Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
.
Critical Accounting Policies and Estimates.
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions
in applying our critical accounting policies that affect the reported amounts of assets and liabilities and the disclosure (if
any) of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues
and expenses during the reporting period. Our estimates and assumptions concern, among things, potential impairment of our other
investments and other long-lived assets, uncertainties for Federal and state income tax and allowance for potential doubtful accounts.
We evaluate those estimates and assumptions on an ongoing basis based on historical experience and on various other factors which
we believe are reasonable under the circumstances. Note 1 of the consolidated financial statements, included elsewhere on this
Form 10-K, includes a summary of the significant accounting policies and methods used in the preparation of the Company’s
consolidated financial statements. The Company believes the following critical accounting policies affect the significant judgments
and estimates used in the preparation of the Company’s consolidated financial statements:
Marketable Securities
. Consistent with the Company’s
overall investment objectives and activities, management has classified its entire marketable securities portfolio as trading.
As a result, all unrealized gains and losses on the Company’s investment portfolio are included in the Consolidated Statements
of Income. Our investments in trading equity and debt marketable securities are carried at fair value and based on quoted market
prices or other observable inputs. Marketable securities are subject to fluctuations in value in accordance with market conditions.
Other Investments.
The Company’s
other investments consist primarily of nominal equity interests in various privately-held entities, including limited
partnerships whose purpose is to invest venture capital funds in growth-oriented enterprises. The Company does not have
significant influence over any investee and the Company’s investment represents less than 3% of the investee’s
ownership. None of these investments meet the criteria of accounting under the equity method and are carried at cost less
distributions and other than temporary unrealized losses. These investments do not have available quoted market prices, so we
must rely on valuations and related reports and information provided to us by those entities for the purposes of determining
other-than-temporary declines. These valuations are by their nature subject to estimates which could change significantly
from period to period. The Company regularly reviews the underlying assets in its other investment portfolio for events, that
may indicate the investment has suffered other-than-temporary decline in value including. These events include but are not
limited to bankruptcies, closures and declines in estimated fair value. When a decline is deemed other-than-temporary, we
permanently reduce the cost basis component of the investments to its estimated fair value, and the loss is recorded as a
component of net income from other investments. As such, any recoveries in the value of the investments will not be
recognized until the investments are sold.
We believe our estimates of each of these items historically
have been adequate. However, due to uncertainties inherent in the estimation process, it is reasonably possible that the actual
resolution of any of these items could vary significantly from the estimate and, accordingly, there can be no assurance that the
estimates may not materially change in the near term.
Real Estate.
Land, buildings and improvements, furniture,
fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are stated
at cost. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Renovations and/or
replacements, which improve or extend the life of the asset are capitalized and depreciated over the shorter of their estimated
useful lives, or the remaining lease term (if leased).
Depreciation is computed utilizing the straight-line method
over the estimated useful lives of ten to forty years for buildings and improvements and five to ten years for furniture, fixtures
and equipment. Tenant improvements are amortized on a straight-line basis over the shorter of the term of the related leases or
the assets useful life.
The Company is required to make subjective assessments as to
the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect
to those properties. These assessments have a direct impact on the Company’s net income. Should the Company lengthen the
expected useful life of a particular asset, it would be depreciated over more years, and result in less depreciation expense and
higher annual net income.
Assessment by the Company of certain other lease related costs
must be made when the Company has a reason to believe that the tenant will not be able to execute under the term of the lease as
originally expected.
The Company periodically reviews the carrying value of certain
of its properties and long-lived assets in relation to historical results, current business conditions and trends to identify potential
situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such
assets may not be recoverable, the Company would estimate the undiscounted sum of the expected future cash flows of such assets
or analyze the fair value of the asset, to determine if such sum or fair value is less than the carrying value of such assets to
ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using
quoted market prices, if available, for such assets, or if quoted market prices are not available, the Company would discount the
expected future cash flows of such assets and would adjust the carrying value of the asset to fair value. Judgments as to impairments
and assumptions used in projecting future cash flow are inherently imprecise.
Results of Operations
:
For the years ended December 31, 2016 and 2015, the Company reported
a net loss of approximately $431,000 ($.42 per share) and $1,060,000 ($1.02 per share), respectively.
Revenues
:
Total revenues for the years ended December 31, 2016 and 2015 were
approximately $66,000. This is primarily comprised of rental revenue from the leasing of the corporate offices to the Adviser.
Expenses
:
Total expenses for the year ended December 31, 2016 as compared
to that of 2015 decreased by approximately $419,000 (or 22%). This decrease was primarily due to decreased legal fees, partially
offset by increased general and administrative expenses. Legal fees decreased by approximately $467,000 (71%) in 2016 as compared
to 2015. This was due to the Grove Isle litigation which was settled in September 2015. General and administrative expenses for
the year ended December 31, 2016 as compared to that of 2015 increased by approximately $97,000 (or 38%). This increase was primarily
attributable to increased dues and subscriptions of $36,000 and increased non-employee stock compensation of $21,000.
Other Income:
Net realized and unrealized gain (loss) from investments
in marketable securities:
Net gain (loss) from investments in marketable securities, including
marketable securities distributed by partnerships in which the Company owns minority positions, for the years ended December 31,
2016 and 2015, is as follows:
|
Description
|
|
2016
|
|
|
2015
|
|
|
Net realized gain from sales of marketable securities
|
|
$
|
271,000
|
|
|
$
|
50,000
|
|
|
Net unrealized loss from marketable securities
|
|
|
(21,000
|
)
|
|
|
(402,000
|
)
|
|
Total net gain (loss) from investments in marketable securities
|
|
$
|
250,000
|
|
|
$
|
(352,000
|
)
|
Net realized gain from sales of marketable securities consisted
of approximately $648,000 of gains net of $377,000 of losses for the year ended December 31, 2016. The comparable amounts in fiscal
year 2015 were approximately $487,000 of gains net of $437,000 of losses.
