| Summary of Significant Accounting Policies | Description of Business First
Hartford Corporation (the Company) was incorporated in Maine in 1909 and is engaged in the purchase, development, ownership, management
and sale of real estate, all of which is considered the “Real Estate Operation” segment. The Company has a second
segment “Fee for Service” in which the Company is engaged as a preferred developer for CVS and Cumberland Farms (see
Service Income to follow). Principles of Consolidation The
accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and all other
entities in which the Company has a controlling financial interest. The latter includes those in which the Company has been determined
to be the primary beneficiary of a variable interest entity or otherwise meets certain criteria as a sole general partner or managing
member in accordance with the consolidation guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification.
As such, included in the consolidated financial statements are the accounts of Rockland Place Apartments Limited Partnership and
Clarendon Hill Somerville Limited Partnership. The Company’s ownership percentage in these variable interest entity partnerships
is nominal. All intercompany balances and transactions have been eliminated in consolidation. Estimates The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Financial Statement
Presentation Because
the Company is engaged in the development and sale of real estate at various stages of construction, the operating cycle may extend
beyond one year. Accordingly, following the usual practice of the real estate industry, the accompanying consolidated balance
sheets are unclassified. Statements
of Cash Flows For
purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. Revenue
Recognition Rental
Income – Rental income is recognized on a straight-line basis over the terms of the respective leases and consists of base
rent and reimbursements for certain costs such as real estate taxes, utilities, insurance, common maintenance and other recoverable
costs as provided in the lease agreements. There are no contingent rents. If conditions of rent are not met, certain tenants
may have rights to pay percentage rent not to exceed stated rent. Currently, there are a very limited number of tenants on percentage
rent. Service
Income - The Company is party to preferred developer agreements with CVS and Cumberland Farms. Under these agreements, the
Company’s fee for such services provided is recognized as earned when services, as outlined in the development agreements,
are provided. Fees earned related to the development of pharmacy stores for CVS during the years ended April 30, 2017 and 2016
were $3,394,500 and $4,767,000, respectively. Fees earned for Cumberland Farms during the years ended April 30, 2017 and
2016 were $1,445,000 and $1,531,250, respectively. These fees are included in service income in the consolidated statements
of income. The
Company also provides management and maintenance services to others. Fees for such services provided are recognized in service
income as earned when services are provided. Sales
of Real Estate – The Company recognizes sales of real estate as revenue upon the transfer of title and when substantially
all performance requisites have been fulfilled. For the years ended April 30, 2017 and 2016, the Company had sales of $34,373,493
and $21,100,182, respectively. The cost of the property sold was $27,723,800 and $17,673,023 for 2017 and 2016, respectively.
None of the property sold was otherwise providing significant ongoing cash flows to the Company. Construction
Income - The Company primarily develops real estate for its own use. However, revenues from long-term projects built for
third parties are recognized on the percentage-of-completion method of accounting based on costs incurred to date in relation
to total actual costs and estimated costs to complete. Revisions in costs and profit estimates are reflected in operations during
the accounting period in which the facts become known. The Company provides for estimated losses on contracts in the year
such losses become known. There were no long-term construction projects or revenue for the years ended April 30, 2017 and
2016. Other Receivables
and Payables Pursuant
to the Company’s Preferred Developer Agreement with CVS, the Company is obligated to fund allowable costs incurred in connection
with the identification and development of new retail pharmacy stores for which it receives direct reimbursements from CVS.
Payables for allowable costs incurred in connection with these activities but not yet funded were $4,363,317 and $7,478,581 as
of April 30, 2017 and 2016 respectively, and have been included as “other payables” in the consolidated balance sheets.
Related reimbursements due from CVS were $4,064,876 and $5,956,103 as of April 30, 2017 and 2016, respectively, and have been
included in “other receivables” in the consolidated balance sheets. Cash
and Cash Equivalents – Restricted Cash
and cash equivalents – restricted, consist of funds received from CVS in connection with the Company’s Preferred Developer
Agreement. Such amounts are to be used for the payment of costs incurred by the Company for the development and construction
of CVS retail pharmacy stores. The restricted cash also includes Tenant Security Deposits held by the VIEs. Developed
Properties, Equipment and Tenant Improvements Developed
properties, equipment and tenant improvements are recorded at cost. Depreciation
and amortization are provided using the straight-line method based on the following estimated useful lives.
