Management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended. Internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles in the United States of America.
Because of the inherent limitations of
internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls,
material misstatements may not be prevented or detected on a timely basis. Accordingly, even internal controls determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Furthermore,
projections of any evaluation of the effectiveness of internal controls to future periods are subject to the risk that such controls
may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness
of internal control over financial reporting as of April 30, 2020 based upon the criteria set forth in a report entitled “Internal
Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based
on its assessment, management has concluded that, as of April 30, 2020, internal control over financial reporting was effective.
This annual report on Form 10-K does not
include an attestation report of the Company’s independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to such attestation pursuant to rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report on internal control over financial reporting in this
annual report on Form 10-K.
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 (collectively, the “Company”). The
Company, through its subsidiaries, is primarily engaged in one business segment: the real estate business. The Company has no foreign
sales. All significant intercompany accounts and transactions have been eliminated in consolidation.
Prior to April 26, 2019, the Company had
been engaged in the fulfillment services business. On April 26, 2019, the Company’s fulfillment services business was sold.
Unless otherwise stated, the information disclosed in the footnotes accompanying the consolidated financial statements refers to
continuing operations. See Note 2 for more information regarding results from discontinued operations.
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. Certain 2019 balances in these financial statements have been reclassified to conform to the current year presentation
with no effect on the net income or loss or shareholders’ equity.
Fiscal year
The Company’s fiscal year ends on
April 30. All references to 2020 and 2019 mean the fiscal years ended April 30, 2020 and 2019, unless the context otherwise indicates.
Revenue recognition
Revenue from land sales: The Company accounts for revenue
from land sales in accordance with Accounting Standards Codification (“ASC”) 2014-09, Revenue from Contracts with
Customers (Topic 606). Revenues from land sales generally consist of real estate land sales and corporate land sales. Revenue
from these land sales are recognized when the parties are bound by the terms of a contract, consideration has been exchanged,
title and other attributes of ownership have been conveyed to the buyer by means of a closing and the Company is not obligated
to perform further significant development of the specific property sold. In general, the Company’s performance obligation
for each of these land sales is fulfilled upon the delivery of the land, which generally coincides with the receipt of cash consideration
from the counterparty.
Cost of land sales includes all direct
acquisition costs and other costs specifically identified with the property, including pre-acquisition costs and capitalized real
estate taxes and interest, and an allocation of certain common development costs associated with the entire project. Common development
costs include the installation of utilities and roads, and may be based upon estimates of cost to complete. The allocation of costs
is based on the relative sales value of the property. Estimates and cost allocations are reviewed on a regular basis until a project
is substantially completed, and are revised and reallocated as necessary on the basis of current estimates.
Rental Income: The Company may enter
into leases with tenants with respect to property or buildings it owns. Base rental payments from tenants are recognized as revenue
monthly over the term of the lease. Additional rent related to the reimbursement of real estate taxes, insurance, repairs and maintenance,
and other operating expenses is recognized as revenue in the period the expenses are incurred.
Cash, cash equivalents
and restricted cash
Cash equivalents consist of highly liquid
investments that have an original maturity of ninety days or less when purchased and are readily convertible into cash. Restricted
cash consists of cash deposits with a bank that are restricted due to subdivision improvement agreements with a governmental authority.
Real estate inventory
Real estate inventory includes land and
improvements on land held for future development or sale. The Company accounts for its real estate inventory in accordance with
ASC 360-10. The cost basis of the land and improvements includes all direct acquisition costs including development costs, certain
amenities, capitalized interest, capitalized real estate taxes and other costs. Interest and real estate taxes are not capitalized
unless active development is underway. Real estate inventory held for future development or sale is stated at accumulated cost
and is evaluated and reviewed for impairment when events or changes in circumstances indicate the carrying value of an asset may
not be recoverable.
Investment assets
Investment assets consist of (i) investment
land, which represents vacant, undeveloped land not held for development or sale in the normal course of business, and (ii) real
estate assets that are intended to be leased to third parties. Investment assets are stated at the lower of cost or net realizable
value.
Depreciation of investment assets (other
than land) is 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 to 40 years for buildings and improvements. Land is not subject
to depreciation.
Impairment of long-lived assets
Long-lived assets consist of real estate
that are intended to be leased to third parties and are accounted for in accordance with ASC 360-10. Long-lived assets are evaluated
and tested for impairment when events or changes in circumstances indicate the carrying value of an asset may not be recoverable.
Asset impairment tests are based upon the intended use of assets, expected future cash flows and estimates of fair value of assets.
The evaluation of operating asset groups includes an estimate of future cash flows on an undiscounted basis using estimated revenue
streams, operating margins and general and administrative expenses. The estimation process involved in determining if assets have
been impaired and in the determination of estimated future cash flows is inherently uncertain because it requires estimates of
future revenues and costs, as well as future events and conditions. If the excess of undiscounted cash flows over the carrying
value of a project is small, there is a greater risk of future impairment and any resulting impairment charges could be material.
Due to the subjective nature of the estimates and assumptions used in determining future cash flows, actual results could differ
materially from current estimates and the Company may be required to recognize impairment charges in the future
Leases
Right-of-use assets and lease liabilities are recorded on the
balance sheet for all leases with an initial term over one year. Leases with an initial term of 12 months or less are not recorded
on the consolidated balance sheet. Right-of-use assets are classified within other assets and the corresponding lease liability
is included in accounts payable and accrued expenses in the consolidated balance sheet.
Share-based compensation
The Company accounts for awards of restricted
stock and deferred stock units in accordance with ASC 718-10, which requires that compensation cost for all stock awards be calculated
and amortized over the service period (generally equal to the vesting period). Compensation expense for awards of restricted stock
and deferred stock units are based on the fair value of the awards at their grant dates.
Income taxes
Deferred income tax assets and liabilities
are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured by
using currently enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse.
The Company provides a valuation allowance against deferred tax assets unless, based upon the available evidence, it is more likely
than not that the deferred tax assets will be realized.
Earnings
(loss) per share
Basic earnings (loss) per share is based
on the weighted average number of common shares outstanding during each year. Unvested restricted shares of common stock (see Note
11) are not included in the computation of basic earnings per share, as they are considered contingently returnable shares. Unvested
restricted shares of common stock are included in diluted earnings per share if they are dilutive. Deferred stock units (see Note
11) are included in both basic and diluted earnings per share computations.
Pension plan
The Company recognizes the over-funded
or under-funded status of its defined benefit pension plan as an asset or liability as of the date of the plan’s year-end
statement of financial position and recognizes changes in that funded status in the year in which the changes occur through comprehensive
income (loss).
Comprehensive income
Comprehensive income is defined as the
change in equity during a period from transactions and other events from non-owner sources. Total comprehensive income is the total
of net income or loss and other comprehensive income or loss that, for the Company, consists of the minimum pension liability net
of the related deferred income tax effect.
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. Significant estimates that
affect the financial statements include, but are not limited to, (i) real estate cost of sales calculations, which are based on
land development budgets and estimates of costs to complete; (ii) cash flows, asset groupings and valuation assumptions in performing
asset impairment tests of long-lived assets and assets held for sale; (iii) actuarially determined benefit obligations and other
pension plan accounting and disclosures; (iv) risk assessment of uncertain tax positions; and (v) the determination of the recoverability
of net deferred tax assets. The Company bases its significant estimates on historical experience and on various other assumptions
that management believes are reasonable under the circumstances. Actual results could differ from these estimates.
Discontinued operations
The Company records discontinued operations
when the disposal of a separately identified business unit constitutes a strategic shift in the Company’s operations, as
defined in ASC Topic 205-20, Discontinued Operations.
Recent accounting pronouncements
In February 2016, the FASB issued 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. During 2020, right-of-use assets obtained in exchange for operating lease liabilities amounted to $198,000
as a result of adoption of ASU 2016-02. In addition, ASU 2016-02 requires the lessor to recognize fixed lease payments under tenant
leases on a straight-line basis over the term of the related lease. 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.
As permitted by the ASU 2016-02, the Company elected to carry forward its historical lease classifications. ASU 2016-02 was effective
for the Company on May 1, 2019, with the Company recognizing and measuring leases using a modified retrospective approach. The
adoption of ASU 2016-02 by the Company did not have a material effect on its consolidated financial statements.
In January 2018, the FASB issued ASU 2019-02,
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 opted not to reclassify items from other comprehensive
income to retained earnings, as was permitted by ASU 2018-02; therefore, the adoption of ASU 2018-02 had no impact 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 August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement: 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.
In December 2019, the FASB issued ASU No.
