Notes to Consolidated Financial Statements
(Unaudited)
Three Months Ended July 31, 2019 and 2018
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(1)
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SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL
REPORTING POLICIES
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The accompanying unaudited consolidated
financial statements have been prepared by AMREP Corporation (the “Company”) pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”) for interim financial information, and do not include all the
information and footnotes required by accounting principles generally accepted in the United States of America for complete financial
statements. The Company, through its subsidiaries, is primarily engaged in one business segment: the real estate business. The
Company has no foreign sales or activities outside the United States. All significant intercompany accounts and transactions have
been eliminated in consolidation.
In the opinion of management, these unaudited
consolidated financial statements include all adjustments, which are of a normal recurring nature, considered necessary to reflect
a fair presentation of the results for the interim periods presented. The results of operations for such interim periods are not
necessarily indicative of what may occur in future periods. Unless the context otherwise indicates, all references to 2020 and
2019 are to the fiscal years ending April 30, 2020 and 2019 and all references to the first quarters of 2020 and 2019 mean the
fiscal three month periods ended July 31, 2019 and 2018.
The unaudited consolidated financial statements
herein should be read in conjunction with the Company’s annual report on Form 10-K for the year ended April 30, 2019, which
was filed with the SEC on July 26, 2019 (the “2019 Form 10-K”). Certain 2019 balances in these financial statements
have been reclassified to conform to the current year presentation with no effect on net income or loss or shareholders’
equity.
Summary of Significant Accounting Policies
The significant accounting policies used
in preparing these consolidated financial statements are consistent with the accounting policies described in the 2019 Form 10-K,
except for those adopted as described below.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. Since
that date, the FASB has issued additional ASUs providing further guidance for lease transactions (collectively “ASU 2016-02”).
ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize
in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right
to use the underlying asset for the lease term. For leases with a term of twelve months or less, a lessee is permitted to make
an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In addition, ASU
2016-02 requires fixed lease payments under tenant leases to be recognized on a straight-line basis over the term of the related
lease where the Company is lessor. The cumulative difference between lease revenue recognized under the straight-line method and
contractual lease payments is recorded within Other assets on the consolidated balance sheets. ASU 2016-02 was effective for the
Company on May 1, 2019, with the Company recognizing and measuring leases at the beginning of the earliest period presented using
a modified retrospective approach. In the quarter ended July 31, 2019, right-of-use assets obtained in exchange for operating
lease liabilities amounted to $198,000 as a result of adoption of ASU 2016-02. The adoption of ASU 2016-02 by the Company did
not have a material effect on its consolidated financial statements.
In June 2018, the FASB issued ASU No.
2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment
Accounting. ASU 2018-07 addresses several aspects of the accounting for nonemployee share-based payment transactions,
including share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 was effective for
the Company on May 1, 2019. The adoption of ASU 2018-07 by the Company had no impact on its consolidated financial
statements.
In January 2018, the FASB issued
ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income, which permits but does not require the reclassification to retained
earnings of certain tax effects resulting from the U.S. Tax Cuts and Jobs Act related to items in accumulated other
comprehensive income. ASU 2018-02 may be applied retrospectively to each period in which the effect of the U.S. Tax Cuts and
Jobs Act is recognized or may be applied in the period of adoption. ASU 2018-02 was effective for the Company on May 1, 2019.
The Company had no such tax effects and therefore the adoption of ASU 2018-02 had no impact on its consolidated financial
statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.
ASU 2018-13 eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to
disclose certain new information and modifies some disclosure requirements to improve the effectiveness of disclosures in the notes
to financial statements. ASU 2018-13 will be effective for the Company’s fiscal year beginning May 1, 2020. The Company is
currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined
Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit
Plans. ASU 2018-14 removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of
disclosures, and adds disclosure requirements identified as relevant for companies with defined benefit retirement plans. ASU 2018-14
will be effective for the Company’s fiscal year beginning May 1, 2020. The
Company is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.
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(2)
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DISCONTINUED OPERATIONS
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Refer to Note 2 to the consolidated financial
statements contained in the 2019 Form 10-K for detail about the sale in 2019 of the Company’s fulfillment services business
reported as discontinued operations in the accompanying financial statements. The following table provides a reconciliation of
the carrying amounts of components of pretax income of the discontinued operations to the amounts reported in the accompanying
consolidated statements of operations:
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Three Months
ended
July 31,
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2018
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(in thousands)
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Components of pretax income from discontinued operations:
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Revenues
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$
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7,445
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Operating expenses
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6,233
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General and administrative expenses
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346
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Interest expense
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1
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Income from discontinued operations before income taxes
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865
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Provision for income taxes
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142
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Income from discontinued operations
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$
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723
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The Company has entered into two Subdivision
Improvement Agreements with the City of Rio Rancho, New Mexico. In connection with these agreements, the Company has signed a promissory
note for each subdivision and deposited restricted funds in a reserve bank account for each subdivision. Following successful
completion and acceptance of the Company’s performance in a subdivision, the applicable promissory note will be cancelled
and the related restricted funds will be returned to the Company’s general cash.
