenues from land sales in New Mexico were
comparable on a year-to-year basis, with an increase in revenues from commercial
and industrial properties being offset by a decrease from residential lot sales.
As a result, total revenues from land sales increased from $16.4 million in 2001
(with an average gross profit percentage of 42%) to $30.2 million in 2002 (with
an average gross profit percentage of 24%). The average gross profit percentage
decreased in 2002 from the prior year because the two large land sales outside
of New Mexico contributed a significant amount of cash but only a very slight
gross profit. The average gross profit percentage on land sales in the Company's
principal market of Rio Rancho, New Mexico was 50% in 2001 and 43% in 2002. In
addition, results for 2001 included impairment and other charges of
approximately $1.0 million associated with land activities, while there were no
similar charges in 2002. Revenues and related gross profits from land sales can
vary from period to period as a result of many factors, including the nature and
timing of specific transactions, and thus prior results are not necessarily an
indication of what may be expected to occur in future periods.
The Company completed all homebuilding activities during 2002, and realized
revenues of approximately $600,000 (representing 3 homes delivered) compared to
$4.6 million (representing 18 homes delivered) in 2001. In addition, results for
2001 included impairment and other charges of approximately $1.1 million
associated with the wind-down of homebuilding projects, while there were no such
charges in 2002.
Operating expenses for magazine operations decreased 6%, from $41.1 million in
2001 to $38.6 million in 2002, as a result of reduced bad debt expense as well
as the effects of a cost reduction program, including staff and related cost
reductions, principally in the Newsstand business. Real estate commissions and
selling expenses decreased from $1.2 million to $1.0 million due in part to the
wind-down of homebuilding operations and the elimination of related commissions.
Real estate and corporate general and administrative expenses also decreased
from $4.1 million to $3.2 million due to the effects of the Company's real
estate restructuring and the continued downsizing of administrative functions.
General and administrative costs of magazine operations remained comparable at
approximately $6.9 million in each year. Interest expense-net decreased from
$2.8 million to $1.3 million due to reduced borrowing requirements in all
segments of the Company's operations and lower interest rates.
Revenues associated with interest and other operations decreased from $3.6
million in 2001 to $3.3 million in 2002, principally due to a decrease in
interest income resulting from a reduction in the average balance of real estate
mortgages receivable from land sales from year to year. In addition, costs of
other operations also decreased, from $2.8 million in 2001 to $2.6 million in
2002, due to an impairment charge of $500,000 included in 2001's results for the
estimated loss on the sale of property, plant and equipment utilized in the
operations of the Company's utility subsidiary.
During 2001, the Company recognized a tax benefit of $3.5 million resulting from
the resolution of all matters under review by the Internal Revenue Service
("IRS") in connection with examinations of the Company's 1993 and 1994 tax
returns at an amount less than the Company had previously accrued on account
thereof. There was no similar tax adjustment recorded in 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the past several years, the Company has financed its operations from
internally generated funds from real estate sales and magazine operations, and
from borrowings under its various lines-of credit and construction loan
agreements.
Cash Flows From Financing Activities
- ------------------------------------
The Company's subsidiaries have line-of-credit arrangements with several
financial institutions collateralized by various assets which, based upon
collateral availability, amounted to an aggregate borrowing availability of
$37.6 million at April 30, 2003 against which $13.7 million was borrowed.
10
In April 2002, Kable entered into a loan agreement with a bank for a revolving
line-of-credit which allowed Kable to borrow up to $20 million based upon a
prescribed percentage of eligible accounts receivable, as defined. During April
2003, this line of credit was increased to $30.0 million to facilitate the
acquisition of the subscription fulfillment business in Colorado described above
and to support its expanded operations. At April 30, 2003, Kable had borrowing
availability of $27.4 million under this line of credit against which $10.6
million was outstanding. This line-of-credit bears interest at the bank's prime
rate (4.25% at April 30, 2002) plus 0.75%, and is collateralized by
substantially all of Kable's assets. The credit arrangement requires the
maintenance or achievement of certain financial covenants and contains certain
financial restrictions, the most significant of which limit the amount of
dividends and other repayments that may be made by Kable to its parent or other
affiliates, as well as capital expenditures and other borrowings. This line of
credit matures May 1, 2005 at which time the bank is to be paid all amounts then
borrowed thereunder.
Other line-of-credit borrowings are used principally to support real estate
development in New Mexico. These loans are collateralized by certain real estate
assets and are subject to available collateral and various financial performance
and other covenants. At April 30, 2003, real estate operations had
lines-of-credit totaling $15.2 million and borrowing availability of $10.2
million against which $3.1 million was outstanding.
Notes payable outstanding, including the lines-of-credit discussed above, were
$18.4 million at April 30, 2003 compared to $16.6 million at April 30, 2002.
Real estate loans decreased from $8.1 million at April 30, 2002 to $4.7 million
at April 30, 2003 as the result of the repayment of borrowings utilizing the
proceeds from certain land sales. Kable's borrowings increased from $8.5 million
at April 30, 2002 to $13.7 million at April 30, 2003 principally as a result of
the use of the line for the acquisition of the Colorado subscription fulfillment
business described above.
Cash Flows From Operating Activities
- ------------------------------------
Inventories amounted to $63.1 million at April 30, 2003 compared to $62.3
million at April 30, 2002. Inventories in the Company's core real estate market
of Rio Rancho were approximately $56.7 and $55.4 million at April 30, 2003 and
2002, respectively, with the balance principally consisting of properties in
Colorado and Florida.
Receivables from magazine operations increased from $34.8 million in 2002 to
$36.5 million in 2003, principally as a result of the receivables resulting from
revenues earned after the acquisition date of the Colorado subscription
fulfillment business. Accounts payable increased by $4.0 million due to a
combination of factors, including the assumption of certain liabilities as part
of the purchase price of the subscription fulfillment business described above.
The Company has a defined benefit retirement plan which covers substantially all
employees. At April 30, 2003, the fair value of the assets of the plan was
approximately $22.4 million, and the accumulated plan liability was
approximately $29.5 million. Accordingly, the Company was required to record a
reserve of approximately $3.0 million against a prepaid pension amount which had
been recorded in prior years and to charge "Other Comprehensive Loss" for the
amount of the unfunded pension liability of $7.1 million, net of a related
deferred tax benefit. As a result, a net charge to Comprehensive Loss of
approximately $6.0 million was recorded in 2003. In addition, the Company's
actuary has advised that a contribution to the plan will be required in 2004 for
the plan year ended December 31, 2003; while the actuarial valuation has not yet
been completed, it is estimated that the contribution could approximate $1.5
million. An additional contribution will likely be required for the plan year
ended December 31, 2004.
Magazine distribution services contracts between Kable and a number of
publishing companies owned or controlled by a major shareholder and member of
the Board of Directors of the Company, which accounted for approximately 4% of
the Company's revenues in 2003, were scheduled to expire August 1, 2003. The
parties have agreed to an extension of these contracts through November 1, 2003
under terms that provide for higher payments to the publishing companies than
previously pertained but which are at terms no less favorable to Kable than
would be obtained in a comparable arm's length transaction with an unaffiliated
publisher having the same volume of business. Efforts are being made by Kable to
11
renew the contracts for a longer term and to include additional magazines for
which Kable presently is not the distributor. If Kable is successful in these
efforts, which cannot be assured, the results likely will involve similar
increased payments to the publishing companies, which the Company anticipates
would partly be offset by revenue increases from expected higher distribution
volumes and prices. However, if these efforts are not successful, it is likely
that the adverse impact on the Company's operating results would be material.
Cash Flows From Investing Activities
- ------------------------------------
Capital expenditures have remained comparable on a year-to-year basis. The
Company believes that it has adequate financing capability to provide for
anticipated capital expenditures.
During 2003, Kable purchased substantially all of the assets of a subscription
fulfillment business formerly owed by Electronic Data Systems Corporation and
various affiliates. The purchase price for the assets was approximately $10.0
million, and consisted of $6.5 million of cash and the assumption of certain
liabilities. The cash portion of the purchase price was financed from available
borrowing capacity under Kable's line of credit bank arrangement, which line of
credit was increased from $20 million to $30 million in connection with the
acquisition.
The Company has a contract for the sale for its utility subsidiary which was
scheduled to close during fiscal 2003 but has been delayed as a result of the
regulatory approval process. No material gain or loss is expected upon the sale
of this asset, which is included in Assets Held for Sale - Net on the balance
sheet and in Other operations on the income statement. There is no assurance
that this sale will be concluded.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
SFAS No. 141 requires the purchase method of accounting be used for business
combinations initiated after June 30, 2001 and prohibits the use of the pooling
of interests method. In April 2003, Kable acquired substantially all of the
assets of a subscription fulfillment business formerly owned by Electronic Data
Systems Corporation, and allocated the purchase price in accordance with SFAS
No. 141. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment approach, which compares the carrying value of a
business (including goodwill) with its fair value. The Company adopted SFAS No.
