AXR

AMREP Corp. 10-Q Summary: Period Ended October 31, 2006

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for AMREP Corporation for the three and six months ended October 31, 2006. The company operates in three primary segments: Real Estate (AMREP Southwest), Fulfillment Services, and Newsstand Distribution Services (Kable Media Services). The company is a non-accelerated filer with 6,652,612 shares of common stock outstanding as of the period end.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 61% for the quarter and 76% for the six-month period compared to the prior year. This was driven primarily by a surge in Real Estate land sales, which rose from $11.65M to $31.71M in the quarter and from $19.06M to $64.20M for the six months.
• Profitability: Net income increased significantly, from $5.06M to $16.06M for the quarter and from $10.42M to $31.87M for the six months. The prior year included income from discontinued operations ($3.56M gain for six months), whereas current results are entirely from continuing operations.
• Margin Expansion: The gross profit percentage on land sales improved from 54% to 75% in the quarter and from 47% to 70% for the six months, attributed to a higher proportion of undeveloped lot sales.
• Media Services: Revenues were relatively flat for the quarter (+1%) but declined slightly for the six months (-2.5%). Fulfillment Services revenues decreased due to prior customer losses, while Newsstand Distribution revenues increased due to higher volumes.
• Liquidity: Cash and cash equivalents more than doubled from $46.9M to $110.2M, bolstered by strong operating cash flows ($72.1M for six months) and proceeds from asset dispositions.

Outlook, Risks, and Unusual Items

• Pending Acquisition: On November 7, 2006, the company agreed to acquire Palm Coast Data, LLC, for approximately $92 million. The transaction is expected to close in early 2007 and will be financed via internal funds and borrowings.
• Dividends: A special cash dividend of $0.85 per share was paid in August 2006. Management stated they may consider future special dividends based on earnings and cash position, but no assurance is given.
• Debt Covenants: The company maintains credit facilities for real estate development ($25M capacity) and media services ($20M capacity). As of October 31, 2006, there were no outstanding balances under these revolving lines. Covenants restrict dividends and capital expenditures.
• Tax Rate: The effective tax rate increased to 37% for the current periods compared to 30-32% in the prior year, largely due to the absence of tax benefits from charitable land contributions that occurred in the prior year.
• Accounting Standards: The company is evaluating the impact of FASB Interpretation No. 48 (Income Taxes) and Statement No. 158 (Pension Plans), effective for fiscal years beginning after December 15, 2006.

Investor Verification Checklist

• Real Estate Sustainability: Verify the durability of the 75% gross margin in land sales and the volume of remaining inventory in the Rio Rancho market.
• Acquisition Financing: Confirm the terms of the $92M Palm Coast Data acquisition and the impact on future leverage ratios and cash flow.
• Media Segment Trends: Assess the long-term impact of customer losses in the Fulfillment Services segment versus growth in Newsstand Distribution.
• Cash Utilization: Monitor the deployment of the $110M cash balance, specifically regarding the pending acquisition and potential future special dividends.
• Debt Covenants: Review the specific financial ratios required by the credit facilities to ensure compliance as the company scales operations.