Consistent with the Company’s overall current investment
objectives and activities, the entire marketable securities portfolio is classified as trading (as defined by U.S generally accepted
accounting principles). Unrealized gains or losses from marketable securities are recorded as other income in the Consolidated
Statements of Income.
Investment gains and losses on marketable securities may fluctuate
significantly from period to period in the future and could have a significant impact on the Company’s net earnings. However,
the amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in
amount from period to period have no practical analytical value.
Investments in marketable securities give rise to exposure resulting
from the volatility of capital markets. The Company attempts to mitigate its risk by diversifying its marketable securities portfolio.
Equity loss (gain) in residential real estate partnership:
For the year ended December 31, 2016 JY-TV Associates LLC reported
a net loss of approximately $849,000, which includes depreciation and amortization expense of $712,000 and interest expense of
$289,000. The Company’s portion of that loss is approximately $283,000. For the year ended December 31, 2015 JY-TV reported
net income was minimal as the Project was under construction.
Net income from other investments is summarized below (excluding
other than temporary impairment losses):
|
|
|
2016
|
|
|
2015
|
|
|
Venture capital funds – diversified businesses (a)
|
|
$
|
231,000
|
|
|
$
|
151,000
|
|
|
Partnerships owning real estate and related investments (a)
|
|
|
148,000
|
|
|
|
149,000
|
|
|
Venture capital funds – technology businesses
|
|
|
(13,000
|
)
|
|
|
-
|
|
|
Investment in 49% owned affiliate and other (b)
|
|
|
12,000
|
|
|
|
22,000
|
|
|
Total net income from other investments
|
|
$
|
378,000
|
|
|
$
|
322,000
|
|
(a) The gains in 2016 and 2015 consist of various cash distributions
from investments owning diversified businesses and real estate and related investments which made cash distributions from the sale
or refinancing of operating companies.
(b) This gain represents income from the Company’s 49%
owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”). In 2016 and 2015 TGIF declared and paid a cash dividend of which the
Company’s portion was approximately $193,000 each year. These dividends were recorded as reduction in the investment carrying
value as required under the equity method of accounting for investments.
Other than temporary impairment (“OTTI”) losses
from other investments
|
|
|
2016
|
|
|
2015
|
|
|
Technology and related
|
|
$
|
(69,000
|
)
|
|
$
|
-
|
|
|
Total other than temporary impairment loss from other investments
|
|
$
|
(69,000
|
)
|
|
$
|
|
|
The OTTI loss for the year ended December 31, 2016 consists
of a recognized impairment loss in an investment in a partnership that invested in technology related companies. There were no
OTTI losses for the year ended December 31, 2015.
Net income or loss from other investments may fluctuate significantly
from period to period in the future and could have a significant impact on the Company’s net earnings. However, the amount
of investment gain or loss from other investments for any given period has no predictive value and variations in amount from period
to period have no practical analytical value.
Interest, dividend and other income
Interest, dividend and other income for the year ended December
31, 2016 as compared with 2015 decreased by approximately $188,000 (or 24%), primarily due to a non-recurring gain of approximately
$166,000 from the settlement of litigation in 2015.
Provision for income taxes:
The Company qualifies as a real estate investment trust and
distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not
required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be
carried forward to reduce future taxable income but cannot be carried back. Distributed capital gains on sales of real estate as
they relate to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax.
The benefit from income taxes for the year ended December 31, 2016
was approximately $113,000 and was attributable to deferred tax benefit of $145,000 less current federal tax provision of $28,000
relating to non-recurring prohibited REIT income. There was no provision or benefit for income taxes for the year ended December
31, 2015.
As of December 31, 2016, the Company, excluding its taxable
REIT subsidiary, CII, has an estimated tax net operating loss carryover (NOL) of approximately $485,000.
The Company’s 95%-owned taxable REIT subsidiary, CII,
files a separate income tax return and its operations are not included in the REIT’s income tax return.
For CII, the Company follows the liability method of accounting
for income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences
of temporary differences between the carrying amount and the tax basis of assets and liabilities at each year-end based on enacted
tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. As a
result of timing differences associated with the carrying value of other investments, unrealized gains and losses of marketable
securities, depreciable assets and the future benefit of a net operating loss, as of December 31, 2016, and 2015 the Company has
recorded a net deferred tax liability of $76,000 and $217,000, respectively.
As of December 31, 2016, CII has an estimated NOL of approximately
$1.1 million which has been fully reserved due to CII historically having tax losses.
Effect of Inflation.
Inflation affects the costs of maintaining the Company’s
investments.
Liquidity, Capital Expenditure Requirements and Capital Resources.
The Company’s material commitments primarily consist of
a note payable to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of approximately $1.6 million
due on demand (see
Item 13. Certain Relationships and Related Transactions and Director Independence
), and contributions
committed to other investments of approximately $1.8 million due upon demand. The funds necessary to meet these obligations are
expected from the proceeds from the sales of investments, distributions from investments and available cash and equivalents ($3
million at December 31, 2016).
A summary of the Company’s contractual cash obligations
at December 31, 2016 is as follows:
|
|
|
Payments Due by Period
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
Total
|
|
|
Less than 1 year
|
|
|
1 – 3 years
|
|
|
4 – 5 years
|
|
|
After 5 years
|
|
|
Note payable
|
|
$
|
1,600,000
|
|
|
$
|
1,600,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other investments commitments
|
|
|
1,800,000
|
|
|
|
1,800,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
3,400,000
|
|
|
$
|
3,400,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The timing of amounts due under commitments for other investments
is determined by the managing partners of the individual investments.
Material Changes in Operating, Investing and Financing Cash
Flows
.
The Company’s cash flows are generated primarily from
its dividends, interest and sales proceeds of marketable securities, distributions from other investments and borrowings.
For the year ended December 31, 2016, net cash used in operating
activities was approximately $880,000, primarily consisting of net loss before income taxes and other income of approximately $1.5
million, plus interest, dividends and other income of approximately $590,000.