142 in the first quarter of fiscal 2003, and there was no effect on the
financial position or results of operations of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which, among other things,
requires that long-lived assets be reviewed for impairment whenever there are
changes in events or circumstances that indicate that the carrying amount of an
asset may not be recoverable. The Company adopted SFAS No. 144 in the first
quarter of fiscal 2003, and there was no effect on the consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146") which requires that a
liability for a cost associated with an exit or disposal activity be recognized
when a liability is incurred. The Company adopted SFAS 146 effective January 1,
2003, and it is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company did not initiate any exit or disposal
activities during fiscal 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS No. 148"), which amends the
transition and disclosure provisions of SFAS No. 123. The Company accounts for
stock-based awards to employees and directors using the intrinsic value method
in accordance with APB Opinion No. 25; accordingly, no compensation expense has
been recognized with respect to the directors' stock option plan in the
financial statements. Further, the amount of additional compensation disclosable
under the disclosure-only provisions of SFAS No. 123 as amended by SFAS No. 148
is immaterial for all periods presented.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees of Indebtedness of Others" ("FIN
45"). The Company adopted the disclosure provisions of FIN 45 during 2003, which
require increased disclosure of guarantees, including those for which likelihood
of payment is remote. In the normal course of business, the Company does not
issue guarantees to third parties; accordingly, the adoption of FIN 45 had no
effect on the Company's consolidated financial statements.
12
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). FIN 46 requires the Company to consolidate a variable
interest entity if it is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns, or both. The Company does not currently have any
interests in variable interest entities and, accordingly, does not expect the
adoption of FIN 46 to have a material impact on its consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures in its balance sheet certain financial instruments with characteristics
of both liabilities and equity. It is effective for the Company in the second
quarter of fiscal 2004 but, because the Company currently has no instruments
falling under the provisions of SFAS No. 150, it is not expected to have a
material impact on the Company's consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. The Company
discloses its significant accounting policies in the notes to its audited
consolidated financial statements.
The preparation of such financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
those financial statements and the reported amounts of revenues and expenses
during the reporting period. Following are some of the areas requiring
significant judgments and estimates: (i) revenue recognition for the magazine
distribution business/estimates of allowances for magazine returns; (ii)
allowances for bad debts; (iii) land development budgets and costs to complete;
(iv) cash flow and valuation assumptions in performing asset impairment tests of
long-lived assets and assets held for sale; (v) pension plan information; and
(vi) legal contingencies. Actual results could differ from those estimates.
There are numerous critical assumptions that may influence accounting estimates
in these and other areas. Management bases its critical assumptions on
historical experience, third-party data and various other estimates which are
believed to be reasonable. Certain of the more critical assumptions include: (i)
distribution revenues represent commissions earned from the distribution of
publications for client publishers which are recorded at the time the
publications go on sale and which are generally sold on a fully returnable
basis. Accordingly, management provides for estimated returns by charges to
income which are determined on an issue by issue basis utilizing sales
information and other relevant data, including publisher and like-title history;
(ii) management determines the allowance for doubtful accounts by attempting to
identify troubled accounts by analyzing the credit risk of specific customers
and by using historical experience applied to the aging of accounts and, where
appropriate within the real estate business, by reviewing any collateral which
may secure a receivable; (iii) real estate development costs are incurred
throughout the life of a project, and the costs of initial sales from a project
frequently must include a portion of costs that have been budgeted based on
engineering estimates or other studies, but not yet incurred: (iv) asset
impairment determinations (including that of goodwill) are based upon the
intended use of assets and expected future cash flows; (v) pension plan
accounting and disclosure is based upon numerous assumptions and estimates,
including the expected rate of investment return on retirement plan assets, the
interest rate used to determine the present value of liabilities (the discount
rate), the rate of salary increases for employees and certain employee-related
factors, such as turnover, retirement age and mortality; and (vi) the Company is
currently involved in one legal proceeding which is described in Item 3 of the
Form 10-K, and several other routine matters. The legal proceeding described in
Item 3 is still in an early stage, and it is not expected to come to trial
before fiscal 2005. It is possible that the consolidated financial position or
results of operations for any particular quarterly or annual period could be
materially affected by a change in assumptions or the effectiveness of
strategies related to these proceedings.
SEGMENT INFORMATION
- -------------------
Information by industry segment is presented in Note 14 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
13
consistent with the manner in which financial information is prepared and
evaluated by management for making operating decisions. A number of assumptions
and estimations are required to be made in the determination of segment data,
including the need to make certain allocations of common costs and expenses
among segments. On an annual basis, management has evaluated the basis upon
which costs are allocated, and has periodically made revisions to these methods
of allocation. Accordingly, the determination of "pretax income (loss)
contribution" of each segment as summarized in Note 14 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, 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 prior years
interest rates have been at historically low levels and other price increases
have been commensurate with the general rate of inflation in the Company's
markets, and as a result the Company has not found the inflation risk to be a
significant problem in its real estate or magazine operations.
Item 7(A). Quantitative and Qualitative Disclosures About Market Risk
- --------- ----------------------------------------------------------
The primary market risk facing the Company is interest rate risk on its
long-term debt. 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, 2003 the
Company's long term debt obligations by scheduled maturity, weighted average
interest rate and estimated Fair Market Value ("FMV") (amounts in thousands):
2004 2005 2006 2007 2008 There- FMV @
after Total 04/30/03
---- ---- ---- ---- ---- ----- ----- -------
Fixed rate debt $1,150 $1,110 $ 976 $360 $ 172 $ 954 $4,722 $ 5,080
Weighted average
interest rate 6.3% 6.2% 6.2% 6.8% 7.9% 7.9% 6.7% -
Variable rate debt $2,974 $ 169 $10,562 $ - $ - $ - $13,705 $13,705
Weighted average
interest rate 4.3% 4.3% 5.0% - - - 4.8% -
14
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
Report of Independent Public Accountants
----------------------------------------
To the Shareholders
AMREP Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of AMREP
Corporation and subsidiaries as of April 30, 2003 and 2002 and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. The consolidated financial statements of AMREP Corporation and
subsidiaries for the year ended April 30, 2001 were audited by other auditors
whose report, dated August 13, 2001, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2003 and 2002 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II accompanying the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
McGladrey & Pullen, LLP
Davenport, Iowa
June 13, 2003
15
Note: The Report of Independent Public Accountants that follows is a copy of a
previously issued Report of Arthur Andersen LLP, Independent Public Accountants,
and it has not been reissued by Arthur Andersen LLP. This Report was filed with
the Form 10-K/A (Amendment No. 1) of AMREP Corporation for the year ended April
30, 2001, and the consent of Arthur Andersen LLP, dated August 13, 2001, was
filed as an exhibit to the Form 10-K/A, consenting to the incorporation of this
Report in the previously filed Registration Statements of Form S-8 nos.
33-67114, 33-67116 and 333-17695. The Registrant has been unable to obtain a
reissued Report of Arthur Andersen LLP or a currently dated consent to the
incorporation of this previously issued Report of Arthur Andersen LLP into the
Registration Statements on Form S-8. While the extent of any resulting
limitations on recovery by investors is unclear, the lack of a currently dated
consent could limit the time within which any such actions by investors against
Arthur Andersen LLP for liabilities arising under Section 11 of the Securities
Act of 1933 must be brought.