2019-12, Income Taxes – Simplifying the Accounting for Income Taxes, which removes certain exceptions for companies
related to tax allocations and simplifies when companies recognize deferred tax liabilities in an interim period. ASU 2019-12 will
be effective for the Company’s fiscal year beginning May 1, 2021. The Company is currently evaluating the impact that this
ASU will have on the Company’s consolidated financial statements.
There are no other new accounting standards
or updates to be adopted that the Company currently believes might have a significant impact on its consolidated financial statements.
(2)
|
DISCONTINUED OPERATIONS:
|
Prior to April 26, 2019, the Company was
engaged in the fulfillment services business operated by Palm Coast Data LLC (“PCD”) and its affiliates. The fulfillment
services business performed fulfillment and contact center services for publications, membership organizations, government agencies
and other direct marketers.
On April 26, 2019, Palm Coast Data Holdco,
Inc. (“Seller”), a subsidiary of the Company, entered into a membership interest purchase agreement (the “Membership
Purchase Agreement”) with Studio Membership Services, LLC (“Buyer”). The closing of the transactions contemplated
by the Membership Purchase Agreement occurred on April 26, 2019 (the “Closing Date”). Pursuant to the Membership Purchase
Agreement, Buyer acquired the Company’s fulfillment services business through the purchase from Seller of all of the membership
interests (the “Membership Interests”) of PCD (which owned all of the membership interests of FulCircle Media, LLC)
and Media Data Resources, LLC (PCD, FulCircle Media, LLC and Media Data Resources, LLC are collectively referred to herein as the
“Target Group”). The purchase price for the Membership Interests was $1,000,000, which was paid by Buyer to Seller
on the Closing Date. Buyer and Seller provided customary indemnifications under the Membership Purchase Agreement and provided
each other with customary representations, warranties and covenants.
In connection with the Membership Purchase
Agreement, PCD entered into a triple net lease agreement, dated as of April 26, 2019 (the “2 Commerce Lease Agreement”),
with Two Commerce LLC (“TC”), pursuant to which PCD leased from TC a 61,000 square foot facility located at 2 Commerce
Boulevard, Palm Coast, Florida (the “2 Commerce Property”) and a triple net lease agreement, dated as of April 26,
2019 (the “11 Commerce Lease Agreement”), with Commerce Blvd Holdings, LLC (“CBH”), pursuant to which PCD
leased from CBH a 143,000 square foot facility located at 11 Commerce Boulevard, Palm Coast, Florida (the “11 Commerce Property”).
TC and CBH are subsidiaries of the Company. The term of each lease agreement was originally 10 years. The aggregate annual rent,
payable in equal monthly installments in each of the applicable years, subject to a waiver of the payment of rent attributable
to the month of May 2019, of the lease agreements was originally Year 1: $1,900,000, Year 2: $1,941,500, Year 3: $1,985,328, Year
4: $2,041,564, Year 5: $2,105,294, Year 6: $2,181,604, Year 7: $2,260,585, Year 8: $2,342,331, Year 9: $2,426,937 and Year 10:
$2,514,505.
In connection with the transactions contemplated
by the Membership Purchase Agreement, the Company (not including the Target Group) retained their obligations under the Company’s
defined benefit pension plan following the Closing Date. The transactions contemplated by the Membership Purchase Agreement and
the associated workforce reduction with respect to the Company resulted in the acceleration of the funding of $5,194,000
of accrued pension-related obligations to the Company’s defined benefit pension plan pursuant to the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), and the regulations thereunder. The Company notified the Pension
Benefit Guaranty Corporation of the transactions contemplated by the Membership Purchase Agreement and, as permitted by ERISA,
made an election to satisfy this accelerated funding obligation over a period of seven years beginning in fiscal year 2021. During
2020, the Company made voluntary contributions to the pension plan of $3,600,000, which eliminated any requirement for the Company
to further satisfy the $5,194,000 of accelerated accrued pension-related obligations to the pension plan.
The gain before income taxes recorded in
2019 on the sale of the Company’s fulfillment services business was $2,506,000 and consisted of the following:
|
·
|
closing consideration of $1,000,000 in
cash; plus
|
|
·
|
deferred
purchase price of $5,636,000 based on the present value of the portion of the lease rates in the lease agreements that exceeded
estimated market rates. The deferred purchase price was included in Other assets in the accompanying consolidated balance sheet
as of April 30, 2019 (see Note 6) and was being amortized as payments from the tenant were received over the term of the lease
agreements. During 2020, the Company recognized a non-cash impairment charge of the remaining deferred purchase price; minus
|
|
·
|
the
net book value of the Membership Interests of $3,939,000; minus
|
|
·
|
transaction costs of $191,000.
|
The following table provides a reconciliation
for 2019 of the carrying amounts of components of pretax income of the discontinued operations to the amounts reported in the accompanying
consolidated statements of operations (in thousands):
|
|
April 30, 2019
|
|
Components of pretax income from discontinued operations:
|
|
|
|
|
Revenues
|
|
$
|
26,847
|
|
Operating expenses
|
|
|
(23,813
|
)
|
General and administrative expenses
|
|
|
(1,281
|
)
|
Interest expense
|
|
|
(2
|
)
|
Gain on sale of the fulfillment services business
|
|
|
2,506
|
|
Income from discontinued operations before income taxes
|
|
|
4,257
|
|
Provision for income taxes
|
|
|
(265
|
)
|
Income from discontinued operations
|
|
$
|
3,992
|
|
PCD did not pay
the required rent under the 2 Commerce Lease Agreement or 11 Commerce Lease Agreement from December 2019 through May 2020. In December
2019, each of TC and CBH filed a complaint in the Circuit Court of the Seventh Judicial District in and for Flagler County, Florida
against PCD and the guarantors under the 2 Commerce Lease Agreement and the 11 Commerce Lease Agreement for failure to pay amounts
due under the leases. Each complaint included claims for damages and for the eviction of PCD from the 2 Commerce Property and the
11 Commerce Property. In connection with such lawsuits, PCD and the guarantors raised certain claims against the Company and certain
of its subsidiaries, including with respect to the Membership Purchase Agreement, the 2 Commerce Lease Agreement and the 11 Commerce
Lease Agreement.
In February 2020,
Seller, Buyer and PCD entered into a first settlement agreement (the “First Settlement Agreement”) pursuant to which
Seller, Buyer and PCD agreed to settle their outstanding claims. In connection with the First Settlement Agreement, PCD paid Seller
$625,000. Following PCD’s breach of the First Settlement Agreement, Seller, TC, CBH, Buyer, PCD and certain affiliates of
Buyer entered into a second settlement agreement in May 2020 pursuant to which the parties agreed to settle their outstanding claims
in accordance with the following terms: PCD paid Seller $650,000; the parties released the claims between the parties; and the
2 Commerce Lease Agreement and the 11 Commerce Lease Agreement were amended as follows: the expiration of the term of each lease
was amended to August 15, 2020, PCD provided the landlords a cash deposit of $260,000 to secure PCD’s obligations under the
leases and PCD paid rent in the amount of $350,000 for the rental period from May 18, 2020 through August 15, 2020. During 2020,
the Company recorded non-cash impairment charges on other assets of $5,046,000, which amount represented the remaining present
value of expected lease payments under the 2 Commerce Lease Agreement and 11 Commerce Lease Agreement deemed to be consideration
for the sale of the Company’s fulfillment services business offset by the receipt of $625,000 pursuant to the First Settlement
Agreement.
The Company had no restricted cash at April
30, 2020 and $969,000 at April 30, 2019. As of April 30, 2019, the Company was subject to two subdivision improvement agreements
with the City of Rio Rancho, New Mexico. In connection with these agreements, the Company had signed a promissory note for each
subdivision and deposited restricted cash in a reserve bank account for each subdivision. During 2020, the Company completed its
obligations under the two subdivision improvement agreements, the applicable promissory notes were cancelled and the related restricted
cash was returned to the Company’s general cash.
The following provides a reconciliation
of the Company’s cash and cash equivalents and restricted cash as reported in the consolidated balance sheets to the amount
reported in the statement of cash flows (in thousands):
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
17,502
|
|
|
$
|
13,267
|
|
Restricted cash
|
|
|
-
|
|
|
|
969
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
17,502
|
|
|
$
|
14,236
|
|
(4)
|
REAL ESTATE INVENTORY:
|
Real estate inventory consists of land
and improvements held for sale or development. A substantial majority of the Company’s real estate assets are located in
or adjacent to Rio Rancho, New Mexico. As a result of this geographic concentration, the Company has been and will be affected
by changes in economic conditions in that region. In addition, approximately 97% of 2020 land sales were made to four customers.
There were no outstanding receivables from these four customers at April 30, 2020.