For the year ended December 31, 2016, net cash provided by investing
activities was approximately $1.7 million and consisted primarily of proceeds from sales of marketable securities of $6.7 million
and distributions from other investments of $1.1 million. These sources of funds were partially offset by $3.7 million of purchases
of marketable securities, $2.2 million of contributions to other investments.
For the year ended December 31, 2016, net cash used in financing
activities was approximately $9 million and consisted primarily of $7.95 million of repayments of margin borrowings, repayment
of note payable to affiliate of $200,000, dividend paid of $518,000 and purchase of treasury stock of $340,000.
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risks.
Not Applicable to the Company.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of HMG/Courtland
Properties, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets
of HMG/Courtland Properties, Inc. (a Delaware corporation) and Subsidiaries (the “Company”) as of December 31, 2016
and 2015, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial position of HMG/Courtland Properties, Inc. and Subsidiaries
at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Cherry Bekaert LLP
Coral Gables, Florida
March 24, 2017
|
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2015
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Investment properties, net of accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
Office building and other commercial property
|
|
$
|
864,349
|
|
|
$
|
833,680
|
|
|
Total investment properties, net
|
|
|
864,349
|
|
|
|
833,680
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,019,463
|
|
|
|
11,213,385
|
|
|
Investments in marketable securities
|
|
|
7,750,661
|
|
|
|
10,507,750
|
|
|
Other investments
|
|
|
5,307,765
|
|
|
|
3,895,317
|
|
|
Investment in affiliate
|
|
|
1,880,854
|
|
|
|
2,061,706
|
|
|
Loans, notes and other receivables
|
|
|
1,623,151
|
|
|
|
1,260,620
|
|
|
Investment in residential real estate
partnership
|
|
|
2,039,714
|
|
|
|
2.322,695
|
|
|
Other assets
|
|
|
291,464
|
|
|
|
129,755
|
|
|
TOTAL ASSETS
|
|
$
|
22,777,421
|
|
|
$
|
32,224,908
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Note payable to affiliate
|
|
$
|
1,600,000
|
|
|
$
|
1,800,000
|
|
|
Margin payable
|
|
|
48,803
|
|
|
|
7,999,166
|
|
|
Dividends payable
|
|
|
501,196
|
|
|
|
517,747
|
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
87,536
|
|
|
|
23,132
|
|
|
Amounts due to the Adviser
|
|
|
65,959
|
|
|
|
36,799
|
|
|
Deferred income tax payable
|
|
|
76,327
|
|
|
|
217,000
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
2,379,821
|
|
|
|
10,593,844
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Excess common stock, $1 par value; 100,000 shares authorized: no shares issued
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $1 par value; 1,050,000 and 1,200,000 shares authorized as of December 31, 2016 and 2015, respectively; and 1,035,493 and 1,053,926 issued as of December 31, 2016 and 2015, respectively
|
|
|
1,035,493
|
|
|
|
1,053,926
|
|
|
Additional paid-in capital
|
|
|
24,076,991
|
|
|
|
24,255,614
|
|
|
Less: Treasury shares at cost (33,101 and 18,433 shares as of December 31, 2016 and 2015, respectively)
|
|
|
(340,281
|
)
|
|
|
(223,798
|
)
|
|
Undistributed gains from sales of properties, net of losses
|
|
|
52,208,753
|
|
|
|
52,709,950
|
|
|
Undistributed losses from operations
|
|
|
(56,806,766
|
)
|
|
|
(56,375,340
|
)
|
|
Total stockholders’ equity
|
|
|
20,174,190
|
|
|
|
21,420,352
|
|
|
Noncontrolling interest
|
|
|
223,410
|
|
|
|
210,712
|
|
|
TOTAL EQUITY
|
|
|
20,397,600
|
|
|
|
21,631,064
|
|
|
TOTAL LIABILITIES AND
EQUITY
|
|
$
|
22,777,421
|
|
|
$
|
32,224,908
|
|
See notes to the consolidated financial statements
|
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF INCOME
|
|
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
2016
|
|
|
2015
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Real estate rentals and related revenue
|
|
$
|
66,030
|
|
|
$
|
64,800
|
|
|
Total revenues
|
|
|
66,030
|
|
|
|
64,800
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Rental and other properties
|
|
|
103,393
|
|
|
|
114,050
|
|
|
Adviser’s base fee
|
|
|
660,000
|
|
|
|
660,000
|
|
|
General and administrative
|
|
|
348,203
|
|
|
|
251,689
|
|
|
Professional fees and expenses
|
|
|
189,351
|
|
|
|
656,830
|
|
|
Directors’ fees and expenses
|
|
|
80,532
|
|
|
|
88,029
|
|
|
Depreciation expense
|
|
|
15,398
|
|
|
|
15,335
|
|
|
Interest expense
|
|
|
74,688
|
|
|
|
104,939
|
|
|
Total expenses
|
|
|
1,471,565
|
|
|
|
1,890,872
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other income and income taxes
|
|
|
(1,405,535
|
)
|
|
|
(1,826,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) from investments in marketable securities
|
|
|
250,293
|
|
|
|
(351,843
|
)
|
|
Equity (loss) gain in residential real estate partnership
|
|
|
(282,981
|
)
|
|
|
247
|
|
|
Net income from other investments
|
|
|
378,761
|
|
|
|
321,715
|
|
|
Other than temporary impairment losses from other investments
|
|
|
(69,002
|
)
|
|
|
-
|
|
|
Interest, dividend and other income
|
|
|
590,127
|
|
|
|
778,017
|
|
|
Total other income
|
|
|
867,198
|
|
|
|
748,136
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(538,337
|
)
|
|
|
(1,077,936
|
)
|
|
Benefit from income taxes
|
|
|
112,578
|
|
|
|
-
|
|
|
Net loss
|
|
|
(425,759
|
)
|
|
|
(1,077,936
|
)
|
|
(Gain) loss from noncontrolling interest
|
|
|
(5,668
|
)
|
|
|
17,597
|
|
|
Net loss attributable to the Company
|
|
$
|
(431,427
|
)
|
|
$
|
(1,060,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic and diluted
|
|
|
1,020,084
|
|
|
|
1,040,181
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(.42
|
)
|
|
$
|
(1.02
|
)
|
See notes to the consolidated financial statements
|
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from Sales
|
|
|
Undistributed
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