Report of Independent Public Accountants
----------------------------------------
To AMREP Corporation:
We have audited the accompanying consolidated balance sheets of AMREP
Corporation (an Oklahoma corporation) and subsidiaries as of April 30, 2001 and
2000, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended April 30, 2001.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of AMREP Corporation and
subsidiaries as of April 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
2001 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II accompanying the consolidated
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
August 13, 2001
16
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2003 AND 2002
(Dollar amounts in thousands)
ASSETS 2003 2002
------ ----------- -----------
CASH AND CASH EQUIVALENTS $ 16,443 $ 15,744
RECEIVABLES, net:
Magazine operations 36,464 34,849
Real estate operations 5,830 6,630
----------- -----------
42,294 41,479
REAL ESTATE INVENTORY 63,084 62,296
PROPERTY, PLANT AND EQUIPMENT, net 16,614 9,890
ASSETS HELD FOR SALE- NET 5,819 5,853
OTHER ASSETS, net of accumulated amortization 9,901 9,235
GOODWILL 5,191 5,191
------------ -----------
TOTAL ASSETS $ 159,346 $ 149,688
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 37,897 $ 33,867
NOTES PAYABLE:
Amounts due within one year 4,124 3,383
Amounts subsequently due 14,303 13,236
------------ ------------
18,427 16,619
TAXES PAYABLE 605 1,127
DEFERRED INCOME TAXES 1,506 4,596
ACCRUED PENSION COST 7,083 -
------------ ------------
TOTAL LIABILITIES 65,518 56,209
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value;
shares authorized--20,000,000;
shares issued - 7,406,704 at
April 30, 2003 and 7,399,704
at April 30, 2002 741 740
Capital contributed in excess of par value 44,992 44,935
Retained earnings 59,786 53,513
Accumulated other comprehensive loss, net ( 6,034) -
Treasury stock, at cost ( 5,657) ( 5,709)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 93,828 93,479
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 159,346 $ 149,688
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
17
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended April 30,
----------------------------------------------
2003 2002 2001
------------- ------------- -------------
REVENUES:
Magazine operations $ 54,058 $ 49,248 $ 48,570
Real estate operations-
Land sales 15,965 30,228 16,386
Home sales - 635 4,611
------------- ------------- -------------
15,965 30,863 20,997
Interest and other operations 3,768 3,294 3,642
------------- ------------- -------------
73,791 83,405 73,209
------------- ------------- -------------
COSTS AND EXPENSES:
Operating expenses-
Magazine operations 42,527 38,643 41,128
Real estate commissions and selling 836 978 1,218
Other operations 2,548 2,635 2,836
Real estate cost of sales-
Land sales 7,365 22,894 9,588
Home sales - 704 6,083
General and administrative-
Magazine operations 6,962 6,914 6,934
Real estate operations and corporate 3,114 3,209 4,121
Interest, net 582 1,265 2,771
------------- ------------- -------------
63,934 77,242 74,679
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 9,857 6,163 (1,470)
PROVISION (BENEFIT) FOR INCOME TAXES 3,584 2,465 (4,027)
------------- ------------- -------------
NET INCOME $ 6,273 $ 3,698 $ 2,557
============= ============= ==============
EARNINGS PER SHARE - BASIC AND DILUTED $ .95 $ .56 $ .38
============= ============= ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,580 6,574 6,681
============= ============= ==============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
18
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
Capital
Contributed Accumulated
Common Stock In Excess Other Treasury
------------ of Retained Comprehensive Stock, at
Shares Amount Par Value Earnings Loss Cost Total
------ ------ ------------ -------- ------------- ----------- -----------
BALANCE, April 30, 2000 7,399 $ 740 $ 44,930 $ 47,258 $ - $ (947) $ 91,981
Net income - - - 2,557 - - 2,557
Purchase of treasury stock - - - - - (4,762) (4,762)
Exercise of stock options 1 - 5 - - - 5
------ ------ ------------ -------- ------------- ----------- -----------
BALANCE, April 30, 2001 7,400 740 44,935 49,815 - (5,709) 89,781
Net income - - - 3,698 - - 3,698
------ ------ ------------ -------- ------------- ----------- -----------
BALANCE, April 30, 2002 7,400 740 44,935 53,513 - (5,709) 93,479
Net income - - - 6,273 - - 6,273
Other comprehensive loss - - - - (6,034) - (6,034)
-----------
Total comprehensive income - - - - - - 239
-----------
Issuance of stock under
Directors' Plan - - 14 - - 52 66
Exercise of stock options 7 1 43 - - - 44
------ ------ ------------ -------- ------------- ----------- -----------
BALANCE, April 30, 2003 7,407 $ 741 $ 44,992 $ 59,786 $ (6,034) $ (5,657) $ 93,828
====== ====== ============ ======== ============= =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
19
AMREP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended April 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,273 $ 3,698 $ 2,557
Adjustments to reconcile net income
to net cash provided by operating activities-
Depreciation and amortization 3,071 2,691 3,033
Non-cash credits and charges:
Gain on disposition of property and equipment (109) - (211)
Provision for doubtful accounts 237 491 2,265
Impairment of long-lived assets - - 2,256
Pension benefit accrual 160 (511) (603)
Stock based compensation - Directors' Plan 66 - -
Changes in assets and liabilities,
excluding the effect of acquisition-
Receivables (1,024) 2,465 7,606
Real estate inventory (788) 11,051 (2,085)
Other assets (246) 1,527 (634)
Accounts payable and accrued expenses (1,112) 6,685 1,406
Taxes payable (522) (468) (3,402)
Deferred income taxes 933 2,714 (745)
---------- ---------- ----------
Net cash provided by operating activities 6,939 30,343 11,443
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,916) (2,899) (2,045)
Proceeds from disposition of property, plant and equipment 404 - 1,017
Acquisition, net (6,580) - -
---------- ---------- ----------
Net cash used by investing activities (8,092) (2,899) (1,028)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 28,098 14,582 24,843
Principal debt payments (26,290) (42,223) (27,494)
Exercise of stock options 44 - 5
Purchase of treasury stock - - (4,762)
---------- ---------- ----------
Net cash Provided (used) by financing activities 1,852 (27,641) (7,408)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 699 (197) 3,007
CASH AND CASH EQUIVALENTS, beginning of year 15,744 15,941 12,934
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 16,443 $ 15,744 $ 15,941
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amounts capitalized $ 918 $ 2,281 $ 4,354
========== ========== ==========
Income taxes paid - net of refunds $ 2,450 $ 219 $ 100
========== ========== ==========
Non-Cash Transaction
Transfer to Inventory from Fixed Assets $ - $ - $ 317
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
20
AMREP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES:
------------------------------------------------------------------
Organization and principles of consolidation
--------------------------------------------
The consolidated financial statements include the accounts of AMREP Corporation,
an Oklahoma corporation, and its subsidiaries (individually and collectively, as
the context requires, the "Company"). The Company, through its principal
subsidiaries, is engaged in two unrelated businesses. Kable News Company, Inc.
("Kable") operates in the magazine distribution and fulfillment services
industries, (collectively, "magazine operations"), and AMREP Southwest Inc.
operates predominately in the real estate industry, principally in New Mexico.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated balance sheets are presented in an unclassified format, since
the Company has substantial operations in the real estate industry and its
operating cycle is greater than one year.
Revenue recognition
-------------------
Revenues from magazine operations include revenues from the distribution of
periodicals and subscription fulfillment and other activities. Distribution
revenues represent commissions earned from the distribution of publications for
client publishers which are recorded at the time the publications go on sale.
The publications generally are sold on a fully returnable basis, which is in
accordance with prevailing trade practice. Accordingly, the Company provides for
estimated returns by charges to income which are based on experience. Revenues
from subscription fulfillment activities represent fees earned from the
maintenance of computer files for customers, which are billed and earned
monthly, and other fulfillment activities including customer telephone support,
product fulfillment, and graphic arts and lettershop services, all of which are
billed and earned as the services are provided. In accordance with Emerging
Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent", reimbursed postage costs are accounted for on a net
basis.
Land sales are recognized when all elements of 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 and title and other
attributes of ownership have been conveyed to the buyer by means of a closing.
Profit is recorded either in its entirety or on the installment method depending
upon, among other things, the ability to estimate the collectibility of the
unpaid sales price. In the event the buyer defaults on the obligation, the
property is taken back and recorded as inventory at the unpaid receivable
balance, net of any deferred profit, but not in excess of fair market value less
estimated costs to sell.
Sales of homes are recognized when title and other attributes of ownership have
been conveyed to the buyer by means of a closing.
Cash and cash equivalents
-------------------------
Cash equivalents consist of short term, highly liquid investments which have an
original maturity of ninety days or less, and that are readily convertible into
cash.
Receivables
-----------
Receivables are carried at original invoice or closing statement amount less
estimates made for doubtful receivables and, in the case of distribution
receivables, return allowances. Management determines the allowances for
doubtful accounts by reviewing and identifying troubled accounts on a monthly
basis and by using historical experience applied to an aging of accounts. A
receivable is considered to be past due if any portion of the receivable balance
21
is outstanding for more than 90 days. Receivables are written off when deemed
uncollectible. Recoveries of receivables previously written off are recorded
when received. Management determines the estimated returns for magazines on an
issue by issue basis utilizing historical sales information and other relevant
information, including publisher and like-title history.
Real estate inventory
---------------------
Land and improvements for completed real estate projects, as well as those 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.
Property, plant and equipment
-----------------------------
Items capitalized as part of property, plant and equipment are recorded at cost.
Expenditures for maintenance and repair and minor renewals are charged to
expense as incurred, while those expenditures which improve or extend the useful
life of existing assets are capitalized. Upon sale or other disposition of
assets, their cost and the related accumulated depreciation or amortization are
removed from the accounts and the resulting gain or loss, if any, is reflected
in operations.