Capitalized amounts of interest and loan
costs and real estate taxes included in real estate inventory were:
|
|
Interest and
Loan Costs
|
|
|
Real Estate Taxes
|
|
|
|
(in thousands)
|
|
Balance, May 1, 2018
|
|
$
|
4,029
|
|
|
$
|
1,736
|
|
Additional Amounts Capitalized in 2019
|
|
|
115
|
|
|
|
31
|
|
Capitalized Amounts Charged to Real Estate Cost of Sales in 2019
|
|
|
(1
|
)
|
|
|
(11
|
)
|
Balance, April 30, 2019
|
|
|
4,143
|
|
|
|
1,756
|
|
Additional Amounts Capitalized in 2020
|
|
|
182
|
|
|
|
78
|
|
Capitalized Amounts Charged to Real Estate Cost of Sales in 2020
|
|
|
(4
|
)
|
|
|
(14
|
)
|
Balance, April 30, 2020
|
|
$
|
4,321
|
|
|
$
|
1,820
|
|
Investment assets consist of:
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Land held for long-term investment
|
|
$
|
9,751
|
|
|
$
|
9,706
|
|
Construction in progress
|
|
|
2,320
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Warehouse and office facilities
|
|
|
13,096
|
|
|
|
13,527
|
|
Less accumulated depreciation
|
|
|
(6,523
|
)
|
|
|
(6,006
|
)
|
|
|
|
6,573
|
|
|
|
7,521
|
|
|
|
$
|
18,644
|
|
|
$
|
17,227
|
|
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, 2020, the Company held approximately 12,000 acres of land in New Mexico classified as land held for long-term investment. Construction
in process relates primarily to construction costs of a single tenant retail building in the Las Fuentes at Panorama Village subdivision
in Rio Rancho, New Mexico. Refer to Note 8 for detail about financing of these construction costs.
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 scheduled to expire
in August 2020 (see Note 2). Depreciation associated with the warehouse and office facilities of $517,000 and $516,000 was charged
to operations in 2020 and 2019.
Other assets consist of:
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Deferred purchase price (see Note 2)
|
|
$
|
-
|
|
|
$
|
5,636
|
|
Prepaid expenses and other, net
|
|
|
934
|
|
|
|
839
|
|
|
|
$
|
934
|
|
|
$
|
6,475
|
|
In connection with the transactions contemplated
by the Membership Purchase Agreement, 2 Commerce Lease Agreement and 11 Commerce Lease Agreement described in Note 2, Other assets
in 2019 included deferred purchase price of $5,636,000 based on the present value of the portion of the lease rates in the lease
agreements that exceeded estimated market rates, and was being amortized as payments from the tenant were received over the term
of the lease agreements. During 2020, the Company recognized a non-cash impairment charge of the remaining deferred purchase price
(see Note 2).
Prepaid expenses and other, net includes
property and equipment for which there was depreciation expense of $20,000 and $17,000 in 2020 and 2019. Right-of-use assets associated
with the leases of the Plymouth Meeting, Pennsylvania and Rio Rancho, New Mexico office facilities were $109,000 as of April 30,
2020, net of $104,000 of amortized lease cost during 2020.
(7)
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
|
Accounts payable and accrued expenses consist of:
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Real estate operations
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
518
|
|
|
$
|
491
|
|
Trade payables
|
|
|
1,146
|
|
|
|
652
|
|
Real Estate customer deposits
|
|
|
1,117
|
|
|
|
1,198
|
|
Other
|
|
|
-
|
|
|
|
18
|
|
|
|
|
2,781
|
|
|
|
2,359
|
|
Corporate operations
|
|
|
344
|
|
|
|
605
|
|
|
|
$
|
3,125
|
|
|
$
|
2,964
|
|
Notes payable, net consist of:
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Real estate notes payable
|
|
$
|
3,894
|
|
|
$
|
1,384
|
|
Unamortized debt issuance costs
|
|
|
(4
|
)
|
|
|
(65
|
)
|
|
|
$
|
3,890
|
|
|
$
|
1,319
|
|
Given below is a description of outstanding
financing facilities as of April 30, 2020:
|
·
|
Lomas Encantadas Subdivision.
|
|
o
|
In 2020, Lomas Encantadas Development Company LLC (“LEDC”), a subsidiary of the Company,
entered into a Development Loan Agreement with BOKF, NA dba Bank of Albuquerque (“BOKF”). The Development Loan Agreement
is evidenced by a Non-Revolving Line of Credit Promissory Note and is secured by a Mortgage, Security Agreement and Financing Statement,
between LEDC and BOKF with respect to certain planned residential lots within the Lomas Encantadas subdivision located in Rio Rancho,
New Mexico. Pursuant to a Guaranty Agreement entered into by AMREP Southwest Inc. (“ASW”), a subsidiary of the Company,
in favor of BOKF, ASW guaranteed LEDC’s obligations under each of the above agreements.
|
|
§
|
Available Principal: BOKF agreed
to lend up to $2,475,000 to LEDC on a non-revolving line of credit basis to partially fund the development of certain planned residential
lots within the Lomas Encantadas subdivision.
|
|
§
|
Outstanding Principal Amount and Repayments:
The outstanding principal amount of the loan was $1,576,000 as of April 30, 2020 and LEDC made principal repayments of $675,000
during 2020. LEDC is required to make periodic principal repayments of borrowed funds not previously repaid as follows: $900,000
on or before March 17, 2021, $300,000 on or before June 17, 2021, $300,000 on or before September 17, 2021, $262,500 on or before
December 17, 2021, $525,000 on or before March 17, 2022 and $187,500 on or before June 17, 2022. The outstanding principal amount
of the loan may be prepaid at any time without penalty.
|
|
§
|
Maturity Date: The loan is scheduled
to mature in June 2022.
|
|
§
|
Interest Rate: Interest on the
outstanding principal amount of the loan is payable monthly at the annual rate equal to the London Interbank Offered Rate for a
thirty-day interest period plus a spread of 3.0%, adjusted monthly. The interest rate on the loan at April 30, 2020 was 4.0%.
|
|
§
|
Lot Release Price: BOKF is required
to release the lien of its mortgage on any lot upon LEDC making a principal payment of $37,500.
|
LEDC and ASW made certain representations
and warranties in connection with this loan and are required to comply with various covenants, reporting requirements and other
customary requirements for similar loans. The loan documentation contains customary events of default for similar financing transactions,
including LEDC’s failure to make principal, interest or other payments when due; the failure of LEDC or ASW to observe or
perform their respective covenants under the loan documentation; the representations and warranties of LEDC or ASW being false; the
insolvency or bankruptcy of LEDC or ASW; and the failure of ASW to maintain a tangible net worth of at least $32 million.
Upon the occurrence and during the continuance of an event of default, BOKF may declare the outstanding principal amount and all
other obligations under the loan immediately due and payable. LEDC incurred customary costs and expenses and paid certain fees
to BOKF in connection with the loan. At April 30, 2020, both LEDC and ASW were in compliance with the financial covenants contained
in the loan. The total book value of the property within the Lomas Encantadas subdivision mortgaged to BOKF under this loan was
$3,027,000 as of April 30, 2020. The Company capitalized interest and fees related to this loan of $47,000 in 2020.
|
·
|
Hawk Site Subdivision. In 2020,
Mountain Hawk East Development Company LLC (“MHEDC”), a subsidiary of the Company, entered into a Business Loan Agreement
with Sandia Laboratory Federal Credit Union (“SLFCU”). The Business Loan Agreement is evidenced by a Promissory Note,
and is secured by a Line of Credit Mortgage, between MHEDC and SLFCU, with respect to certain planned residential lots within the
Hawk Site subdivision located in Rio Rancho, New Mexico. Pursuant to a Commercial Guaranty entered into by ASW in favor of SLFCU,
ASW guaranteed MHEDC’s obligations under each of the above agreements.
|
|
o
|
Available Principal: SLFCU agreed to lend up to $3,000,000 to MHEDC on a revolving line
of credit basis to partially fund the development of certain planned residential lots within the Hawk Site subdivision. The maximum
principal available under the loan will be limited to 75% of the bulk discounted value of the lots to be developed with the loan
proceeds.
|
|
o
|
Outstanding Principal Amount: The outstanding principal amount of the loan was $41,000 as
of April 30, 2020 and MHEDC did not make any principal repayments during 2020.
|
|
o
|
Maturity Date: The loan is scheduled to mature on August 1, 2022.
|
|
o
|
Interest Payments: Interest on the outstanding principal amount of the loan is payable monthly
at the fixed annual rate of 4.5%.
|
|
o
|
Principal Payments: SLFCU is required to release the lien of its mortgage on any lot upon
MHEDC making a principal payment equal to $52,000 per lot. On the maturity date, MHEDC will be required to make a final payment
of all outstanding principal and accrued and unpaid interest. The outstanding principal amount of the loan may be prepaid at any
time without penalty.
|
MHEDC and ASW made certain representations
and warranties in connection with this loan and are required to comply with various covenants, reporting requirements and other
customary requirements for similar loans. The loan documentation contains customary events of default for similar financing transactions,
including: MHEDC’s failure to make principal, interest or other payments when due; the failure of MHEDC or ASW to observe
or perform their respective covenants under the loan documentation; the representations and warranties of MHEDC or ASW being false; the
insolvency or bankruptcy of MHEDC or ASW; and the failure of ASW to maintain a tangible net worth of at least $29 million.