Description Years
Developed properties 15 - 40
Equipment 3 - 10
Tenant improvements Lesser of improvement life Expenditures
for major renewals and betterments, which extend the useful lives of developed properties, equipment and tenant improvements,
are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Property
Under Construction The
Company capitalizes costs directly associated with property under construction. Such costs include materials, construction labor
and payroll cost, allocation of salaries and payroll cost from direct activities such as engineering, purchasing and legal and
services provided by subcontractors. Material carrying costs for property taxes, insurance and interest are also capitalized during
the period of active construction until construction is substantially complete (see Note 3). The
Company capitalizes labor cost for direct work by offsite staff on specific projects. In the year ended April 30, 2017,
$52,500 was capitalized. In the year ended April 30, 2016, $131,028 was capitalized. Property
Held for Sale The
Company classifies property as “held for sale” if management commits to sell the property and actively markets the
property to potential buyers at fair market value, the property is available for immediate sale in its present condition subject
only to terms that are usual and customary for sales of such property, and the sale is probable within one year. Deferred
Expenses Expenditures
directly related to real estate under consideration for development are deferred and included in deferred expenses in the consolidated
balance sheets. These costs include option payments, attorney’s fees, architect and engineering fees, consultants,
etc., but only to the extent they are from outside sources. If development of the real estate commences, all of the accumulated
costs are reclassified to property under construction in the consolidated balance sheets. If the project is later abandoned,
all of the accumulated costs are charged to expense. Leasing
costs incurred, primarily commissions, are capitalized for signed leases and included in deferred expenses in the accompanying
consolidated balance sheets. Such costs are amortized using the straight-line method over the terms of the related leases.
The unamortized balance of such cost was $1,226,778 and $1,086,042 as of April 30, 2017 and 2016, respectively. Amortization
expense for the next five years is expected to be as follows:
Year Ending April 30,
2018 $238,625
2019 196,538
2020 131,934
2021 117,048
2022 106,033
Thereafter 436,600
Total $1,226,778 Investment
in Affiliated Entities The
Company has an investment in an affiliated limited liability entity Dover Parkade, LLC, (“Dover”). The Company
has a 50% interest in Dover which owns a shopping center in Dover Township, NJ. The operating and financial policies of
Dover are not controlled by the Company. For years prior to May 1, 2009, the Company was committed to provide funding to
this equity method investee. The Company’s investment was recorded at cost and subsequently adjusted for its share
of their net income and losses and distributions. Through April 30, 2009, losses and distributions from Dover exceeded the
Company’s investment and the Company’s investment balance was reduced below $0 and recorded as a liability.
Beginning May 1, 2009, distributions from Dover have been credited to income and any additional losses have not been allowed to
further reduce the investment balance. The resulting carrying value of this investment of ($1,328,909) as of April 30, 2017
and ($1,654,361) as of April 30, 2016 is included in other liabilities. The Company recorded equity in earnings of unconsolidated
subsidiaries of $685,452 and $666,851 for the years ended April 30, 2017 and 2016, respectively, which includes distributions
of $360,000 in each year. On
October 4, 2011, the Company entered into a partnership with a nonprofit entity which purchased a 99 year leasehold interest in
a 208 unit subsidized housing project in Claymont, Delaware. The Company is a non-controlling .01% limited partner in the
entity. The Company’s investment is carried at cost of $100. A subsidiary of the Company is the managing agent. Fair
Value Measurements Certain
assets and liabilities are presented at fair value on a recurring basis. In addition, fair values are disclosed for certain
other assets and liabilities. In all cases, fair value is determined using valuation techniques based on a hierarchy of
inputs. A summary of the hierarchy follows:
· Level
1 – Quoted prices in active markets that are unadjusted and accessible at
the measurement date for identical, unrestricted assets or liabilities.