of Properties
|
|
|
Losses from
|
|
|
Treasury Stock
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Net of Losses
|
|
|
Operations
|
|
|
Shares
|
|
|
Cost
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
|
1,053,926
|
|
|
$
|
1,053,926
|
|
|
$
|
24,249,844
|
|
|
$
|
53,227,696
|
|
|
$
|
(55,315,000
|
)
|
|
|
800
|
|
|
|
(9,377
|
)
|
|
$
|
23,207,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,060,339
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,060,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payable - $.50 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee stock option compensation
|
|
|
|
|
|
|
|
|
|
|
5,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,633
|
|
|
|
(214,421
|
)
|
|
|
(214,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
1,053,926
|
|
|
|
1,053,926
|
|
|
|
24,255,614
|
|
|
|
52,709,949
|
|
|
|
(56,375,339
|
)
|
|
|
18,433
|
|
|
|
(223,798
|
)
|
|
|
21,420,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(431,427
|
)
|
|
|
|
|
|
|
|
|
|
|
(431,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payable - $.50 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(501,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(501,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee stock option compensation
|
|
|
|
|
|
|
|
|
|
|
26,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares retired
|
|
|
(18,433
|
)
|
|
|
(18,433
|
)
|
|
|
(205,365
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,433
|
)
|
|
|
223,798
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,101
|
|
|
|
(340,281
|
)
|
|
|
(340,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
1,035,493
|
|
|
$
|
1,035,493
|
|
|
$
|
24,076,991
|
|
|
$
|
52,208,753
|
|
|
$
|
(56,806,766
|
)
|
|
|
33,101
|
|
|
$
|
(340,281
|
)
|
|
$
|
20,174,190
|
|
See notes to the consolidated financial statements
|
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
2016
|
|
|
2015
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the Company
|
|
$
|
(431,427
|
)
|
|
$
|
(1,060,339
|
)
|
|
Adjustments to reconcile net loss attributable to the Company to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
15,398
|
|
|
|
15,335
|
|
|
Non-employee stock compensation
|
|
|
26,742
|
|
|
|
5,770
|
|
|
Net income from other investments, excluding impairment losses
|
|
|
(378,761
|
)
|
|
|
(321,715
|
)
|
|
Other than temporary impairment loss from other investments
|
|
|
69,002
|
|
|
|
—
|
|
|
Equity loss (gain) from residential real estate partnership
|
|
|
282,981
|
|
|
|
(247
|
)
|
|
Net (gain) loss from investments in marketable securities
|
|
|
(250,293
|
)
|
|
|
351,843
|
|
|
Net gain (loss) attributable to noncontrolling interest
|
|
|
5,668
|
|
|
|
(17,597
|
)
|
|
Deferred income tax benefit
|
|
|
(140,673
|
)
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Other assets and other receivables
|
|
|
(136,671
|
)
|
|
|
(58,720
|
)
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
58,023
|
|
|
|
(235,321
|
)
|
|
Total adjustments
|
|
|
(448,584
|
)
|
|
|
(260,652
|
)
|
|
Net cash used in operating activities
|
|
|
(880,011
|
)
|
|
|
(1,320,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net proceeds from sales and redemptions of securities
|
|
|
6,658,521
|
|
|
|
7,773,036
|
|
|
Investments in marketable securities
|
|
|
(3,651,139
|
)
|
|
|
(6,842,592
|
)
|
|
Investment in real estate partnership
|
|
|
-
|
|
|
|
(2,041,032
|
)
|
|
Distributions from other investments
|
|
|
1,117,167
|
|
|
|
1,984,673
|
|
|
Contributions to other investments
|
|
|
(2,209,318
|
)
|
|
|
(1,756,178
|
)
|
|
Proceeds from collections of mortgage loans and notes receivables
|
|
|
125,000
|
|
|
|
122,580
|
|
|
Distribution from affiliate
|
|
|
193,286
|
|
|
|
193,286
|
|
|
Purchases and improvements of properties
|
|
|
(46,066
|
)
|
|
|
(55,265
|
)
|
|
Additions in mortgage loans and notes receivable
|
|
|
(500,000
|
)
|
|
|
—
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,687,451
|
|
|
|
(621,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Margin (repayments) borrowings
|
|
|
(7,950,363
|
)
|
|
|
4,746,101
|
|
|
Dividend paid
|
|
|
(517,747
|
)
|
|
|
(526,963
|
)
|
|
Repayment of note payable to affiliate
|
|
|
(200,000
|
)
|
|
|
(300,000
|
)
|
|
Purchase of treasury stock
|
|
|
(340,281
|
)
|
|
|
(214,421
|
)
|
|
Contribution from non-controlling interest
|
|
|
7,029
|
|
|
|
-
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(9,001,362
|
)
|
|
|
3,704,717
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(8,193,922
|
)
|
|
|
1,762,234
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
11,213,385
|
|
|
|
9,451,152
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$
|
3,019,463
|
|
|
$
|
11,213,385
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
75,000
|
|
|
$
|
105,000
|
|
|
Cash paid during the year for income taxes
|
|
$
|
26,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Dividends declared but not paid during the year
|
|
$
|
501,196
|
|
|
$
|
517,747
|
|
|
Treasury stock retired during the year
|
|
$
|
223,798
|
|
|
$
|
—
|
|
See notes to the consolidated financial statements
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2016 and 2015
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business and Consolidation
. The consolidated financial
statements include the accounts of HMG/Courtland Properties, Inc. (“we” or the “Company”) and entities
in which the Company owns a majority voting interest or controlling financial interest. The Company was organized in 1972 and (excluding
its 95% owned subsidiary Courtland Investments, Inc., which files a separate tax return) qualifies for taxation as a real estate
investment trust (“REIT”) under the Internal Revenue Code. The Company’s business is the ownership and management
of income-producing commercial properties and its management considers other investments if such investments offer growth or profit
potential. The Company’s recurring operating revenue is from property rental operations of its corporate offices.