Upon the occurrence and during the continuance of an event of default, SLFCU may declare the outstanding principal amount and all
other obligations under the loan immediately due and payable. MHEDC incurred certain customary costs and expenses and paid certain
fees to SLFCU in connection with the loan. At April 30, 2020, both MHEDC and ASW were in compliance with the financial covenants
contained in the loan. The total book value of the property within the Hawk Site subdivision mortgaged to SLFCU under this loan
was $964,000 as of April 30, 2020. The Company capitalized interest and fees related to this loan of $42,000 in 2020.
|
·
|
Las Fuentes at Panorama Village Subdivision.
In 2020, Las Fuentes Village II, LLC (“LFV”), a subsidiary of the Company, entered into a Loan Agreement with BOKF.
The Loan Agreement is evidenced by a Non-Revolving Line of Credit Promissory Note and is secured by a Mortgage, Security Agreement
and Financing Statement, between LFV and BOKF, with respect to the construction of an approximately 14,000 square foot, single
tenant retail building on an approximately 1.3 acre property owned by LFV in the Las Fuentes at Panorama Village subdivision in
Rio Rancho, New Mexico (the “LFV Mortgaged Property”). Pursuant to a Limited Guaranty Agreement entered into by ASW
in favor of BOKF, ASW guaranteed LFV’s obligations under each of the above agreements.
|
|
o
|
Available Principal: BOKF agreed to lend up to $2,750,000 to LFV on a non-revolving line
of credit basis to partially fund the construction of the single tenant retail building on the LFV Mortgaged Property.
|
|
o
|
Outstanding Principal Amount: The outstanding principal amount of the loan was $1,979,000
as of April 30, 2020 and LFV did not make any principal repayments during 2020.
|
|
o
|
Maturity Date: The loan is scheduled to mature on January 10, 2027.
|
|
o
|
Interest and Principal Payments:
|
|
§
|
During the period beginning on January
10, 2020 and ending on January 10, 2021, interest on the outstanding principal amount of the loan is payable monthly at the annual
rate equal to the London Interbank Offered Rate for a thirty-day interest period plus a spread of 2.9%, adjusted monthly. The outstanding
principal amount of the loan may be prepaid without penalty while this interest rate is applicable to the loan. The interest rate
on the loan at April 30, 2020 was 3.9%.
|
|
§
|
Beginning January 11, 2021, the interest
rate with respect to the outstanding principal amount of the loan will be one of the following interest rates to be selected by
LFV:
|
|
·
|
six-year fixed rate of interest equal
to the weekly average yield on United States Treasury securities, adjusted to a constant maturity of seven years, plus a spread
of 2.29%. The outstanding principal amount of the loan may be prepaid with a penalty while this interest rate is applicable to
the loan.
|
|
·
|
six-year fixed rate of interest equal
to the weekly average yield on United States Treasury securities, adjusted to a constant maturity of seven years, plus a spread
of 3.21%. The outstanding principal amount of the loan may be prepaid without penalty while this interest rate is applicable to
the loan.
|
|
·
|
three-year fixed rate of interest equal
to the weekly average yield on United States Treasury securities, adjusted to a constant maturity of three years, plus a spread
of 2.33%. The outstanding principal amount of the loan may be prepaid with a penalty while this interest rate is applicable to
the loan.
|
|
·
|
three-year fixed rate of interest equal
to the weekly average yield on United States Treasury securities, adjusted to a constant maturity of three years, plus a spread
of 3.0%. The outstanding principal amount of the loan may be prepaid without penalty while this interest rate is applicable to
the loan.
|
|
§
|
Beginning January 11, 2021, LFV will be
required to make payments of principal and interest at the applicable interest rate on a monthly basis calculated based on a 25-year
amortization. On the maturity date, LFV will be required to make a final payment of all outstanding principal and accrued and unpaid
interest and any other unpaid sums.
|
LFV and ASW made certain representations
and warranties in connection with this loan and are required to comply with various covenants, reporting requirements and other
customary requirements for similar loans. The loan documentation contains customary events of default for similar financing transactions,
including: LFV’s failure to make principal, interest or other payments when due; the failure of LFV or ASW to observe or
perform their respective covenants under the loan documentation; the representations and warranties of LFV or ASW being false; the
insolvency or bankruptcy of LFV or ASW; and the failure of LFV to complete construction of the single tenant retail building
on the LFV Mortgaged Property by January 10, 2021. Upon the occurrence and during the continuance of an event of default, BOKF
may declare the outstanding principal amount and all other obligations under the loan immediately due and payable. LFV incurred
certain customary costs and expenses and paid certain fees to BOKF in connection with the loan. At April 30, 2020, both LFV and
ASW were in compliance with the financial covenants contained in the loan. The total book value of the LFV Mortgaged Property was
$2,487,000 as of April 30, 2020. The Company capitalized interest related to this loan of $7,000 in 2020.
|
·
|
SBA Paycheck Protection Program.
In 2020, the Company received a loan from BOKF pursuant to the Paycheck Protection Program loan program administered by the U.S.
Small Business Administration. The loan is evidenced by a note and is unsecured.
|
|
o
|
Outstanding Principal Amount: The Company received $298,000 pursuant to the loan.
|
|
o
|
Maturity Date: The loan is scheduled to mature on April 14, 2022.
|
|
o
|
Interest and Principal Payments: Interest on the outstanding principal amount of the loan
accrues at the fixed annual rate of 1.0% beginning on the issuance date of the loan. Beginning in November 2020, the Company will
be required to make payments of principal and interest on a monthly basis calculated based on an 18-month amortization. On the
maturity date, the Company will be required to make a final payment of all outstanding principal and accrued and unpaid interest
and any other unpaid sums. The outstanding principal amount of the loan may be prepaid at any time without penalty.
|
|
o
|
Loan Forgiveness: In
accordance with the provisions of the Paycheck Protection Program loan program, the Company may apply for forgiveness of that
part of the loan which was used during the 24 weeks from the receipt of the loan funds to pay eligible payroll costs, interest
on a mortgage obligation incurred before February 2020, rent obligations under leases dated before February 2020 and utility obligations
under services agreements dated before February 2020; provided that at least 75% of the forgivable amount was used for payroll
costs.
|
The Company made certain representations
and warranties in connection with this loan and is required to comply with various covenants, reporting requirements and other
customary requirements for similar loans. The loan documentation contains customary events of default for similar financing transactions,
including: the Company’s failure to make principal, interest, tax or other payments when due; the failure of the Company
to observe or perform its covenants under the loan documentation; the representations and warranties of the Company being false; the
insolvency or bankruptcy of the Company; the default by the Company on any other loan with BOKF or another creditor; and the Company
having an adverse change in financial condition or business operations. Upon the occurrence an event of default, BOKF may declare
the outstanding principal amount and all other obligations under the loan immediately due and payable.
Refer to Note 17 for additional financing facilities entered
into after April 30, 2020.