· Level
2 – Quoted prices for identical assets and liabilities in markets that are
not active, quoted prices for similar assets and liabilities in active markets or financial
instruments for which significant observable inputs are available, either directly or
indirectly such as interest rates and yield curves that are observable at commonly quoted
intervals; and
· Level
3 – Prices or valuations that require inputs that are unobservable. In
certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such
cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined
based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment
of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability. The
Company’s financial instruments include cash and cash equivalents, accounts receivable, marketable securities, accounts
payable, accrued expenses and debt. The fair values of accounts receivable, accounts payable and accrued expenses are estimated
to approximate their carrying amounts because of their relative short-term nature. In general, the carrying amount of variable
rate debt approximates its fair value. Further, the carrying amount of fixed rate debt approximates fair value debt since
the interest rates on the debt approximates the Company’s current incremental borrowing rate. Information about the
fair values of marketable securities and derivative liabilities is presented below. Level 1 Marketable Securities
– Common and Preferred Stocks The
Company determines the appropriate classifications of its investments in marketable debt and equity securities at the time of
purchase and re-evaluates such determinations at each balance sheet date. As of April 30, 2017 and 2016, investments consist
of equity securities, which are classified as available for sale. Investments in marketable securities are stated at fair
value. Fair value for marketable securities is based on the last sale of the period obtained from recognized stock exchanges
(i.e. Level 1). Net unrealized holding gains and temporary losses on equity securities are included as a separate component
of the deficiency. Net unrealized gains of $112,813 as of April 30, 2017 and losses of $466,872 as of April 30, 2016 are included
in noncontrolling interests. Gains or losses on securities sold are based on the specific identification method. Level
2 Derivative
Instruments The
Company, through its 50% owned consolidated subsidiaries, has entered into two separate floating-to-fixed interest rate swap agreements
with banks that expire in May 2025 and July 2031. The Company has determined that these derivative instruments do not meet
the requirements of hedge accounting and have therefore recorded the change in fair value of these derivative instruments through
income in the consolidated statement of operations. The gain / (loss) on derivatives incurred during the years ended April 30,
2017 and 2016 totaled $2,669,416 and ($2,177,879), respectively, and the Company has recorded a liability of $2,023,793 and $4,693,209
in the consolidated balance sheets, which represents the fair value of the interest rate swaps as of April 30, 2017 and 2016,
respectively. Level
3 Debt A
VIE of the Company assumed a third mortgage note with Massachusetts Housing Finance Agency (MHFA) on November 1, 2006, having
a balance of $18,315,482. The note bears interest at the rate of 5.36% per annum. The VIE has the right to purchase the note upon
maturity for the fair value of the note as determined by an appraiser. The mortgage loan was recorded at its estimated fair value
on the date of acquisition. The fair value of the third mortgage note has been determined based on the fair value of the property
on the acquisition date less the primary loan balances. As of April 30, 2017, the carrying amount of the loan was $1,828,910. There
were no gross realized and unrealized gains and losses on Level 3 assets and liabilities for the years ended April 30, 2017 and
2016. The
Company recognizes transfers between levels within the hierarchy as of the beginning of the reporting period. There have been
no significant transfers between levels within the hierarchy for the years ended April 30, 2017 and 2016. Long-Lived
Assets Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount might not be
recovered. Income
Taxes Deferred
income taxes are provided on the differences between the financial statement and income tax bases of assets and liabilities and
on net operating loss carryforwards using the enacted tax rates. A
valuation allowance would be provided for deferred income tax assets for which realization is not likely in the near term. As
of April 30, 2017 and 2016, the Company has no significant uncertain income tax positions. The Company recognizes interest
and penalties on any uncertain income tax positions as a component of income tax expense. During the years ended April 30, 2017
and 2016, the Company did not recognize any interest or penalties related to unrecognized tax benefits. The
statute of limitations is three years unless there is fraud or substantial understatement of income. Therefore, tax returns beginning
with fiscal year 2014 are open to examination by Federal, local and state authorities. Stock
Compensation Share-based
compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense
over the employee’s requisite service period (generally the vesting period of the equity grant). Earnings
(loss) per share (EPS) Basic
earnings (loss) per share amounts are determined using the weighted-average outstanding common shares for the year. Diluted
earnings (loss) per share amounts include the weighted-average outstanding common shares as well as potentially dilutive common
stock options and warrants using the “treasury stock” method. There were no options outstanding at April 30, 2017
or April 30, 2016. New
Accounting Pronouncements In
May 2014, the FASB issued a standard on revenue recognition providing a single, comprehensive revenue recognition model for all
contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration of which the entity expects to
be entitled in exchanged for those goods or services. The standard is effective beginning January 1, 2017, with no early adoption
permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative
effect recognized as of the date of initial application. We are currently evaluating the adoption method options and the
impact of the new guidance on our consolidated financial statements. In
February 2015, the FASB issued a standard that amends the current consolidation guidance. The amendments affect both the
variable interest entity (VIE) and voting interest entity (VOE) consolidation models. The changes are extensive and apply
to all companies. The need to assess an entity under the different consolidation model may change previous consolidation
conclusions. The standard is effective in fiscal periods beginning after December 15, 2015 with early adoption permitted.
The Company has evaluated the impact of the new guidance on its consolidated financial statements and concluded that it has no
impact on its consolidated financial statements. In
February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases, (Topic 842), which is intended
to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that engage
in lease transactions (both lessee and lessor) that lease assets such as real estate and manufacturing equipment. This ASU will
require organizations that lease assets—referred to as “leases”—to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by those leases. ASU No. 2016-02 is effective for fiscal years
and interim periods within those years beginning January 1, 2019. The Company is in process of assessing the impact of the
adoption of ASU No. 2016-02 on its financial position, results of operations and cash flows. In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. The ASU provides guidance on how certain cash receipts and cash payments are to be presented and classified in
the statement of cash flows. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential
impact of adopting this guidance on its consolidated financial statements. |