Depreciation and amortization of property, plant and equipment are provided
principally by the straight-line method at various rates calculated to amortize
the book values of the respective assets over their estimated useful lives,
which generally are 10 years or less for furniture and fixtures (including
equipment) and 25 to 40 years for buildings. Assets utilized in the Company's
utility company subsidiary, which is under contract for sale and classified as
"Assets Held for Sale-Net", are generally depreciated over 50 years.
Goodwill
--------
The excess of amounts paid for business acquisitions over the net fair value of
the assets acquired and liabilities assumed ("goodwill") is carried as an asset.
Goodwill arose in connection with the acquisition of Kable during 1969 and has
not been amortized to operations, since this acquisition was made prior to the
effective date of Accounting Principles Board Opinion ("APB") No. 17.
Effective May 1, 2002, the Company adopted Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Under SFAS No.
142, goodwill and intangible assets with an indefinite life are no longer
subject to amortization. SFAS No.142 requires that these assets be reviewed for
impairment at least annually. An impairment charge is recognized only when the
calculated fair value of a reporting unit, including goodwill, is less than its
carrying amount. Based on a review completed in October 2002, the Company
believes that no goodwill impairment existed at April 30, 2003. In accordance
with SFAS No. 142, the Company will complete an impairment analysis on an annual
basis.
Long-lived assets
-----------------
Long-lived assets, including real estate inventory, are evaluated when
indicators of impairment are present. Provisions for possible losses are
recorded when undiscounted cash flows estimated to be generated by those assets
are less than the assets' carrying amount. See Notes 4 and 5.
Income taxes
------------
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured by
using currently enacted tax rates expected to apply to taxable income in the
years in which those differences are expected to reverse.
Earnings per share
------------------
Basic earnings per share is based on the weighted average number of common
shares outstanding during each year. Diluted earnings per share is computed
assuming the issuance of common shares for all dilutive stock options
outstanding (using the treasury stock method) during the reporting period.
22
Stock options
-------------
The Company accounts for stock option grants in accordance with APB No. 25,
"Accounting for Stock Issued to Employees". The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (see Note 8). Stock options granted have been issued with an
exercise price at the fair market value of the Company's stock at the date of
grant. Accordingly, no compensation expense has been recognized with respect to
the stock option plans. Further, the amount of additional compensation
disclosable under the disclosure-only provisions of SFAS No. 123 is immaterial
for all periods presented.
Comprehensive income (loss)
---------------------------
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events from non-owner sources. Comprehensive income
(loss) is the total of net income and other comprehensive income (loss), which
for the Company is comprised entirely of the minimum pension liability net of
the related deferred income taxes.
Management's estimates and assumptions
--------------------------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The significant estimates that
affect the financial statements include, but are not limited to, inventory
valuation, magazine returns, the recoverability of long-term assets and
amortization periods, pension plan assumptions and legal contingencies. Actual
results could differ from those estimates.
Recent accounting pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
SFAS No. 141 requires the purchase method of accounting be used for business
combinations initiated after June 30, 2001 and prohibits the use of the pooling
of interest method. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment approach. The impairment test compares the
fair value of a business with its carrying amount (including goodwill). The
Company adopted SFAS No. 142 in the first quarter of fiscal 2003, and there was
no effect on the financial position or results of operations of the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. It also requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of or is classified as held for sale. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell. The Company adopted SFAS No. 144 in the first quarter of fiscal 2003, and
there was no effect on the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146") which is effective for exit
or disposal activities initiated after December 31, 2002. SFAS No. 146, once
adopted, updates the guidance in the Emerging Issues Task Force ("EITF") Issue
No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, whereas
EITF No. 94-3 had allowed for recognition of the liability at the commitment
date to an exit plan. The Company adopted SFAS No. 146 effective January 1, 2003
and it is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company did not initiate any exit or disposal activities
during 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends
the transition and disclosure provisions of SFAS No. 123. The Company accounts
for stock-based awards to employees and directors using the intrinsic value
method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
23
Employees". Accordingly, no compensation expense has been recognized with
respect to the stock option plans in the financial statements. Further, the
amount of additional compensation disclosable under the disclosure-only
provisions of SFAS No. 123 as amended by SFAS No. 148 is immaterial for all
periods presented.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures in its balance sheet certain financial instruments with characteristics
of both liabilities and equity. It is effective for the Company in the second
quarter of 2004, but because the Company does not currently have any instruments
falling under the provisions of SFAS No. 150, it is not expected to have an
impact on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). The Company adopted the disclosure
provisions of FIN 45 during 2003, which require increased disclosure of
guarantees, including those for which likelihood of payment is remote. In the
normal course of business, the Company does not issue guarantees to third
parties; accordingly, this interpretation had no effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
addresses consolidation by business enterprises of entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support form other parties. The
Company has no arrangements that would be subject to this interpretation.
(2) ACQUISITION:
-----------
On April 15, 2003, the Company acquired certain tangible and intangible assets
and assumed certain liabilities constituting the subscription fulfillment
business of Electronic Data Systems Corporation and various subsidiaries
("Business") in order to expand its fulfillment operations. The purchase price
for these assets was approximately $10.0 million and consisted of cash and the
assumption of certain customer deposit liabilities. The transaction has been
accounted for as a purchase, and the results of operations since the date of
acquisition are included in the consolidated financial statements. The payment
of the cash portion of the purchase price and related acquisition expenses was
financed from available cash and borrowings under the Company's collateralized
credit line. In connection with the acquisition, that credit line was increased
from $20.0 million to $30.0 million, subject to available collateral (see Note
7).
The following unaudited pro forma information reflects the results of the
Company's operations as if the acquisition had occurred at the beginning of 2002
(in thousands, except per share data):
Year Ended April 30,
------------------------------------
Pro forma: 2003 2002
---------------- ----------------
Revenue $ 148,688 $ 187,360
Net income 9,426 12,944
Earnings per share- basic and diluted $ 1.43 $ 1.97
Because of known customer losses of the Business that occurred prior to the
acquisition, it is anticipated that the revenues and net income from the
acquired Business for the year ended April 30, 2004 will be substantially
reduced from historical levels. Accordingly, these pro-forma results are not
necessarily an indication of what may be expected to occur in future periods.
The purchase price has been allocated to the acquired net assets based upon the
preliminary estimates of an appraisal which is not yet complete and other
studies. The preliminary purchase price allocation is as follows (in thousands):
Property, plant and equipment - $7,486; Other assets - $4,296; Accrued expenses
- - $5,202; Total cash price - $6,580.
24
(3) RECEIVABLES:
-----------
Receivables consist of: April 30,
-------------------------------------
2003 2002
---------------- -----------------
(Thousands)
Magazine operations-
Accounts receivable (maturing
within one year) $ 102,275 $ 92,760
Allowances for-
Estimated returns (64,419) (56,803)
Doubtful accounts (1,392) (1,108)
---------------- -----------------
$ 36,464 $ 34,849
================ =================
Real estate operations-
Mortgage and other receivables $ 6,110 $ 6,883
Allowance for doubtful accounts (280) (253)
---------------- -----------------
$ 5,830 $ 6,630
================ =================
Mortgage and other receivables bear interest at rates ranging from 8.0% to 10.0%
and result primarily from land sales. Magazine operations receivables
collateralize a general purpose line-of-credit utilized for the magazine
operations (see Note 7).
The Company extends credit to various companies in the real estate and magazine
operation industries which may be affected by changes in economic or other
external conditions. Financial instruments that may potentially subject the
Company to a significant concentration of risk primarily consist of trade
accounts receivable from wholesalers in the magazine distribution industry. As
industry practices allow, the Company's policy is to manage its exposure to
credit risk through credit approvals and limits and, where appropriate, to be
secured by collateral. The Company also provides an allowance for doubtful
accounts for potential losses based upon factors surrounding the credit risk of
specific customers, historical trends and other financial and non-financial
information. In recent years, as a result of changes within the magazine
distribution industry there has been a major consolidation and reduction in the
number of wholesalers to whom Kable distributes magazines and, as a result, at
April 30, 2003 approximately 55% of Kable's accounts receivable were due from
three customers.
Kable performs fulfillment services and purchases magazines for resale to
wholesalers from publishing companies owned or controlled by a major shareholder
and member of the Board of Directors. Commissions and other revenues earned on
these transactions represent approximately 4%, 3% and 3% of consolidated
revenues in 2003, 2002 and 2001, respectively.
Maturities of principal on real estate receivables at April 30, 2003 are as
follows (in thousands): 2004 - $3,967; 2005 - $1,574; 2006 - $358; 2007 - $3;
2008 - $15; 2009 and thereafter - $193.