Given below is a description of financing
facilities that were outstanding during 2019 or 2020 that have expired or terminated prior to April 30, 2020:
|
·
|
Lomas Encantadas Subdivision. In
2018, LEDC entered into a Development Loan Agreement with BOKF. The Development Loan Agreement was evidenced by a Non-Revolving
Line of Credit Promissory Note and was secured by a Mortgage, Security Agreement and Financing Statement, between LEDC and BOKF
with respect to certain planned residential lots within the Lomas Encantadas subdivision located in Rio Rancho, New Mexico. Pursuant
to a Guaranty Agreement entered into by ASW in favor of BOKF, ASW guaranteed LEDC’s obligations under each of the above agreements.
|
|
o
|
Initial Available Principal: BOKF agreed to lend up to $4,750,000 to LEDC on a non-revolving
line of credit basis to partially fund the development of certain planned residential lots within the Lomas Encantadas subdivision.
|
|
o
|
Outstanding Principal Amount and Repayments: The outstanding principal amount of the loan
was $181,000 as of April 30, 2019. LEDC made principal repayments of $894,000 during 2020 and $3,234,000 during 2019. In 2020,
the outstanding principal amount of the loan was fully repaid and the loan was terminated.
|
|
o
|
Maturity Date: The loan was scheduled to mature in December 2021.
|
|
o
|
Interest Rate: Interest on the outstanding principal amount of the loan was payable monthly
at the annual rate equal to the London Interbank Offered Rate for a thirty-day interest period plus a spread of 3.0%, adjusted
monthly.
|
|
o
|
Capitalized Interest: The
Company capitalized interest and fees related to this loan of $27,000 in 2020 and $82,000
in 2019.
|
|
·
|
Hawk Site Subdivision. In 2019,
Hawksite 27 Development Company, LLC (“HDC”), a subsidiary of the Company, entered into a Business Loan Agreement with
Main Bank. The loan under the Business Loan Agreement was evidenced by a Promissory Note and was secured by a Mortgage, between
HDC and Main Bank with respect to certain planned residential lots within the Hawk Site subdivision located in Rio Rancho, New
Mexico. Pursuant to a Commercial Guaranty entered into by ASW in favor of Main Bank, ASW guaranteed HDC’s obligations under
each of the above agreements.
|
|
o
|
Initial Available Principal: Main Bank agreed to lend up to $1,800,000 to HDC on a non-revolving
line of credit basis to partially fund the development of certain planned residential lots within the Hawk Site subdivision.
|
|
o
|
Outstanding Principal Amount and Repayments: The outstanding principal amount of the loan
was $1,203,000 as of April 30, 2019. HDC made principal repayments of $1,593,000 during 2020 and $390,000 during 2019. In 2020,
the outstanding principal amount of the loan was fully repaid and the loan was terminated.
|
|
o
|
Maturity Date: The loan was scheduled to mature in July 2021.
|
|
o
|
Interest Rate: Interest on the outstanding principal amount of the loan was payable monthly
at the annual rate equal to the Wall Street Journal Prime Rate plus a spread of 2.38%, adjusted annually.
|
|
o
|
Capitalized Interest: The
Company capitalized interest and fees related to this loan of $59,000 in 2020 and $33,000
in 2019.
|
The following table summarizes the scheduled principal repayments
subsequent to April 30, 2020:
|
|
Scheduled Payments
|
|
Fiscal Year
|
|
(in thousands)
|
|
2021
|
|
$
|
3,036
|
|
2022
|
|
|
817
|
|
2023
|
|
|
41
|
|
2024
|
|
|
-
|
|
2025
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
3,894
|
|
(9) OTHER REVENUES:
Other revenues consist of:
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Oil & gas royalty
|
|
$
|
608
|
|
|
$
|
-
|
|
Private infrastructure reimbursement covenants
|
|
|
324
|
|
|
|
-
|
|
Public improvement district reimbursements
|
|
|
113
|
|
|
|
-
|
|
Other revenue
|
|
|
301
|
|
|
|
441
|
|
|
|
$
|
1,346
|
|
|
$
|
441
|
|
Other revenues
includes the recognition of deferred revenue related to royalties received during 2020 from oil and gas production for the
period March 2019 through April 2020 by a third party lessee with respect to the Company’s mineral rights in Brighton, Colorado,
private infrastructure reimbursement covenants, public improvement district reimbursements, forfeited deposits from customers,
non-refundable option payments earned by the Company, amortization of deferred revenue and miscellaneous other income items.
The Company owns certain minerals and mineral
rights in and under approximately 55,000 surface acres of land in Sandoval County, New Mexico leased to a third party for a term
ending in September 2020 and for as long thereafter as oil or gas is produced and marketed in paying quantities from the property
or for additional limited periods of time if the lessee undertakes certain operations or makes certain de minimis shut-in royalty
payments. If the lessee or any of its affiliates provides any consideration to obtain, enter into, option, extend or renew an interest
in any minerals or mineral rights within Sandoval County, Bernalillo County, Santa Fe County or Valencia County in New Mexico at
any time from September 2017 through September 2020, lessee is required to pay the Company an amount equal to the amount of such
consideration paid per acre multiplied by 55,000. The lessee is required to assign, or to cause their affiliate to assign, to the
Company an overriding royalty interest of 1% with respect to the proceeds derived from any minerals or minerals rights presently
or hereinafter owned by, leased by, optioned by or otherwise subject to the control of lessee or any of its affiliates in any part
of Sandoval County, Bernalillo County, Santa Fe County or Valencia County in New Mexico. As partial consideration for entering
into the lease, the Company received $1,010,000 in fiscal year 2015, of which $76,000 was recorded as revenue in
2019. The Company did not record any revenue in 2020 related to the lease. No drilling has commenced with respect to this property.
The Company owns certain minerals and mineral
rights in and under approximately 147 surface acres of land in Brighton, Colorado leased to a third party for as long as oil or
gas is produced and marketed in paying quantities from the property or for additional limited periods of time if the lessee undertakes
certain operations or makes certain de minimis shut-in royalty payments. The lessee has pooled approximately 1,240 acres of minerals
and mineral rights, including the Company’s minerals and mineral rights, for purposes of drilling and extraction. After applying
the ownership and royalty percentages of the pooled minerals and mineral rights, the lessee is required to pay the Company a royalty
on oil and gas produced from the pooled property of 1.42% of the proceeds received by the lessee from the sale of such oil and
gas, and such royalty will be charged with 1.42% of certain post-production costs associated with such oil and gas. The lessee
commenced drilling with respect to the pooled property in 2019, with initial royalty payments made in 2020. The Company received
$608,000 of royalties with respect to the pooled property during 2020 from oil and gas production for the period March 2019 through
April 2020. No royalties with respect to the pooled property were received during 2019.
A portion of the Lomas Encantadas subdivision
and a portion of the Enchanted Hills/Commerce Center subdivision are subject to a public improvement district. The public improvement
district reimburses the Company for certain on-site and off-site costs of developing the subdivisions by imposing a special levy
on the real property owners within the district. During 2020, the Company collected $113,000 of reimbursements from the public
improvement district. The Company may accept discounted prepayments of amounts due under the public improvement district.
The Company instituted private infrastructure
reimbursement covenants on a portion of the property in Hawk Site. Similar to a public improvement district, the covenants are
expected to reimburse the Company for certain on-site and off-site costs of developing the subject property by imposing a special
levy on the real property owners subject to the covenants. The Company has accepted discounted prepayments of amounts due under
the public improvement district. During 2020, the Company collected $324,000 in connection with these private infrastructure reimbursement
covenants.
(10) FAIR VALUE
MEASUREMENTS:
The FASB’s accounting guidance defines
fair value and establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). The FASB’s guidance classifies the inputs to measure fair value into the following hierarchy:
|
Level 1
|
Unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
|
|
|
Level 2
|
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
|
|
|
Level 3
|
Inputs for the asset or liability are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.
|
The fair value measurement level of an
asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
There were no transfers between Levels 1, 2 or 3 during 2020 or 2019.
The Financial Instruments Topic of the
FASB Accounting Standards Codification requires disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that value. The Topic excludes all nonfinancial instruments
from its disclosure requirements. Fair value is determined under the hierarchy discussed above. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company. The following methods and assumptions are used in
estimating fair value disclosure for financial instruments: the carrying amounts of cash and cash equivalents and trade payables
approximate fair value because of the short maturity of these financial instruments; and debt that bears variable interest rates
indexed to prime or LIBOR also approximates fair value as it reprices when market interest rates change.
(11) BENEFIT PLANS:
Pension plan
The Company has
a defined benefit pension plan for which accumulated benefits were frozen and future service credits were curtailed as of March
1, 2004. Under generally accepted accounting principles, the Company’s defined benefit pension plan was underfunded at April
30, 2020 by $5,014,000, with $18,260,000 of assets and $23,274,000 of liabilities and was underfunded at April 30, 2019 by $6,401,000,
with $23,903,000 of assets and $30,304,000 of liabilities. The pension plan liabilities were determined using a weighted average
discount interest rate of 2.29% per year at April 30, 2020 and 3.54% per year at April 30, 2019, which are based on the FTSE Pension
Discount Curve as of such dates as it corresponds to the projected liability requirements of the pension plan.
The closing of certain Company facilities in fiscal year 2011
and the associated workforce reduction resulted in the Pension Benefit Guaranty Corporation requiring the Company to accelerate
the funding of $11,688,000 of accrued pension-related obligations to the Company’s defined benefit pension plan pursuant
to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the regulations thereunder. The Company
entered into a settlement agreement with the Pension Benefit Guaranty Corporation in fiscal year 2014 with respect to such liability.