During the three months ended July 31,
2019, $664,000 of cash was released from restrictions under the Subdivision Improvement Agreements. The total amount of restricted
funds at July 31, 2019 was $305,000 and at April 30, 2019 was $969,000.
The following provides a reconciliation
of the Company’s cash, cash equivalents and restricted cash as reported in the consolidated balance sheets to the amount
reported in the statement of cash flows for the three month period ending July 31, 2019:
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July 31,
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April 30,
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2019
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2019
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(in thousands)
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Cash and cash equivalents
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$
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15,591
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$
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13,267
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Restricted cash
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305
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969
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Total cash, cash equivalents and restricted cash
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$
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15,896
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$
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14,236
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(4)
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INVESTMENT ASSETS, NET
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Investment assets, net consist of:
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July 31,
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April 30,
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2019
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2019
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(in thousands)
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Land held for long-term investment
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$
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9,709
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$
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9,706
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Leased warehouse and office facilities
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13,527
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13,527
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Less accumulated depreciation
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(6,128
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)
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(6,006
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)
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7,399
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7,521
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$
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17,108
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$
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17,227
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Land held for long-term investment represents
property located in areas that are not planned to be developed in the near term and thus has not been offered for sale. As of April
30, 2019, the Company held approximately 12,000 acres of land in New Mexico classified as land held for long-term investment.
The warehouse and office facilities are
located in Palm Coast, Florida, aggregate 204,000 square feet and are leased to a third party with a lease term that expires in
2029. Depreciation associated with the warehouse and office facilities of $122,000 and $122,000 was charged to operations for the
three months ended July 31, 2019 and July 31, 2018.
Other assets consist of:
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July 31,
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April 30,
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2019
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2019
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(in thousands)
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Deferred purchase price
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$
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5,584
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$
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5,636
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Prepaid expenses and other, net
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1,088
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839
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$
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6,672
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$
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6,475
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The Company recognized deferred purchase
price upon the sale of the Company’s fulfillment services business in April 2019. The deferred purchase price is being amortized
over the term of the two lease agreements, with $52,000 of tenant lease payments reducing the deferred purchase price for the
three months ended July 31, 2019. Prepaid expenses and other, net includes property and equipment for which there was $4,000 charged
to depreciation expense for the three months ended July 31, 2019 and July 31, 2018. Right-of-use assets associated with the Company’s
leases, amount to $175,000, net of $23,000 of depreciation expense charged during the three months ended July 31, 2019.
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(6)
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES
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Accounts payable and accrued expenses consist of:
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July 31,
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April 30,
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2019
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2019
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(in thousands)
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Real estate operations
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$
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2,391
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$
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2,359
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Corporate operations
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618
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605
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$
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3,009
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$
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2,964
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As of July 31, 2019, accounts payable and
accrued expenses for the Company’s real estate business included accrued expenses of $439,000, trade payables of $590,000,
real estate customer deposits of $1,317,000 and other of $45,000. As of April 30, 2019, accounts payable and accrued expenses for
the Company’s real estate business included accrued expenses of $491,000, trade payables of $652,000, real estate customer
deposits of $1,198,000 and other of $18,000.
Notes payable, net consist of:
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July 31,
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April 30,
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2019
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2019
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(in thousands)
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Real estate notes payable
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$
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842
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$
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1,384
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Unamortized debt issuance costs
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-
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(65
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)
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$
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842
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$
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1,319
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Refer to Note 7 to the consolidated financial
statements contained in the 2019 Form 10-K for detail about the loan agreement entered into with Main Bank in July 2018 with respect
to the development of certain planned residential lots within the Hawksite subdivision located in Rio Rancho, New Mexico. The outstanding
principal amount of the loan as of July 31, 2019 was $813,000 and the Company made principal repayments of $390,000 during the
three months ended July 31, 2019. The interest rate on the loan at July 31, 2019 was 7.88%. The Company capitalized $20,000 and
$0 of interest related to this loan in the three months ended July 31, 2019 and July 31, 2018. In August 2019, the outstanding
principal amount of the loan was fully repaid and the loan was terminated.