(4) REAL ESTATE INVENTORY:
---------------------
Real estate inventory consists of land and improvements held for sale or
development. Accumulated capitalized interest costs included in real estate
inventory at April 30, 2003 and 2002 were (in thousands) $4,192 and $4,017,
respectively. Interest costs capitalized during 2003, 2002 and 2001 were $287,
$767 and $1,533, respectively. Accumulated capitalized real estate taxes
included in the inventory of land and improvements at April 30, 2003 and 2002
were $5,049 and $5,184, respectively. Real estate taxes capitalized during 2003,
2002 and 2001 were $72, $72 and $425, respectively. Previously capitalized
interest costs and real estate taxes charged to real estate cost of sales were
$319, $2,103 and $775 in 2003, 2002 and 2001, respectively.
During 2001, the Company determined that certain real estate assets were
impaired primarily due to conditions associated with the restructuring of real
estate operations. The Company recognized an impairment for long-lived assets of
approximately $1.75 million and charged real estate cost of sales based upon an
estimate of the future cash flows to be generated by those assets compared to
the remaining carrying value of those assets.
Substantially all of the Company's real estate assets are located in New Mexico.
As a result of this geographic concentration, the Company could be affected by
economic conditions in this region.
25
(5) PROPERTY, PLANT AND EQUIPMENT:
-----------------------------
Property, plant and equipment consists of:
April 30,
---------------------------------
2003 2002
-------------- ---------------
(Thousands)
Land, buildings and improvements $ 9,411 $ 9,574
Furniture and fixtures 22,911 14,663
Other 132 152
-------------- ---------------
32,454 24,389
Accumulated depreciation and
amortization (15,840) (14,499)
-------------- ---------------
$ 16,614 $ 9,890
============== ===============
The Company has a contract for sale for its utility subsidiary which was
scheduled to close during fiscal 2003. The closing has been delayed pending
completion of the regulatory approval process and satisfaction of other
conditions. The closing is now scheduled during fiscal 2004, however, there is
no assurance that the sale will be concluded. No material gain or loss is
expected upon the sale of this asset, which is included in Assets Held for Sale
- - Net on the balance sheet and in Other operations on the income statement. At
April 30, 2003 and 2002, Assets Held for Sale - Net consists of the following
(in thousands): Accounts receivable ($140 and $168), Property, plant and
equipment ($5,873 and $5,571) and Other assets ($10 and $258), net of accounts
payable and accrued expenses ($204 and $144), respectively.
During 2001, the Company provided an impairment reserve of $.5 million and
charged costs and expenses - other operations for the estimated loss on the sale
of property, plant and equipment utilized in the operations of the utility
subsidiary.
Depreciation charged to operations amounted to (in thousands) $2,081, $1,752 and
$1,807 in 2003, 2002 and 2001, respectively.
(6) OTHER ASSETS:
------------
Other assets consist of:
April 30,
---------------------------------
2003 2002
-------------- ---------------
(Thousands)
Prepaid expenses and other deferred charges, net $ 9,414 $ 4,922
Purchased magazine distribution contracts,
net of accumulated amortization of $4,172 and
$3,744 in 2003 and 2002, respectively 107 535
Security and other deposits 103 379
Prepaid pension (Note 8) - 3,134
Other 277 265
-------------- ---------------
$ 9,901 $ 9,235
============== ===============
Amortization related to deferred charges and distribution contracts was (in
thousands) $990, $939 and $1,226 in 2003, 2002 and 2001, respectively.
26
(7) DEBT FINANCING:
--------------
Debt financing consists of:
April 30,
--------------------------------
2003 2002
------------ --------------
(Thousands)
Notes payable -
Line-of-credit borrowings -
Real estate operations and other $ 3,143 $ 5,839
Magazine operations 10,562 8,156
Mortgages and other notes payable 4,722 2,624
------------ --------------
$ 18,427 $ 16,619
============ ==============
Maturities of principal on notes outstanding at April 30, 2003 are as follows
(in thousands): 2004 - $4,124; 2005 - $1,279; 2006 - $11,538; 2007 - $360; 2008
- - $172; 2009 and thereafter - $954.
Line-of-credit borrowings
-------------------------
The Company has several loans with one financial institution to support real
estate operations. These loans have a total maximum amount available of
approximately $15.2 million subject to a borrowing base determined based upon a
prescribed percentage of eligible inventory and accounts receivable. At April
30, 2003, the Company had borrowing availability of $10.2 million against which
$3.1 million was outstanding. These borrowings, which mature in fiscal 2004
through 2006, bear interest at the prime rate (4.25% at April 30, 2003), are
collateralized by certain real estate assets and are subject to certain
financial performance and other covenants. The Chief Executive Officer of the
real estate subsidiary, who is also a member of the Board of Directors of the
Company, serves as a member of the board of directors of the financial
institution from which these loans were obtained.
In April 2002, Kable entered into an agreement with a bank for a line of credit
which allowed the Company to borrow up to $20 million based upon a prescribed
percentage of eligible accounts receivable, as defined. During April 2003, this
line of credit was increased to $30 million in connection with the acquisition
of the subscription fulfillment business described in Note 2. At April 30, 2003,
the Company had borrowing availability of approximately $27.4 million against
which $10.6 million was outstanding. This line of credit bears interest at the
bank's prime rate (4.25% at April 30, 2003) plus .75%, and is collateralized by
substantially all the Company's assets. The credit arrangement requires the
maintenance or achievement of certain financial covenants and contains certain
financial restrictions, the most significant of which limit the amount of
dividends and other payments that may be made by Kable to its parent or other
affiliates, as well as capital expenditures and other borrowings. This line of
credit matures May 1, 2005.
Mortgages and other notes payable
---------------------------------
Mortgages and other notes payable had interest rates ranging from 5.19% to 10%
at April 30, 2003, and are primarily collateralized by property, plant and
equipment. These borrowings mature through fiscal 2013.
(8) BENEFIT PLANS:
-------------
Retirement plan
---------------
The Company has a retirement plan which covers substantially all full-time
employees and which provides benefits based upon a percentage of the employee's
annual salary. No contribution to the plan was required in 2003, 2002 and 2001.
Assets are invested primarily in equity and debt securities, United States
Treasury obligations and money market funds.
27
Net periodic pension cost (income) for 2003, 2002 and 2001 was comprised of the
following components:
Year Ended April 30,
-------------------------------------------------------
2003 2002 2001
--------------- ------------------ --------------
(Thousands)
Service cost - benefits earned during the
period $ 568 $ 556 $ 571
Interest cost on projected
benefit obligation 1,804 1,766 1,738
Expected return on assets (2,049) (2,481) (2,560)
Amortization of prior service cost (352) (352) (352)
Recognized net actuarial loss 189 - -
--------------- ----------------- ---------------
Net periodic pension cost (income) $ 160 $ (511) $ (603)
=============== ================= ===============
Assumptions used in determining net periodic pension cost were:
Year Ended April 30,
-----------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
Discount rates 6.25% 7.25% 7.5%
Rates of increase in compensation
levels 4.5% 4.5% 4.5%
Expected long-term rate of return
on assets 8.0% 9.0% 9.0%
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,
-------------------------------
2003 2002
------------- --------------
(Thousands)
Change in benefit obligations:
Benefit obligation at beginning of year $ 25,833 $ 24,621
Service cost (excluding expense component) 447 433
Interest cost 1,804 1,766
Actuarial loss 3,051 651
Benefits paid (1,652) (1,638)
------------- --------------
Benefit obligation at end of year $ 29,483 $ 25,833
============= ==============
Change in plan assets:
Fair value of plan assets at beginning of year $ 26,558 $ 28,411
Actual return on plan assets (2,406) (98)
Employer contribution - -
Benefits paid (1,652) (1,638)
Expenses (100) (117)
------------- --------------
Fair value of plan assets at end of year $ 22,400 $ 26,558
============= ==============
Funded status $ (7,083) $ 725
Unrecognized net actuarial loss 12,036 4,740
Unrecognized prior service cost (1,979) (2,331)
------------- --------------
Net amount recognized in the balance sheets $ 2,974 $ 3,134
============= ==============
Amounts recognized on the balance sheets:
Prepaid pension asset $ - $ 3,134
Accrued pension costs (7,083) -
Pre-tax accumulated comprehensive loss 10,057 -
------------- --------------
$ 2,974 $ 3,134
============= ==============
28
At April 30, 2003, the fair value of the assets of the plan was approximately
$22.4 million, and the accumulated plan liability was approximately $29.5
million. Accordingly, the Company was required to charge Other comprehensive
loss for $10.1 million, consisting of the unfunded pension liability of $7.1
million and a charge against a prepaid pension recorded in prior years, net of
$4.0 million of deferred income taxes. In addition, the Company's actuary has
advised that a contribution to the plan will be required in 2004 for the plan
year ended December 31, 2003; while the actuarial valuation has not been
completed, it is estimated that the contribution could approximate $1.5 million.
An additional contribution will likely be required for the plan year ended
December 31, 2004.