The settlement agreement with the Pension Benefit Guaranty Corporation terminated by its terms in 2019 with the Pension Benefit
Guaranty Corporation being deemed to have released and discharged the Company and all other members of its controlled group from
any claims under the settlement agreement or with respect to such liability.
In connection with the transactions contemplated
by the Membership Purchase Agreement described in Note 2, the Company (not including the Target Group) retained their obligations
under the Company’s defined benefit pension plan following the Closing Date. The transactions contemplated by the Membership
Purchase Agreement and the associated workforce reduction with respect to the Company resulted in the acceleration of the funding
of $5,194,000 of accrued pension-related obligations to the Company’s defined benefit pension plan pursuant to ERISA. The
Company notified the Pension Benefit Guaranty Corporation of the transactions contemplated by the Membership Purchase Agreement
and, as permitted by ERISA, made an election to satisfy this accelerated funding obligation over a period of seven years beginning
in fiscal year 2021. During 2020, the Company made voluntary contributions to the pension plan of $3,600,000, which eliminated
any requirement for the Company to further satisfy the $5,194,000 of accelerated accrued pension-related obligations to the pension
plan.
The Company recognized a non-cash pre-tax
pension settlement charge of $2,929,000 in 2020. This charge resulted from the Company’s defined benefit pension plan paying
an aggregate of $7,280,000 in lump sum payouts of pension benefits to 309 former employees. There were no such charges in 2019.
Pension assets and liabilities are measured
at fair value (measured in accordance with the guidance described in Note 10) and are subject to fair value adjustment in certain
circumstances (for example, when there is evidence of impairment). There were no impairments resulting in a change in fair value
during 2020 and 2019.
Net periodic pension cost for 2020 and
2019 was comprised of the following components (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Interest cost on projected benefit obligation
|
|
$
|
716
|
|
|
$
|
1,183
|
|
Expected return on assets
|
|
|
(1,591
|
)
|
|
|
(1,854
|
)
|
Plan expenses
|
|
|
410
|
|
|
|
415
|
|
Recognized net actuarial loss
|
|
|
563
|
|
|
|
905
|
|
Settlement loss
|
|
|
2,929
|
|
|
|
-
|
|
Net periodic pension cost
|
|
$
|
3,027
|
|
|
$
|
649
|
|
The estimated net loss, transition obligation
and prior service cost for the pension plan that will be amortized from accumulated other comprehensive income into net periodic
pension cost over fiscal year 2021 are $529,000, $0 and $0. Assumptions used in determining net periodic pension cost and the benefit
obligation were:
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Discount rate used to determine net periodic pension cost
|
|
|
3.54
|
%
|
|
|
3.82
|
%
|
Discount rate used to determine pension benefit obligation
|
|
|
2.29
|
%
|
|
|
3.54
|
%
|
Expected long-term rate of return on assets used for pension
cost
|
|
|
7.75
|
%
|
|
|
8.00
|
%
|
The following table sets forth changes
in the pension plan’s benefit obligation and assets, and summarizes components of amounts recognized in the Company’s
consolidated balance sheet (in thousands):
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
30,304
|
|
|
$
|
32,423
|
|
Interest cost
|
|
|
716
|
|
|
|
1,183
|
|
Actuarial loss (gain)
|
|
|
1,550
|
|
|
|
(966
|
)
|
Benefits paid
|
|
|
(2,050
|
)
|
|
|
(2,336
|
)
|
Settlement paid
|
|
|
(7,246
|
)
|
|
|
-
|
|
Benefit obligation at end of year
|
|
$
|
23,274
|
|
|
$
|
30,304
|
|
Change in plan assets:
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
23,903
|
|
|
$
|
23,372
|
|
Actual return on plan assets
|
|
|
393
|
|
|
|
1,277
|
|
Company contributions
|
|
|
3,600
|
|
|
|
2,000
|
|
Benefits paid
|
|
|
(2,050
|
)
|
|
|
(2,336
|
)
|
Settlement paid
|
|
|
(7,246
|
)
|
|
|
-
|
|
Plan expenses
|
|
|
(340
|
)
|
|
|
(410
|
)
|
Fair value of plan assets at end of year
|
|
$
|
18,260
|
|
|
$
|
23,903
|
|
|
|
|
|
|
|
|
|
|
Underfunded status
|
|
$
|
(5,014
|
)
|
|
$
|
(6,401
|
)
|
Recognition of underfunded status:
|
|
|
|
|
|
|
Accrued pension cost
|
|
$
|
(5,014
|
)
|
|
$
|
(6,401
|
)
|
The funded status of the pension plan is
equal to the net liability recognized in the consolidated balance sheets. The following table summarizes the amounts recorded in
accumulated other comprehensive loss, which have not yet been recognized as a component of net periodic pension costs (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Pretax accumulated comprehensive loss
|
|
$
|
11,082
|
|
|
$
|
11,896
|
|
The following table summarizes the changes
in accumulated other comprehensive loss related to the pension plan for the years ended April 30, 2020 and 2019 (in thousands):
|
|
Pension Benefits
|
|
|
|
Pretax
|
|
|
Net of Tax
|
|
Accumulated comprehensive loss, May 1, 2018
|
|
$
|
13,184
|
|
|
$
|
7,934
|
|
Net actuarial gain
|
|
|
(383
|
)
|
|
|
(274
|
)
|
Amortization of net loss
|
|
|
(905
|
)
|
|
|
(629
|
)
|
Accumulated comprehensive loss, April 30, 2019
|
|
|
11,896
|
|
|
|
7,031
|
|
Net actuarial loss (gain)
|
|
|
2,678
|
|
|
|
1,868
|
|
Recognized settlement gain
|
|
|
(2,929
|
)
|
|
|
(2,049
|
)
|
Amortization of net loss
|
|
|
(563
|
)
|
|
|
(383
|
)
|
Accumulated comprehensive loss, April 30, 2020
|
|
$
|
11,082
|
|
|
$
|
6,467
|
|
The Company recorded, net of tax, other comprehensive income
of $564,000, including the pension settlement, net of tax, of $2,049,000 and $903,000 in 2020 and 2019 to account for the net effect
of changes to the unfunded portion of pension liability.
The asset allocation for the pension plan by asset category
was as follows:
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Equity securities
|
|
|
27
|
%
|
|
|
52
|
%
|
Fixed income securities
|
|
|
59
|
|
|
|
45
|
|
Other (principally cash and cash equivalents)
|
|
|
14
|
|
|
|
3
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
The investment mix between equity securities
and fixed income securities seeks to achieve a desired return by balancing equity securities and fixed-income securities. Pension
plan assets are invested in portfolios of diversified public-market equity securities and fixed income securities. The pension
plan holds no securities of the Company. Investment allocations are made across a range of markets, industry sectors, market capitalization
sizes and, in the case of fixed income securities, maturities and credit quality.
The expected return on assets for the pension
plan is based on management’s expectation of long-term average rates of return to be achieved by the underlying investment
portfolio. In establishing this assumption, management considers historical and expected returns for the asset classes in which
the pension plan is invested, as well as current economic and market conditions. For 2020, the Company used a 7.75% assumed rate
of return for purposes of the expected return rate on assets for the development of net periodic pension costs for the pension
plan. For years following 2020, the assumed rate of return for purposes of the expected return rate on assets is anticipated to
be 7.75%.
The Company funds the pension plan in compliance
with IRS funding requirements. The Company made voluntary contributions to the pension plan of $3,600,000 in 2020 and $2,000,000
in 2019. The Company is required to make minimum contributions to the pension plan; however, no minimum contributions are expected
to be required during fiscal year 2021.
The amount of future annual benefit payments
to pension plan participants payable from plan assets is expected to be as follows: 2021 - $2,506,000, 2022 - $1,769,000, 2023
- $1,710,000, 2024 - $1,637,000 and 2025 - $1,576,000 and an aggregate of $7,003,000 is expected to be paid in the
fiscal five-year period 2026 through 2030.
The Company has adopted the disclosure
requirements in ASC 715, which requires additional fair value disclosures consistent with those required by ASC 820. The following
is a description of the valuation methodologies used for pension plan assets measured at fair value: common stock – valued
at the closing price reported on a listed stock exchange; corporate bonds, debentures and government agency securities –
valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flow; and U.S. Treasury
securities – valued at the closing price reported in the active market in which the security is traded.