All material transactions and balances with consolidated and
unconsolidated entities have been eliminated in consolidation or as required under the equity method.
The Company’s consolidated subsidiaries are described
below:
Courtland Investments, Inc. (“CII”).
In March
2016, this 95% owned corporation of the Company amended its Certificate of Incorporation so that, as amended, the holders of Class
A and Class B common stock of CII shall have and possess the exclusive right to notice of and to vote at any meeting of the stockholders
and any adjournment thereof, and the exclusive right to express consent to corporate action in writing without a meeting. Class
A and Class B shareholders of CII shall have equal voting rights. CII is the Company’s taxable REIT subsidiary which files
a separate tax return. CII’s operations are not part of the REIT tax return.
HMG Orlando, LLC (“HMGO”).
This wholly owned
limited liability company was formed in August 2014. In September 2014 HMGO acquired a one-third equity membership interest in
JY-TV Associates, LLC a Florida limited liability company (“JY-TV”) and entered into the Amended and Restated Operating
Agreement of JY-TV (the “Agreement”). JY-TV was formed in 2014 for the sole purpose of purchasing and constructing
two hundred forty (240) unit rental apartments on approximately 9.5 acres in Orlando, Florida. The other two initial members of
JY-TV are not related to the Company. The construction on the rental apartments was completed in September 2016.
260 River Corp (“260”).
This wholly owned
corporation of the Company owns an approximate 70% interest in a vacant commercially zoned building located on 5.4 acres in Montpelier,
Vermont. Development of this property is being considered.
HMG Bayshore, LLC (“HMGBS”).
This is a wholly owned Florida limited liability company which owns an investment in an entity which invests
in mortgages secured by real estate.
Baleen Associates, Inc. (“Baleen”).
This
corporation is wholly owned by CII and its sole asset is a 50% interest in a partnership which operates an executive suite rental
business in Coconut Grove, Florida.
Preparation of Financial Statements
. 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 and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
. The Company qualifies as a real estate
investment trust and distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue
Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating
losses can be carried forward to reduce future taxable income but cannot be carried back. Distributed capital gains on sales of
real estate as they relate to REIT activities are not subject to taxes; however, undistributed capital gains are taxed as capital
gains. State income taxes are not significant. The Company’s 95%-owned taxable REIT subsidiary, CII, files a separate income
tax return and its operations are not included in the REIT’s income tax return. The Company accounts for income taxes in
accordance with ASC Topic 740, “Accounting for Income Taxes” (“ASC Topic 740”). This requires a Company
to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for
the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect
on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred
taxes only pertain to CII.
The Company follows the provisions of ASC Topic 740-10, “Accounting
for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with ASC Topic 740, and prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition in our consolidated financial statements. Our evaluation was performed
for the tax years ended December 31, 2016 and 2015. The Company’s federal income tax returns since 2013 are subject to examination
by the Internal Revenue Service, generally for a period of three years after the returns were filed.
We may from time to time be assessed interest or penalties by
major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results.
In the event we have received an assessment for interest and/or penalties, it has been classified in the consolidated financial
statements as selling, general and administrative expense.
Depreciation
. Depreciation of the corporate offices properties
held for investment is computed using the straight-line method over its estimated useful life of 39.5 years. Depreciation expense
for the corporate offices for each of the years ended December 31, 2016 and 2015 was approximately $15,000.
Fair Value of Financial Instruments.
The Company records
its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measure date. The Company uses valuation
techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard
describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value which are the following:
|
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset
or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
|
An investment’s categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value measurement.
The carrying value of financial instruments including other
receivables, notes and advances due from related parties (if any), accounts payable and accrued expenses and mortgages and notes
payable approximate their fair values at December 31, 2016 and 2015, due to their relatively short terms or variable interest rates.
Cash equivalents are classified within Level 1 or Level 2 of
the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing
sources with reasonable levels of transparency. Other investments which are measured by investees at net asset value per share
or its equivalent are also classified within Level 2.
The valuation of other investments not included above requires
significant judgment by the Company’s management due to the absence of quoted market values, inherent lack of liquidity and
long-term nature of such assets and have been classified within Level 3. Such investments are valued initially based upon transaction
price. Valuations are reviewed periodically utilizing available market data and additional factors to determine if the carrying
value of these investments should be adjusted. In determining valuation adjustments, emphasis is placed on market participants’
assumptions and market-based information over entity-specific information.
Marketable Securities
. The entire marketable securities
portfolio is classified as trading consistent with the Company’s overall investment objectives and activities. Accordingly,
all unrealized gains and losses on the Company’s marketable securities investment portfolio are included in the Consolidated
Statements of Income.
Gross gains and losses on the sale of marketable securities
are based on the first-in first-out method of determining cost.
Marketable securities from time to time are pledged as collateral
pursuant to broker margin requirements. As of December 31, 2016 there was approximately $49,000 of marketable securities pledged
as collateral pursuant to margin agreements. As of December 31, 2015 there were no such agreements.
Treasury bills, from time to time, are pledged as collateral
pursuant to broker margin requirements. As of December 31, 2016 there were no such margin balances outstanding. As of December
31, 2015 the Company had approximately $7,999,000 of margin balances outstanding.
Notes and other receivables.
Management periodically
performs a review of amounts due on its notes and other receivable balances to determine if they are impaired based on factors
affecting the collectability of those balances. Management’s estimates of collectability of these receivables requires management
to exercise significant judgment about the timing, frequency and severity of collection losses, if any, and the underlying value
of collateral, which may affect recoverability of such receivables. As of December 31, 2016 and 2015, the Company had no allowances
for bad debt.
Equity investments.