Savings plan
------------
The Company has a savings plan to which the Company makes contributions. The
plan provides for standard contributions of 33.3% of eligible employees' defined
contributions up to a maximum of 2% of such employees' compensation. Additional
amounts may be contributed with the approval of the Company's Board of
Directors. The Company's contribution to the plan amounted to approximately (in
thousands) $251, $230 and $252 in 2003, 2002 and 2001, respectively.
Directors' Stock Plan
---------------------
During 2003, the Company adopted the AMREP Corporation 2002 Non-Employee
Directors' Stock Plan and reserved 65,000 shares of common stock for issuance to
non-employee directors. Under the Plan each non-employee director receives 1,250
shares of stock on each March 15 and September 15 as partial payment for
services rendered. During 2003, 7,500 shares were issued under this Plan, and an
expense of $66,000 was recorded based upon the fair market value of the stock at
time of issuance.
Stock option plans
------------------
The Company has a Non-Employee Directors' Option Plan which has 34,000 shares
reserved for issuance at April 30, 2003 and provides for an automatic issuance
of options to purchase 500 shares of common stock to each non-employee director
annually at the fair market value at the date of grant. The options are
exercisable in one year and expire five years after the date of grant. Under the
Company's 1992 Stock Option Plan, 311,750 shares were reserved for issuance to
officers and other key employees at April 30, 2002. This plan expired on June
30, 2002.
A summary of activity in the Company's stock option plans is as follows:
Year Ended April 30,
------------------------------------------------------------------------------
2003 2002 2001
------------------------------- ---------------------------------- -----------
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 13,000 $ 5.92 12,000 $ 6.30 12,000 $ 6.27
Granted 3,000 8.45 3,000 3.95 2,500 5.88
Exercised (7,000) 6.53 - (1,000) 5.53
Expired or canceled - - (2,000) 5.19 (1,500) 5.88
------------ ------------- -----------
Options outstanding at
end of year 9,000 6.30 13,000 5.92 12,000 6.30
============ ============= ===========
Available for grant at
end of year 18,000 332,750 335,750
============ ============= ============
Options exercisable at
end of year 6,000 10,000 9,500
============ ============= ============
Range of exercise prices
for options exercisable
at end of year $3.95 to $7.75 $3.95 to $7.75 $5.19 to $7.75
============== ============== ===============
29
Options outstanding at April 30, 2003 are exercisable over a four year period
beginning one year from date of grant. The weighted average remaining
contractual life of options outstanding at April 30, 2003, 2002 and 2001 are
3.1, 2.5 and 3.1 years, respectively. The weighted average fair value of options
granted during the year was $2.84 in 2003, $1.36 in 2002 and $1.08 in 2001. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003, 2002 and 2001, respectively: expected
volatility of 46%, 46% and 34%, risk-free interest rates of 2.6%, 3.3% and 4.4%,
and expected lives of 3 years.
Stock options granted have been issued with an exercise price at the fair market
value of the Company's stock at the date of grant. Accordingly, no compensation
expense has been recognized with respect to the stock option plans. Further, the
amount of additional compensation disclosable under the disclosure-only
provisions of SFAS No. 123 is immaterial for all periods presented.
(9) INCOME TAXES:
------------
The provision (benefit) for income taxes consists of the following:
Year Ended April 30,
-----------------------------------------
2003 2002 2001
----------- ------------ ------------
(Thousands)
Current:
Federal $ 2,335 $ (76) $ (3,290)
State and local 316 (173) 8
----------- ------------ ------------
2,651 (249) (3,282)
----------- ------------ ------------
Deferred:
Federal 793 2,317 (847)
State and local 140 397 102
----------- ------------ ------------
933 2,714 (745)
----------- ------------ ------------
Total provision (benefit)
for income taxes $ 3,584 $ 2,465 $ (4,027)
=========== ============ ============
The components of the net deferred income tax liability are as follows:
April 30,
-------------------------------------
2003 2002
--------------- ----------------
(Thousands)
Deferred income tax assets-
State tax loss carryforwards $ 4,721 $ 4,500
Minimum pension liability adjustment 4,023 -
Real estate inventory valuation 566 602
Other 335 585
--------------- ----------------
Total deferred income tax assets 9,645 5,687
--------------- ----------------
Deferred income tax liabilities-
Real estate basis differences (1,194) (1,238)
Reserve for periodicals and paperbacks (898) (862)
Depreciable assets (3,009) (2,413)
Capitalized costs for financial reporting
purposes, expensed for tax (1,447) (1,388)
--------------- ----------------
Total deferred income tax liabilities (6,548) (5,901)
--------------- ----------------
Valuation allowance for realization of
state tax loss carryforwards (4,603) (4,382)
--------------- ----------------
Net deferred income tax liability $ (1,506) $ (4,596)
=============== ================
30
The following table reconciles taxes computed at the U.S. federal statutory
income tax rate to the Company's actual tax provision (benefit):
Year Ended April 30,
----------------------------------
2003 2002 2001
---------- ---------- ----------
(Thousands)
Computed tax provision at
statutory rate $ 3,351 $ 2,095 $ (500)
Increase (reduction) in tax resulting from:
State income taxes, net of federal
income tax effect 394 308 73
Net reduction in tax liability as a
result of IRS settlement - - (3,500)
Other, primarily permanent differences (161) 62 (100)
---------- ---------- ----------
Actual tax provision (benefit) $ 3,584 $ 2,465 $ (4,027)
========== ========== ==========
The benefit for income taxes in 2001 includes a component of $3.5 million
resulting from the settlement of Internal Revenue Service examinations for the
years 1993 and 1994 at an amount less than that which the Company had previously
accrued on account thereof.
(10) SHAREHOLDERS' EQUITY:
--------------------
The Company recorded a charge to Other comprehensive loss during 2003 of
approximately $6.0 million to account for the net effect of the minimum pension
liability (see Note 8).
During 2003, 7,500 shares of common stock were issued from treasury stock to
members of the Board of Directors as partial compensation for services. As a
result, there were 818,592 and 826,092 shares held in the Treasury at April 30,
2003 and 2002, respectively.
The Company has from time to time reacquired its shares to be held as treasury
stock as part of a stock repurchase program. During 2001, the Board of Directors
authorized the repurchase of stock by means of a self-tender "Dutch Auction" for
725,000 shares of the Company's stock at a price not to exceed $7.00 per share
and not lower than $5.25 per share. As a result of this program and other
repurchases, the Company reacquired a total of approximately 668,000 shares at
an aggregate cost of approximately $4.8 million. There were no treasury stock
repurchases in 2003 and 2002.
(11) COMMITMENTS AND CONTINGENCIES:
-----------------------------
Land sale contracts
-------------------
The Company has entered into several conditional sales contracts for the sale of
approximately 830 lots in Rio Rancho which would close at varying times
throughout fiscal 2004 and 2005; however, since each of the contracts permits
the purchaser to terminate its obligations by forfeiture of a relatively modest
deposit, there are no assurances that all, or even a substantial portion, of the
lots subject to the contracts will be sold pursuant to the contracts.
Non-cancelable leases
---------------------
The Company is obligated under long-term non-cancelable leases for equipment and
various real estate properties. Certain real estate leases provide that the
Company will pay for taxes, maintenance and insurance costs and include renewal
options. Rental expense for 2003, 2002 and 2001 was approximately (in thousands)
$4,378, $3,750 and $3,767, respectively.
The total (in thousands) minimum rental commitments for years subsequent to
April 30, 2003 of $13,710 are due as follows : 2004 - $5,023; 2005 - $4,586;
2006 - $3,842; 2007 - $230; 2008 - $29; and 2009 and thereafter - none.
31
Rio Rancho lot exchanges
------------------------
In connection with certain individual homesite sales made prior to 1977 at Rio
Rancho, New Mexico, if water, electric and telephone utilities have not reached
the lot site when a purchaser is ready to build a home, the Company is obligated
to exchange a lot in an area then serviced by such utilities for a lot of the
purchaser, without cost to the purchaser. The Company has not incurred
significant costs related to the exchange of lots.
(12) LITIGATION:
----------
The Company's magazine operations subsidiary is a defendant in a lawsuit in
which the plaintiff is a former wholesaler no longer in business who alleges
that the Company and other national magazine distributors and wholesalers
engaged in violations of the Robinson-Patman act (which generally prohibits
discriminatory pricing) that caused it to go out of business. The plaintiff is
seeking damages of $275 million trebled against all the defendants, plus
punitive damages. Management intends to vigorously defend itself, however, the
outcome of this matter is unknown since the case is in the early stage. Pretrial
discovery commenced in fiscal 2003 and it is unlikely that a trial will commence
prior to fiscal 2005.