The methods described above may produce
a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while
the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value
measurement at the reporting date. The following table sets forth by level within the fair value hierarchy the pension plan’s
assets at fair value as of April 30, 2020 and 2019 (in thousands):
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
2,655
|
|
|
$
|
2,655
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
4,880
|
|
|
|
4,880
|
|
|
|
-
|
|
|
|
-
|
|
Fixed income securities
|
|
|
10,725
|
|
|
|
-
|
|
|
|
10,725
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
18,260
|
|
|
$
|
7,535
|
|
|
$
|
10,725
|
|
|
$
|
-
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents
|
|
$
|
631
|
|
|
$
|
631
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
12,473
|
|
|
|
12,473
|
|
|
|
-
|
|
|
|
-
|
|
Fixed income securities
|
|
|
10,799
|
|
|
|
-
|
|
|
|
10,799
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
23,903
|
|
|
$
|
13,104
|
|
|
$
|
10,799
|
|
|
$
|
-
|
|
Simple IRA
In 2020, the Company established a Simple
IRA plan as a retirement plan for eligible employees who earned at least $5,000 of annual compensation. Under the Simple IRA plan,
eligible employees may contribute a portion of their pre-tax yearly salary, up to the maximum contribution limit for Simple IRA
plans as set forth under the Internal Revenue Code of 1986, as amended, with the Company matching on a dollar-for-dollar basis
up to 3% of the employees’ annual pre-tax compensation. The Company’s employer contribution was $14,000 for 2020.
Equity compensation plans
The AMREP Corporation 2006 Equity Compensation
Plan (the “2006 Equity Plan”) authorized stock-based awards of various kinds to non-employee directors and employees.
The 2006 Equity Plan expired by its terms during fiscal year 2017 without affecting any existing awards under the 2006 Equity Plan,
and no further awards may be granted under the 2006 Equity Plan. There were no awards issued under the 2006 Equity Plan that had
not vested as of April 30, 2020.
The AMREP Corporation 2016 Equity Compensation
Plan (the “2016 Equity Plan”) authorizes stock-based awards of various kinds to non-employee directors and employees
covering up to a total of 500,000 shares of common stock of the Company. The 2016 Equity Plan will expire by its terms on, and
no award will be granted under the 2016 Equity Plan on or after, September 19, 2026. As of April 30, 2020, the Company had 391,619
shares of common stock of the Company available for issuance under the 2016 Equity Plan.
Shares of restricted common stock that
are issued under the equity plans (“restricted shares”) are considered to be issued and outstanding as of the grant
date and have the same dividend and voting rights as other common stock. Compensation expense related to the restricted shares
is recognized over the vesting period of each grant based on the fair value of the shares as of the date of grant. The fair value
of each grant of restricted shares is determined based on the trading price of the Company’s common stock on the date of
such grant, and this amount will be charged to expense over the vesting term of the grant. Forfeitures are recognized as reversals
of compensation expense on the date of forfeiture.
The summary of the 2019 and 2020 restricted
share award activity presented below represents the maximum number of shares issued to employees that could be vested:
Restricted
share awards
|
|
Number
of
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Non-vested at April 30, 2018
|
|
|
34,750
|
|
|
$
|
6.35
|
|
Granted during 2019
|
|
|
29,200
|
|
|
|
7.05
|
|
Vested during 2019
|
|
|
(21,283
|
)
|
|
|
6.25
|
|
Forfeited during 2019
|
|
|
-
|
|
|
|
-
|
|
Non-vested at April 30, 2019
|
|
|
42,667
|
|
|
|
6.87
|
|
|
|
|
|
|
|
|
|
|
Granted during 2020
|
|
|
9,000
|
|
|
|
6.35
|
|
Vested during 2020
|
|
|
(14,833
|
)
|
|
|
6.59
|
|
Forfeited during 2020
|
|
|
(4,000
|
)
|
|
|
6.76
|
|
Non-vested at April 30, 2020
|
|
|
32,834
|
|
|
$
|
6.86
|
|
For 2020 and 2019, the Company recognized
$113,000 and $151,000 of compensation expense related to shares of restricted common stock issued to employees under the equity
plans. As of April 30, 2020, there was $49,000 of total unrecognized compensation expense related to shares of common stock issued
to employees under the equity plans, which will be recognized over the weighted-average remaining vesting period of one year.
On the last trading day of calendar year
2018, each non-employee member of the Company’s Board of Directors was issued the number of deferred common share units of
the Company under the 2016 Equity Plan equal to $20,000 divided by the closing price per share of Common Stock reported on the
New York Stock Exchange on such date. Based on the closing price per share of $5.95 on December 31, 2018, the Company issued a
total of 13,444 deferred common share units to members of the Company’s Board of Directors.
On the last trading day of calendar year
2019, each non-employee member of the Company’s Board of Directors was issued the number of deferred common share units of
the Company under the 2016 Equity Plan equal to $25,000 divided by the closing price per share of Common Stock reported on the
New York Stock Exchange on such date. Based on the closing price per share of $5.98 on December 31, 2019, the Company issued a
total of 16,720 deferred common share units to members of the Company’s Board of Directors.
Each deferred common share unit represents
the right to receive one share of Common Stock within 30 days after the first day of the month to follow such director’s
termination of service as a director of the Company. Director compensation expense is recognized for the annual grant of deferred
common share units ratably over the director’s service in office during the calendar year. The total non-cash director fee
compensation related to the issued deferred common share units was $100,000 and $80,000 for 2020 and 2019. At April 30, 2020 and
2019, there was $33,000 and $27,000 of accrued compensation expense related to the deferred stock units expected to be issued in
December of the following fiscal year.
(12) INCOME TAXES:
The provision (benefit) for income taxes consists of the following
(in thousands):
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(36
|
)
|
|
$
|
(414
|
)
|
State and local
|
|
|
112
|
|
|
|
5
|
|
|
|
|
76
|
|
|
|
(409
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,597
|
)
|
|
|
(193
|
)
|
State and local
|
|
|
(201
|
)
|
|
|
(106
|
)
|
|
|
|
(1,798
|
)
|
|
|
(299
|
)
|
Total benefit for income taxes
|
|
$
|
(1,722
|
)
|
|
$
|
(708
|
)
|
The components of the net deferred income taxes are as follows
(in thousands):
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
State tax loss carryforwards
|
|
$
|
4,622
|
|
|
$
|
4,287
|
|
U.S. federal NOL carryforward
|
|
|
3,746
|
|
|
|
2,079
|
|
Accrued pension costs
|
|
|
1,258
|
|
|
|
1,608
|
|
Vacation accrual
|
|
|
52
|
|
|
|
12
|
|
Real estate basis differences
|
|
|
4,096
|
|
|
|
3,725
|
|
Other
|
|
|
194
|
|
|
|
117
|
|
Total deferred income tax assets
|
|
|
13,968
|
|
|
|
11,828
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciable assets
|
|
|
(1,341
|
)
|
|
|
(1,138
|
)
|
Deferred gains on investment assets
|
|
|
(2,277
|
)
|
|
|
(2,110
|
)
|
Other
|
|
|
-
|
|
|
|
(36
|
)
|
Total deferred income tax liabilities
|
|
|
(3,618
|
)
|
|
|
(3,284
|
)
|
Valuation allowance for realization of certain deferred income tax assets
|
|
|
(4,270
|
)
|
|
|
(4,008
|
)
|
Net deferred income tax asset
|
|
$
|
6,080
|
|
|
$
|
4,536
|
|
A valuation allowance
is provided when it is considered more likely than not that certain deferred tax assets will not be realized. The valuation allowance
relates primarily to deferred tax assets, including net operating loss carryforwards, in states where the Company either has no
current operations or its operations are not considered likely to realize the deferred tax assets due to the amount of the applicable
state net operating loss or its expected expiration date. The $262,000 increase in the valuation allowance in 2020 is related to
the increase in state net operating losses that are not expected to be realizable.
The Company has federal net operating loss carryforwards of
$17,838,000, of which $147,000 will expire beginning in 2038 and the remaining amount does not have an expiration. In addition,
the Company has state net operating loss carryforwards of $118,209,000 that expire beginning in fiscal year ending April 30, 2021.