Investments in which the Company
does not have a majority voting or financial controlling interest but has the ability to exercise influence are accounted for under
the equity method of accounting, even though the Company may have a majority interest in profits and losses. The Company follows
ASC Topic 323-30 in accounting for its investments in limited partnerships. This guidance requires the use of the equity method
for limited partnership investments of more than 3 to 5 percent.
The Company has no voting or financial controlling interests
in its other investments which include entities that invest venture capital funds in growth oriented enterprises. These other investments
are carried at cost less adjustments for other than temporary declines in value.
Income (loss) per common share
. Net income (loss) per
common share (basic and diluted) is based on the net income (loss) divided by the weighted average number of common shares outstanding
during each year. Diluted net loss per share includes the dilutive effect of options to acquire common stock. Common shares outstanding
include issued shares less shares held in treasury. There were 17,700 and 12,500 stock options outstanding as of December 31, 2016
and 2015, respectively. The 2016 and 2015 options were not included in the diluted earnings per share computation as their effect
would have been de minimums or anti-dilutive.
Gain on sales of properties
. Gain on sales of properties
is recognized when the minimum investment requirements have been met by the purchaser and title passes to the purchaser.
There were no sales of property in 2016 and 2015.
Cash and cash Equivalents
. For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less
to be cash and cash equivalents.
Concentration of Credit Risk
. Financial instruments that
potentially subject the Company to concentration of credit risk are cash and cash equivalent deposits in excess of federally insured
limits, marketable securities, other receivables and notes and mortgages receivable. From time to time the Company may have bank
deposits in excess of federally insured limits (presently $250,000). The Company evaluates these excess deposits and transfers
amounts to brokerage accounts and other banks to mitigate this exposure. As of December 31, 2016 and 2015, respectively, we had
approximately $50,000 and $399,000 of deposits in excess of federally insured limits. The Company has not experienced any losses
in such accounts and believes that it is not exposed to any significant credit risk on cash.
Other intangible assets:
Deferred loan costs, when applicable, are amortized on a straight
line basis over the life of the loan. This method approximates the effective interest rate method.
Noncontrolling Interest
. Noncontrolling interest represents
the noncontrolling or minority partners’ proportionate share of the equity of the Company’s majority owned subsidiaries.
A summary for the years ended December 31, 2016 and 2015 is as follows:
|
|
|
2016
|
|
|
2015
|
|
|
Noncontrolling interest balance at beginning of year
|
|
$
|
211,000
|
|
|
$
|
228,000
|
|
|
Noncontrolling partners’ interest in operating gains (losses) of consolidated subsidiary
|
|
|
5,000
|
|
|
|
(17,000
|
)
|
|
Noncontrolling partners’ contribution
|
|
|
7,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest balance at end of year
|
|
$
|
223,000
|
|
|
$
|
211,000
|
|
Revenue recognition
. CII is the lessor of the Company’s
principal executive offices and the Adviser corporate offices. This lease agreement is classified as an operating lease and accordingly
all rental revenue is recognized as earned based upon total fixed cash flow over the initial term of the lease, using the straight
line method. In December 2014 the lease was renewed for a one year lease term expiring on December 1, 2015, with two one year extensions
permitted with an increase of 5% in rent for each extension. The lease was extended in December 2015 for one year, as permitted
by the lease agreement, and was extended again in December 2016. Beginning in December 2016 the base rent is $52,920 per year payable
in equal monthly installments during the term of the lease. The Adviser, as tenant, pays utilities, certain maintenance and security
expenses relating to the leased premises.
Impairment of long-lived assets
. The Company periodically
reviews the carrying value of its properties and long-lived assets in relation to historical results, current business conditions
and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate
that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected
future cash flows of such assets or analyze the fair value of the asset, to determine if such sum or fair value is less than the
carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would
determine the fair value by using quoted market prices, if available, for such assets, or if quoted market prices are not available,
the Company would discount the expected future cash flows of such assets and would adjust the carrying value of the asset to fair
value. There were no impairment of long-lived assets in 2016 and 2015.
Share-based compensation.
The Company accounts for share-based compensation in accordance
with ASC Topic 718 “Share-Based Payments”. The Company has used the Black-Scholes option pricing model to estimate
the fair value of stock options on the dates of grant.
Recent accounting pronouncements
.
On May 28 2014, the FASB issued ASU 2014
-
09,
Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects
to be entitled in exchange for those goods or services. This standard also includes expanded disclosure requirements that
result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing,
and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. This standard will be
effective for the calendar year ending December 31, 2018. The Company is currently in the process of evaluating the impact of
adoption of this ASU on the financial statements.
In November 2015, the FASB issued ASU No. 2015-17, "Income
Taxes (Topic 740)" ("ASU 2015-17"). Currently U.S. GAAP requires an entity to separate deferred income tax
liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments under
ASU 2015-17 will require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial
position. The amendments in this update will be effective for fiscal years beginning after December 15, 2016 and interim periods
within the fiscal years beginning after December 15, 2016. The adoption of ASU 2015-17 is not expected to have a material impact
on the Company's consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases. The
standard requires all leases with lease terms over 12 months to be capitalized as a right-of-use asset and lease liability on
the balance sheet at the date of lease commencement. Leases will be classified as either finance or operating. This distinction
will be relevant for the pattern of expense recognition in the income statement. This standard will be effective for the calendar
year ending December 31, 2019. The Company is currently in the process of evaluating the impact of adoption of this ASU on the
financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation
— Stock Compensation: Improvements to Employee Share-Based Payment Accounting
.
The standard is intended to
simplify several areas of accounting for share-based compensation arrangements, including the income tax impact,
classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company beginning January 1,
2017 and will require us to recognize excess tax benefits and tax deficiencies in the consolidated income statement when the
awards vest or are settled. These changes are currently recognized in capital surplus in our consolidated balance sheet.