The Company and/or its subsidiaries are involved in various other claims and
legal actions incident to their operations, which in the opinion of management,
based upon advice of counsel, will not materially affect the consolidated
financial position or results of operations of the Company and its subsidiaries.
(13) 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 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 changes. The estimated fair value of
the Company's long-term, fixed-rate mortgage receivables is $4.4 million versus
a carrying amount of $5.2 million, and $4.0 million versus $4.6 million,
respectively, at April 30, 2003 and April 30, 2002. The estimated fair value of
the Company's long-term, fixed-rate notes payable is $5.1 million versus a
carrying amount of $4.7 million as of April 30, 2003 and $3.1 million versus
$2.6 million as of April 30, 2002.
(14) INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT INDUSTRY SEGMENTS:
-------------------------------------------------------------------------
The Company has identified three segments in which it currently operates under
the definition established by this standard. The Company's magazine operations
subsidiary has two identified segments, Newsstand Distribution Services and
Fulfillment Services operations. Newsstand Distribution operations involve the
national and international distribution and sale of periodicals and paperbacks
to wholesalers, and Fulfillment Services operations involve the performance of
subscription and product fulfillment and other related activities on behalf of
various publishers and other clients. The Company's real estate subsidiary is
active in Land Sale activities which involves the obtaining of approvals and
development of large tracts of land for sale to builders, commercial users and
others. In prior years, the real estate subsidiary was also active in
Homebuilding, which involved the construction and sale of single-family homes
and other projects, however, the Company exited this segment as part of a
restructuring of its real estate operations. Corporate and other miscellaneous
revenues and expenses not identifiable with a specific segment are grouped
together in this presentation. Certain expenses are allocated among industry
segments based upon management's estimate of each segment's absorption. In
addition, corporate management fees were charged to business segments beginning
in 2003.
Identifiable assets by industry are those assets that are used in the Company's
operations in each industry segment, which also is based upon certain estimates
and allocations among segments.
32
The following schedules set forth summarized data relative to the industry
segments (amounts in thousands):
Newsstand Fulfillment Land Home Corporate
Distribution Services Sales Building and Other Consolidated
------------ ----------- ------------ ----------- ---------- ------------
Year ended April 30, 2003:
Revenues $ 14,832 $ 39,226 $ 17,087 $ - $ 2,646 $ 73,791
Operating expenses 12,147 37,342 10,430 - 3,433 63,352
Management fee 182 518 700 - (1,400) -
Interest expense, net 190 162 - - 230 582
------------ ----------- ------------ ----------- ---------- ------------
Pretax income contribution $ 2,313 $ 1,204 $ 5,957 $ - $ 383 $ 9,857
============ =========== ============ =========== ========== ============
Depreciation and amortization $ 763 $ 1,848 $ 89 $ - $ 371 $ 3,071
Identifiable assets $ 31,962 $ 34,970 $ 67,969 $ - $ 19,254 $ 154,155
Intangible assets $ 3,893 $ 1,298 $ - $ - $ - $ 5,191
Capital expenditures $ 66 $ 1,263 $ - $ - $ 587 $ 1,916
- ----------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2002:
Revenues $ 15,253 $ 33,995 $ 31,321 $ 683 $ 2,153 $ 83,405
Operating expenses 13,065 32,492 26,164 950 3,306 75,977
Interest expense, net 933 158 27 - 147 1,265
------------ ----------- ------------ ----------- ---------- ------------
Pretax income (loss)
contribution $ 1,255 $ 1,345 $ 5,130 $ (267) $ (1,300) $ 6,163
============ =========== ============ =========== ========== ============
Depreciation and amortization $ 890 $ 1,296 $ 94 $ - $ 411 $ 2,691
Identifiable assets $ 30,489 $ 18,264 $ 75,787 $ 448 $ 19,509 $ 144,497
Intangible assets $ 3,893 $ 1,298 $ - $ - $ - $ 5,191
Capital expenditures $ 133 $ 2,629 $ - $ - $ 137 $ 2,899
- ----------------------------------------------------------------------------------------------------------------------------
Year ended April 30, 2001:
Revenues $ 13,899 $ 34,671 $ 17,914 $ 4,805 $ 1,920 $ 73,209
Operating expenses 15,963 32,099 12,808 6,900 4,138 71,908
Interest expense, net 1,740 472 350 42 167 2,771
------------ ----------- ------------ ----------- ---------- ------------
Pretax income (loss)
contribution $ (3,804) $ 2,100 $ 4,756 $ (2,137) $ (2,385) $ (1,470)
============ =========== ============ =========== ========== ============
Depreciation and amortization $ 1,093 $ 1,311 $ 106 $ 150 $ 373 $ 3,033
Identifiable assets $ 39,044 $ 18,242 $ 79,032 $ 4,194 $ 19,141 $ 159,653
Intangible assets $ 3,893 $ 1,298 $ - $ - $ - $ 5,191
Capital expenditures $ 295 $ 1,020 $ - $ - $ 730 $ 2,045
- -
- ----------------------------------------------------------------------------------------------------------------------------
33
Selected Quarterly Financial Data (Unaudited):
- ----------------------------------------------
(In thousands of dollars, except per share amounts)
Quarter Ended
----------------------------------------------------------------
July 31, October 31, January 31, April 30,
Year Ended April 30, 2003: 2002 2002 2003 2003
-------------- -------------- --------------- --------------
Revenues $ 16,010 $ 16,336 $ 20,858 $ 20,587
Gross Profit 4,034 4,823 7,454 5,040
Net Income $ 795 $ 1,249 $ 2,677 $ 1,552
============== ============== ============== ==============
Earnings Per Share -
Basic and Diluted (a) $ 0.12 $ 0.19 $ 0.41 $ 0.24
============== ============== ============== ==============
Year ended April 30, 2002: July 31, October 31, January 31, April 30,
2001 2001 2002 2002
-------------- -------------- -------------- --------------
Revenues $ 19,650 $ 28,218 $ 16,297 $ 19,240
Gross Profit 2,814 6,228 3,945 5,542
Net Income (Loss) $ (365) $ 1,729 $ 668 $ 1,666
============== ============== ============== ==============
Earnings (Loss) Per Share -
Basic and Diluted (a) $ (0.06) $ 0.26 $ 0.10 $ 0.25
============== ============== ============== ==============
(a) The sum of the quarters does not equal the full year earnings per share due to rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ -----------------------------------------------------------------------
Financial Disclosure.
---------------------
On March 7, 2002, the Company notified Arthur Andersen LLP ("Andersen") that the
Company would change its independent public accountants and auditors to
McGladrey & Pullen, LLP for its fiscal year ending April 30, 2002. Andersen and
its predecessor partnership had been the independent public accountants and
auditors for the Company since 1981.
Prior to such notification, the Company did not consult with McGladrey & Pullen,
LLP regarding the application of accounting principles to a specific completed
or contemplated transaction or any matter that was either the subject of a
disagreement or a reportable event. The Company also did not consult with
McGladrey & Pullen, LLP regarding the type of audit opinion that might be
rendered on the Company's consolidated financial statements.
The reports of Andersen on the Company's consolidated financial statements for
the fiscal year ended April 30, 2001 contained no adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In connection with its audit for the fiscal year ended
April 30, 2001 and the subsequent interim period preceding the Company's
notification to Andersen of its intention to dismiss such firm, there had been
no disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure that,
if not resolved to the satisfaction of Andersen, would have caused such firm to
make reference to the subject matter of the disagreement(s) in connection with
this report.
The Company's Audit Committee participated in and approved the decision to
change the Company's external auditors and the Board made the appointment.
34
PART III
--------
The information called for by Items 10, 11, 12 and 13 of Part III is hereby
incorporated by reference from the information set forth under the headings
"Common Stock Ownership of Certain Beneficial Owners and Management", "Election
of Directors", and "Executive Compensation" in the Company's definitive proxy
statement for the 2003 Annual Meeting of Shareholders, which meeting involves
the election of directors. Such definitive proxy statement will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days after the end of the fiscal year covered by this Annual Report on Form
10-K. In addition, information on the Company's executive officers has been
included in Part I above under the caption "Executive Officers of the
Registrant".