Refer to Note 7 to the consolidated financial
statements contained in the 2019 Form 10-K for detail about the loan agreement entered into with BOKF, NA dba Bank of Albuquerque
(“BoABQ”) in December 2017 with respect to the development of certain planned residential lots within the Lomas Encantadas
subdivision located in Rio Rancho, New Mexico. The Company made principal repayments of $182,000 during the three months ended
July 31, 2019. The Company capitalized $4,000 and $26,000 of interest related to this loan in the three months ended July 31,
2019 and July 31, 2018. In June 2019, the outstanding principal amount of the loan was fully repaid and the loan was terminated.
Refer to Note 15 to the consolidated financial
statements contained in the 2019 Form 10-K for detail about the loan agreement entered into with BoABQ in June 2019 with respect
to the development of certain planned residential lots within the Lomas Encantadas subdivision located in Rio Rancho, New Mexico.
The outstanding principal amount of the loan as of July 31, 2019 was $28,000 and the Company made no principal repayments during
the three months ended July 31, 2019. The total book value of the property within the Lomas Encantadas subdivision mortgaged to
BoABQ under this loan was $922,000 as of July 31, 2019. The interest rate on the loan at July 31, 2019 was 5.39%. The Company
capitalized less than $1,000 of interest related to this loan in the three months ended July 31, 2019. At July 31, 2019, the Company
was in compliance with the financial covenants contained within the loan documentation.
Other revenues were $44,000 for the three
months ended July 31, 2019 and $57,000 for the three months ended July 31, 2018 and primarily consisted of forfeited deposits
and amortization of deferred revenue.
Pension Plan
Refer to Note 10 to the consolidated financial
statements contained in the 2019 Form 10-K for detail regarding the Company’s defined benefit pension plan. The Company recognizes
the known changes in the funded status of the pension plan in the period in which the changes occur through other comprehensive
income, net of the related deferred income tax effect. The Company recognized other comprehensive income of $154,000 and $157,000
for the three months ended July 31, 2019 and July 31, 2018, related to the amortization of the plan’s unrecognized net loss
included in Accumulated other comprehensive loss, net in the accompanying financial statements.
The Company funds the pension plan in compliance
with IRS funding requirements. The Company did not make any contributions to the pension plan during the three months ended July
31, 2019 or July 31, 2018.
In the quarter ended July 31, 2019, the
Company initiated a limited offer for certain former employees with vested benefits in the Company’s defined benefit pension
plan to elect to receive a lump sum payout of their pension benefit. The Company completed these lump sum payments from the pension
plan in September 2019 to 309 former employees for approximately $7,200,000. The Company expects to recognize a non-cash pre-tax
pension settlement charge in the quarter ending October 31, 2019 of approximately $2,960,000.
Equity Compensation Plan
Refer to Note 10 to the consolidated financial
statements contained in the 2019 Form 10-K for detail regarding the AMREP Corporation 2016 Equity Compensation Plan (the “2016
Equity Plan”) and the AMREP Corporation 2006 Equity Compensation Plan (together with the 2016 Equity Plan, the “Equity
Plans”). The Company issued 9,000 shares and 29,200 shares of restricted common stock under the 2016 Equity Plan during
the three months ended July 31, 2019 and July 31, 2018. During the three months ended July 31, 2019 and July 31, 2018, 10,000
shares and 8,750 shares of restricted common stock previously issued under the Equity Plans vested. As of July 31, 2019 and July
31, 2018, 41,667 shares and 55,200 shares of restricted common stock previously issued under the Equity Plans had not vested.
For the three months ended July 31, 2019 and July 31, 2018, the Company recognized $25,000 and $25,000 of non-cash compensation
expense related to the vesting of restricted shares of common stock. As of July 31, 2019 and July 31, 2018, there was $164,000
and $248,000 of unrecognized compensation expense related to restricted shares of common stock previously issued under the Equity
Plans which had not vested as of those dates, which is expected to be recognized over the remaining vesting term not to exceed
three years. In addition, the Company recognized $23,000 of expense during the three months ended July 31, 2019 related to deferred
stock units expected to be issued to non-employee members of the Company’s Board of Directors in December 2019.
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(10)
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INTEREST INCOME, NET
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Interest income, net consists of:
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July 31,
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July 31,
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2019
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2018
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(in thousands)
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Interest income on savings
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$
|
60
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$
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32
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Interest on deferred purchase price
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64
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-
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Interest expense
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-
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(4
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)
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$
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124
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$
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28
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