Additionally, the guidance requires excess tax benefits to be presented as an operating activity in the statement of cash
flows rather than as a financing activity.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments
— Measurement of Credit Losses on Financial Instruments
, which requires measurement and recognition of expected credit
losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2020 and we are currently
evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification
of Certain Cash Receipts and Cash Payments
, which addresses eight specific cash flow issues with the objective of reducing
the existing diversity in practice. ASU 2016-15 is effective for the Company beginning January 1, 2018 and we are currently evaluating
the impact that ASU 2016-15 will have on our consolidated financial statements.
The Company does not believe that other standards which have
been issued but are not yet effective will have a significant impact on its financial statements.
2. INVESTMENT PROPERTIES
The components of the Company’s investment properties
and the related accumulated depreciation information follow:
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
Office building and other commercial property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Office - (Coconut Grove, FL) – Building
|
|
$
|
652,198
|
|
|
$
|
325,868
|
|
|
$
|
326,330
|
|
|
Corporate Office – (Coconut Grove, FL) – Land
|
|
|
325,000
|
|
|
|
—
|
|
|
|
325,000
|
|
|
Other (Hopkinton, RI) – Land (50 acres)
|
|
|
82,348
|
|
|
|
—
|
|
|
|
82,348
|
|
|
Other (Paxton, MA) – Land (20,000 square feet)
|
|
|
18,982
|
|
|
|
—
|
|
|
|
18,982
|
|
|
Other (Montpelier, Vermont) – Building
|
|
|
52,000
|
|
|
|
52,000
|
|
|
|
—
|
|
|
Other (Montpelier, Vermont) - Land and improvements (5.4 acres)
|
|
|
111,689
|
|
|
|
—
|
|
|
|
111,689
|
|
|
|
|
$
|
1,242,217
|
|
|
$
|
377,868
|
|
|
$
|
864,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
Office building and other commercial property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Office - (Coconut Grove, FL) – Building
|
|
$
|
652,198
|
|
|
$
|
310,472
|
|
|
$
|
357,060
|
|
|
Corporate Office – (Coconut Grove, FL) – Land
|
|
|
325,000
|
|
|
|
—
|
|
|
|
325,000
|
|
|
Other (Hopkinton, RI) – Land (50 acres)
|
|
|
48,305
|
|
|
|
—
|
|
|
|
48,305
|
|
|
Other (Paxton, MA) – Land (20,000 square feet)
|
|
|
6,960
|
|
|
|
—
|
|
|
|
6,960
|
|
|
Other (Montpelier, Vermont) – Building
|
|
|
52,000
|
|
|
|
52,000
|
|
|
|
—
|
|
|
Other (Montpelier, Vermont) - Land and improvements (5.4 acres)
|
|
|
111,689
|
|
|
|
—
|
|
|
|
111,689
|
|
|
|
|
|
1,196,152
|
|
|
$
|
362,472
|
|
|
$
|
833,680
|
|
3. INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities consist primarily of large
capital corporate equity and debt securities in varying industries or issued by government agencies with readily determinable fair
values. These securities are stated at market value, as determined by the most recent traded price of each security at the balance
sheet date. Consistent with the Company's overall current investment objectives and activities its entire marketable securities
portfolio is classified as trading. Accordingly, all unrealized gains (losses) on this portfolio are recorded in income. Included
in investments in marketable securities is approximately $6.2 million and $8.3 million of large capital real estate investment
trusts (REITs) as of December 31, 2016 and 2015, respectively.
For the years ended December 31, 2016 and 2015, net unrealized
losses on trading securities were approximately $21,000 and $402,000, respectively.
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Description
|
|
Cost
Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (loss)
|
|
|
Cost
Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain (loss)
|
|
|
Real Estate Investment Trusts
|
|
$
|
6,197,000
|
|
|
$
|
6,249,000
|
|
|
$
|
52,000
|
|
|
$
|
8,108,000
|
|
|
$
|
8,320,000
|
|
|
$
|
212,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds, ETF & other
|
|
|
222,000
|
|
|
|
244,000
|
|
|
|
22,000
|
|
|
|
755,000
|
|
|
|
753,000
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Equity Securities
|
|
|
525,000
|
|
|
|
544,000
|
|
|
|
19,000
|
|
|
|
666,000
|
|
|
|
697,000
|
|
|
|
31,000
|
|
|
Total Equity Securities
|
|
|
6,944,000
|
|
|
|
7,037,000
|
|
|
|
93,000
|
|
|
|
9,529,000
|
|
|
|
9,770,000
|
|
|
|
241,000
|
|
|
Debt Securities
|
|
|
696,000
|
|
|
|
713,000
|
|
|
|
17,000
|
|
|
|
847,000
|
|
|
|
737,000
|
|
|
|
(110,000
|
)
|
|
Total
|
|
$
|
7,640,000
|
|
|
$
|
7,750,000
|
|
|
$
|
110,000
|
|
|
$
|
10,376,000
|
|
|
$
|
10,507,000
|
|
|
$
|
131,000
|
|
As of December 31, 2016, debt securities are scheduled to mature
as follows:
|
|
|
Cost
|
|
|
Fair Value
|
|
|
2017 – 2021
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
2022 – 2026
|
|
|
187,000
|
|
|
|
199,000
|
|
|
2027 – thereafter
|
|
|
459,000
|
|
|
|
464,000
|
|
|
|
|
$
|
696,000
|
|
|
$
|
713,000
|
|
Net gain (loss) from investments in marketable securities for
the years ended December 31, 2016 and 2015 is summarized below:
|
Description
|
|
2016
|
|
|
2015
|
|
|
Net realized gain from sales of marketable securities
|
|
$
|
271,000
|
|
|
$
|
50,000
|
|
|
Net unrealized loss from marketable securities
|
|
|
(21,000
|
)
|
|
|
(402,000
|
)
|
|
Total net gain (loss) from investments in marketable securities
|
|
$
|
250,000
|
|
|
$
|
(352,000
|
)
|
Net realized gain from sales of marketable securities consisted
of approximately $648,000 of gains net of $377,000 of losses for the year ended December 31, 2016. The comparable amounts in fiscal
year 2015 were approximately $487,000 of gains net of $437,000 of losses.