Item 14. Controls and Procedures
- ------- -----------------------
An evaluation of the effectiveness of the design and operation of disclosure
controls as of July 1, 2003 was carried out under the supervision and with the
participation of the Company's management, including the Chief Financial Officer
(the Company does not have a Chief Executive Officer). Based on that evaluation,
the Chief Financial Officer concluded that disclosure controls and procedures
have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed in reports filed under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. 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. Subsequent to the date of the most recent evaluation of internal
controls, there were no significant changes in internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------- ----------------------------------------------------------------
(a) 1. The following financial statements and supplementary financial
information are filed as part of this report:
AMREP Corporation and Subsidiaries:
o Report of Independent Public Accountants dated June 13, 2003 -
McGladrey and Pullen, LLP
o Report of Independent Public Accountants dated August 13, 2001 -
Arthur Andersen LLP
o Consolidated Balance Sheets - April 30, 2003 and 2002
o Consolidated Statements of Income for the Three Years Ended April 30,
2003
o Consolidated Statements of Shareholders' Equity for the Three Years
Ended April 30, 2003
o Consolidated Statements of Cash Flows for the Three Years Ended April
30, 2003
o Notes to Consolidated Financial Statements
o Selected Quarterly Financial Data
2. The following financial statement schedules are filed as part of this
report:
AMREP Corporation and Subsidiaries:
o Schedule II - Valuation and Qualifying Accounts
35
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:
(a) The exhibits filed in this report are listed in the Exhibit Index.
The Registrant agrees, upon request of the Securities and Exchange
Commission, to file as an exhibit each instrument defining the rights of holders
of long-term debt of the Registrant and its consolidated subsidiaries which has
not been filed for the reason that the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis.
(b) During the quarter ended April 30, 2003, Registrant filed a Report on Form
8-K on April 24, 2003 under Item 2, "Acquisition or Disposition of Assets",
reporting the acquisition of certain tangible and intangible assets and
assumption of certain liabilities constituting the subscription fulfillment
business of Electronic Data Systems Corporation.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMREP CORPORATION
(Registrant)
Dated: July 24, 2003 By /s/Peter M. Pizza
-----------------
Peter M. Pizza
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the dates indicated.
/s/Peter M. Pizza /s/Nicholas G. Karabots
- ----------------- -----------------------
Peter M. Pizza Nicholas G. Karabots
Vice President, Director
Principal Financial Officer Dated: July 24, 2003
and Principal Accounting Officer*
Dated: July 24, 2003
/s/Jerome Belson /s/Albert V. Russo
- ---------------- -------------------
Jerome Belson Albert V. Russo
Director Director
Dated: July 24, 2003 Dated: July 24, 2003
/s/Edward B. Cloues II /s/Samuel N. Seidman
- ---------------------- --------------------
Edward B. Cloues II Samuel N. Seidman
Director Director
Dated: July 24, 2003 Dated: July 24, 2003
/s/Lonnie A. Coombs /s/James Wall
- ------------------- -------------
Lonnie A. Coombs James Wall
Director Director*
Dated: July 24, 2003 Dated: July 24, 2003
/s/Michael P. Duloc
-------------------
Michael P. Duloc
President, Kable News
Company, Inc.*
Dated: July 24, 2003
_________________
*The Registrant is a holding company which does substantially all of its
business through two wholly-owned subsidiaries (and their subsidiaries). Those
wholly-owned subsidiaries are AMREP Southwest Inc. ("ASW") and Kable News
Company, Inc. ("Kable"). Mr. Wall is the principal executive officer of ASW, and
Mr. Duloc is the principal executive officer of Kable. The Registrant has no
chief executive officer and its only executive officers are James Wall, Senior
Vice President and Peter M. Pizza, Vice President, and Michael P. Duloc, who may
be deemed an executive officer by reason of his position with Kable.
37
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, 2003:
Allowance for doubtful
accounts (included in
receivables - real estate
operations on the
consolidated balance sheet) $ 253 $ 97 $ - $ 70 $ 280
----------- ------------- -------------- -------------- --------------
Allowance for estimated
returns and doubtful accounts
(included in receivables -
magazine circulation
operations on the consolidated
balance sheet) $ 57,911 $ 8,030 $ - $ 129 $ 65,811
----------- ------------- -------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2002:
Allowance for doubtful
accounts (included in
receivables - real estate
operations on the
consolidated balance sheet) $ 173 $ 137 $ - $ 57 $ 253
----------- ------------- -------------- -------------- --------------
Allowance for estimated
returns and doubtful accounts
(included in receivables -
magazine circulation
operations on the
consolidated balance sheet) $ 50,413 $ 8,098 $ - $ 600 $ 57,911
----------- ------------- -------------- -------------- --------------
FOR THE YEAR ENDED
APRIL 30, 2001:
Allowance for doubtful
accounts (included in
receivables - real estate
operations on the
consolidated balance sheet) $ 361 $ (21) $ - $ 167 $ 173
----------- ------------- -------------- -------------- --------------
Allowance for estimated
returns and doubtful accounts
(included in receivables -
magazine circulation
operations on the
consolidated balance sheet) $ 64,628 $ (11,509) $ - $ 2,706 $ 50,413
----------- ------------- -------------- -------------- --------------
38
EXHIBIT INDEX
3 (a) (i) Articles of Incorporation, as amended - Incorporated by reference
to Exhibit (3) (a) (i) to Registrant's Annual Report on Form 10-K
for the fiscal year ended April 30, 1998.
3 (a) (ii) Certificate of Merger - Incorporated by reference to Exhibit (3)
(a) (ii) to Registrant's Annual Report on Form 10-K for the
fiscal year ended April 30, 1998.
3 (b) By-Laws as restated September 24, 1997 - Incorporated by
reference to Exhibit 3 (c) to Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1997.
4 (a) Loan Agreement dated as of April 4, 2002 between U.S. Bank
National Association and Kable News Company, Inc., Kable
Fulfillment Services of Ohio, Inc. and Kable Distribution
Services, Inc. - Incorporated by reference to Exhibit 4(a) to
Registrant's Current Report on Form 8-K filed April 11, 2002.
4 (b) Amendment to Loan Agreement dated as of March 31, 2003 among
Kable News Company, Inc., Kable Fulfillment Services of Ohio,
Inc., Kable Distribtuion Services, Inc. and Kable Fulfillment
Services, Inc. and U. S. Bank National Association - Incorporated
by reference to Exhibit 10.2 to Registrant's Current Report on
Form 8-K filed April 24, 2003.
10 (a) Non-Employee Directors Option Plan, as amended - Incorporated by
reference to Exhibit 10 (i) to Registrant's Annual Report on Form
10-K for the fiscal year ended April 30, 1997.*
10 (b) 2002 Non-Employee Directors' Stock Plan - Incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended January 31, 2003.*
10 (c) Asset Purchase Agreement dated as of March 31, 2003 among Kable
Fulfillment Services, Inc. and Electronic Data Systems
Corporation, EDS Information Services, Inc., and EDS Resource
Management Corporation - Incorporated by reference to Exhibit
10.1 to Registrant's Current Report on Form 8-K filed April 24,
2003.
21 Subsidiaries of Registrant - Filed herewith.
23 Consent of McGladrey & Pullen, LLP - Filed herewith.
99 Certification Pursuant to 18 U.S.C. Section 1350 as enacted by
Section 906 of the Sarbanes-Oxley Act of 2002 - Filed herewith.
________________________________________
* Management contract or compensatory plan or arrangement in which directors or
officers participate.
39
CERTIFICATIONS
I, Peter M. Pizza, Vice President and Chief Financial Officer of AMREP
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of AMREP Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: July 24, 2003
/s/ Peter M. Pizza
- ------------------
Peter M. Pizza
Title: Vice President and Chief Financial Officer
40
CERTIFICATIONS
I, James Wall, Senior Vice President of AMREP Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of AMREP Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: July 24, 2003
/s/ James Wall
- --------------
James Wall
Senior Vice President, AMREP Corporation*
_______________________
* The Company is a holding company which does substantially all of its business
through two wholly-owned subsidiaries (and their subsidiaries). Those
wholly-owned subsidiaries are AMREP Southwest Inc. ("ASW") and Kable News
Company, Inc. ("Kable"). Mr. Wall is the principal executive officer of ASW, and
Mr. Duloc is the principal executive officer of Kable. The Company has no chief
executive officer and its only executive officers are James Wall and Peter M.
Pizza. Mr. Wall is a Senior Vice President of the Company and Mr. Pizza is a
Vice President and Chief Financial Officer of the Company.
41
CERTIFICATIONS
I, Michael P. Duloc, President of Kable News Company, certify that:
1. I have reviewed this annual report on Form 10-K of AMREP Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: July 24, 2003
/s/ Michael P. Duloc
- --------------------
Michael P. Duloc
President, Kable News Company, Inc.*
_______________________
* The Company is a holding company which does substantially all of its business
through two wholly-owned subsidiaries (and their subsidiaries). Those
wholly-owned subsidiaries are AMREP Southwest Inc. ("ASW") and Kable News
Company, Inc. ("Kable"). Mr. Wall is the principal executive officer of ASW, and
Mr. Duloc is the principal executive officer of Kable. The Company has no chief
executive officer and its only executive officers are James Wall and Peter M.
Pizza. Mr. Wall is a Senior Vice President of the Company and Mr. Pizza is a
Vice President and Chief Financial Officer of the Company.
42