The following table reconciles taxes computed
at the U.S. federal statutory income tax rate from continuing operations to the Company’s actual tax provision (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Computed tax benefit at statutory rate
|
|
$
|
(1,603
|
)
|
|
$
|
(666
|
)
|
Increase (reduction) in tax resulting from:
|
|
|
|
|
|
|
|
|
Deferred tax rate changes
|
|
|
163
|
|
|
|
(137
|
)
|
Change in valuation allowances
|
|
|
262
|
|
|
|
773
|
|
State income taxes, net of federal income tax effect
|
|
|
(481
|
)
|
|
|
(869
|
)
|
Meals and entertainment
|
|
|
-
|
|
|
|
13
|
|
Permanent items
|
|
|
1
|
|
|
|
-
|
|
Other
|
|
|
(64
|
)
|
|
|
178
|
|
Actual tax provision
|
|
$
|
(1,722
|
)
|
|
$
|
(708
|
)
|
The Company is subject to U.S. federal
income taxes and various state and local income taxes. Tax regulations within each jurisdiction are subject to interpretation and
require significant judgment to apply. The Company is not currently under examination by any tax authorities with respect to its
income tax returns. Other than the U.S. federal tax return, in nearly all jurisdictions, the tax years through the fiscal year
ended April 30, 2016 are no longer subject to examination due to the expiration of the applicable statutes of limitations.
ASC 740 clarifies the accounting for uncertain
tax positions, prescribing a minimum recognition threshold a tax position is required to meet before being recognized, and providing
guidance on the derecognition, measurement, classification and disclosure relating to income taxes. The following table summarizes
the beginning and ending gross amount of unrecognized tax benefits:
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Gross unrecognized tax benefits at beginning of year
|
|
$
|
-
|
|
|
$
|
58
|
|
Gross increases:
|
|
|
|
|
|
|
|
|
Additions based on tax positions related to current year
|
|
|
-
|
|
|
|
-
|
|
Additions based on tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
Gross decreases:
|
|
|
|
|
|
|
|
|
Reductions based on tax positions of prior years
|
|
|
-
|
|
|
|
-
|
|
Reductions based on the lapse of the applicable statute of limitations
|
|
|
-
|
|
|
|
(58
|
)
|
Gross unrecognized tax benefits at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
As a result of the lapse of the statute
of limitations, the Company’s total tax effect of gross unrecognized tax benefits in the accompanying financial statements
of $58,000 at April 30, 2018 was recognized during 2019.
The Company has elected to include interest
and penalties in its income tax expense. The Company had no accrued interest or penalties at April 30, 2020 and 2019.
(13) INTEREST
INCOME, NET:
Interest income, net consists of:
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Interest income on savings
|
|
$
|
137
|
|
|
$
|
70
|
|
Interest income on notes
|
|
|
6
|
|
|
|
7
|
|
Interest income on deferred purchase price
|
|
|
191
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
$
|
334
|
|
|
$
|
52
|
|
(14) LEASE COMMITMENTS:
The Company leases offices and office equipment
in Pennsylvania and New Mexico. The leases are generally non-cancelable operating leases with an initial term of two to five years.
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease agreements do not
contain any residual value guarantees or material restrictive covenants.
At April 30, 2020, right-of-use assets
and lease liabilities were $109,000 and $113,000. For the year ended April 30, 2020, the total operating lease expense was $113,000.
Remaining lease payments subsequent to April 30, 2020 are as follows:
Fiscal Year
|
|
Payments
(in thousands)
|
|
2021
|
|
$
|
92
|
|
2022
|
|
|
25
|
|
Total lease payments
|
|
|
117
|
|
Less: Imputed interest
|
|
|
4
|
|
Present value of lease liabilities
|
|
$
|
113
|
|
For 2020, the weighted average remaining
lease term and weighted average discount rate of the Company’s operating leases were 1.2 years and 5.50%. The lease contracts
for the Company generally do not provide a readily determinable implicit rate. For these contracts, the Company estimated the incremental
borrowing rate based on information available upon the adoption of ASU 2016-02. The Company applied a consistent method in periods
after the adoption of ASU 2016-02 to estimate the incremental borrowing rate.
(15) OTHER COMMITMENTS
AND CONTINGENCIES:
Pursuant to a support agreement, the Company
agreed through May 2023 to pay up to $250,000 to the Smithsonian Institution if PCD fails to provide certain required services
to the Smithsonian Institution. The parent company of PCD has guaranteed the payment of this amount to the Company.
In
March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended
containment and mitigation measures worldwide. Subsequently, the COVID-19 pandemic has continued to spread and various state and
local governments have issued or extended “shelter-in-place” orders, which have impacted and restricted various aspects
of the Company’s operations. While the Company cannot reasonably estimate the length or severity of this pandemic or if there
will be additional periods of increases or spikes in the number of COVID-19 cases, future mutations or related strains of the virus
in areas in which the Company operates, an extended economic slowdown could materially impact the Company’s consolidated
financial position, consolidated results of operations, and consolidated cash flows in fiscal year 2021 or beyond.
(16) LITIGATION:
Refer to Note 2 for a description of litigation involving PCD.
The Company is involved in various pending or threatened claims and legal actions arising in the ordinary course of business. While
the ultimate results of these matters cannot be predicted with certainty, management believes that they will not have a material
adverse effect on the Company’s consolidated financial position, liquidity or results of operations.
(17) SUBSEQUENT
EVENTS:
Settlement
of Litigation. Refer to Note 2 for a description of litigation involving PCD and a settlement agreement entered in May 2020.
Financing Facility. In June 2020,
Lavender Fields, LLC (“LF”), a subsidiary of the Company, acquired approximately 28 acres in Bernalillo County, New
Mexico comprising the Meso AM subdivision, which is planned for 82 residential lots.
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Acquisition
Financing. The acquisition included $1,838,000 of deferred purchase price, of which
$919,000 is payable on or before June 2021 and $919,000 is payable on or before June
2022. The deferred purchase price is evidenced by a non-interest bearing Promissory Note
and is secured by a Mortgage, Security Agreement and Fixture Filing with respect to the
acquired property. The lien of the mortgage on any portion of the property will be released
as to such property upon payment of that percentage of the then unpaid principal balance
of the Promissory Note equal to the number of acres of land within the property being
released divided by the number of acres of land within the property then remaining encumbered
by the mortgage (including the property being released). Any prepayment shall be credited
toward the next payment due under the Promissory Note.
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LF made certain representations
and warranties in connection with this loan and is required to comply with various covenants, reporting requirements and other
customary requirements for similar loans. The loan documentation contains customary events of default for similar financing transactions,
including: LF’s failure to make principal or other payments when due; the failure of LF to observe or perform their covenants
under the loan documentation; and the representations and warranties of LF being false. Upon the occurrence and during the continuance
of an event of default, the outstanding principal amount and all other obligations under the loan may be declared immediately due
and payable.
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Development
Financing. In June 2020, LF entered into a Development Loan Agreement with BOKF.
The Development Loan Agreement is evidenced by a Non-Revolving Line of Credit Promissory
Note and is secured by a Mortgage, Security Agreement and Financing Statement, between
LF and BOKF with respect to the acquired property. Pursuant to a Guaranty Agreement entered
into by ASW in favor of BOKF, ASW has guaranteed LF’s obligations under each of
the above agreements.
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Initial Available Principal: BOKF agrees to lend up to $3,750,000 to LF on a non-revolving
line of credit basis to partially fund the development of the acquired property.
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Repayments: LF is required to make periodic principal repayments of borrowed funds not previously
repaid as follows: $657,500 on or before March 19, 2022; $394,500 on or before June 19, 2022; $394,500 on or before September 19,
2022; $394,500 on or before December 19, 2022; $394,500 on or before March 19, 2023; $394,500 on or before June 19, 2023; $394,500
on or before September 19, 2023; $394,500 on or before December 19, 2023; and $331,000 on or before March 19, 2024. The outstanding
principal amount of the loan may be prepaid at any time without penalty. On the maturity date, LF will be required to make a final
payment of all outstanding principal and accrued and unpaid interest.
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Maturity Date: The loan is scheduled to mature in June 2024.
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Interest Payments: Interest on the outstanding principal amount of the loan is payable monthly
at the annual rate equal to the London Interbank Offered Rate for a thirty-day interest period plus a spread of 3.0%, adjusted
monthly, subject to a minimum interest rate of 3.75%.
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Lot Release Price: BOKF is required to release the lien of its mortgage on any lot upon
LF making a principal payment of $65,750.
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LF and ASW have made certain
representations and warranties in connection with this loan and are required to comply with various covenants, reporting requirements
and other customary requirements for similar loans. The loan documentation contains customary events of default for similar financing
transactions, including: LF’s failure to make principal, interest or other payments when due; the failure of LF or ASW to
observe or perform their respective covenants under the loan documentation; the representations and warranties of LF or ASW being
false; the insolvency or bankruptcy of LF or ASW; and the failure of ASW to maintain a tangible net worth of at least
$32 million. Upon the occurrence and during the continuance of an event of default, BOKF may declare the outstanding principal
amount and all other obligations under the loan immediately due and payable. LF incurred certain customary costs and expenses and
paid certain fees to BOKF in connection with the loan.