Consistent with the Company’s overall current investment
objectives and activities the entire marketable securities portfolio is classified as trading (as defined by U.S. generally accepted
accounting principles). Unrealized gains or losses of marketable securities on hand are recorded in income.
Investment gains and losses on marketable securities may fluctuate
significantly from period to period in the future and could have a significant impact on the Company’s net earnings. However,
the amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in
amount from period to period have no practical analytical value.
Investments in marketable securities give rise to exposure resulting
from the volatility of capital markets. The Company attempts to mitigate its risk by diversifying its marketable securities portfolio.
4. OTHER INVESTMENTS
The Company’s other investments consist primarily of nominal
equity interests in various privately-held entities, including limited partnerships whose purpose is to invest venture capital
funds in growth-oriented enterprises. The Company does not have significant influence over any investee and the Company’s
investment typically represents less than 3% of the investee’s ownership. These investments do not meet the criteria of accounting
under the equity method and accordingly are carried at cost less distributions and other than temporary unrealized losses.
The Company’s portfolio of other investments consists
of approximately 40 individual investments primarily in limited partnerships with varying investment objectives and focus. Management
has categorized these investments by investment focus: technology and communications, diversified businesses, real estate related
and other.
As of December 31, 2016 and 2015, other investments had an aggregate
carrying value of $5.3 million and $3.9 million, respectively. As of December 31, 2016 the Company has committed to fund approximately
an additional $1.8 million as required by agreements with the investees. The carrying value of these investments is equal to contributions
less distributions and other than temporary loss valuation adjustments. During the years ended December 31, 2016 and 2015 the Company
made contributions of approximately $2.2 million and $1.8 million, respectively, and received distributions from these investments
of $1.1 million and $2.0 million, respectively.
The Company’s other investments are summarized below.
|
|
|
Carrying values as of December 31,
|
|
|
Investment Focus
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Technology and communications
|
|
$
|
172,000
|
|
|
$
|
284,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified businesses
|
|
|
2,601,000
|
|
|
|
1,860,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and related
|
|
|
1,900,000
|
|
|
|
1,116,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
635,000
|
|
|
|
635,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,308,000
|
|
|
$
|
3,895,000
|
|
The Company regularly reviews the underlying assets in its investment
portfolio for events, including but not limited to bankruptcies, closures and declines in estimated fair value, that may indicate
the investment has suffered other-than-temporary decline in value. When a decline is deemed other-than-temporary, an investment
loss is recognized.
Net income from other investments is summarized below (excluding
other than temporary impairment loss):
|
|
|
2016
|
|
|
2015
|
|
|
Income from investment in 49% owned affiliate (a)
|
|
$
|
12,000
|
|
|
$
|
22,000
|
|
|
Real estate and related (b)
|
|
|
148,000
|
|
|
|
149,000
|
|
|
Diversified businesses (c)
|
|
|
231,000
|
|
|
|
151,000
|
|
|
Technology and related
|
|
|
(13,000
|
)
|
|
|
-
|
|
|
Total net income from other investments
|
|
$
|
378,000
|
|
|
$
|
322,000
|
|
(a) This
gain represents income from the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”). In 2016 and 2015
TGIF declared and paid a cash dividend, the Company’s portion of which was approximately $193,000 each year. These dividends
were recorded as reduction in the investment carrying value as required under the equity method of accounting for investments.
(b) The
gain in 2016 and 2015 consists primarily of cash distributions from an investment in real estate partnership which distributed
proceeds from sales of its real estate.
(c) The
gain in 2016 and 2015 consists of cash distributions from various investments in partnerships owning diversified businesses which
made cash distributions from the sale or refinancing of operating companies and/or distributions from operating activities.
Other than temporary impairment losses from other investments
For the year ended December 31, 2016, valuation losses from
other than temporary impairment losses from other investments of $69,000 were recorded, consisting of a valuation loss from an
investment in a limited liability company which invests in medical technology and experienced an other than temporary impairment
loss. For the year ended December 31, 2015 there were no valuation losses from other than temporary impairment losses from other
investments.
Net gain or loss from other investments may fluctuate significantly
from period to period in the future and could have a significant impact on the Company’s net earnings. However, the amount
of investment gain or loss from other investments for any given period has no predictive value and variations in amount from period
to period have no practical analytical value.
The following tables present gross unrealized losses and fair
values for those investments that were in an unrealized loss position as of December 31, 2016 and 2015, aggregated by investment
category and the length of time that investments have been in a continuous loss position:
|
|
|
As of December 31, 2016
|
|
|
|
|
12 Months or Less
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
|
Investment Description
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Partnerships owning investments in technology related industries
|
|
$
|
151,000
|
|
|
$
|
(11,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
151,000
|
|
|
$
|
(11,000
|
)
|
|
Partnerships owning diversified businesses investments
|
|
|
498,000
|
|
|
|
(30,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
498,000
|
|
|
|
(30,000
|
)
|
|
Total
|
|
$
|
649,000
|
|
|
$
|
(41,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
649,000
|
|
|
$
|
(41,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
12 Months or Less
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
|
Investment Description
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Partnerships owning investments in technology related industries
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,000
|
|
|
$
|
(12,000
|
)
|
|
$
|
5,000
|
|
|
$
|
(12,000
|
)
|
|
Partnerships owning diversified businesses investments
|
|
|
272,000
|
|
|
|
(28,000
|
)
|
|
|
184,000
|
|
|
|
(16,000
|
)
|
|
|
456,000
|
|
|
|
(44,000
|
)
|
|
Other (private banks, etc.)
|
|
|
—
|
|
|
|
—
|
|
|
|
288,000
|
|
|
|
(12,000
|
)
|
|
|
288,000
|
|
|
|
(12,000
|
)
|
|
Total
|
|
$
|
272,000
|
|
|
$
|
(28,000
|
)
|
|
$
|
477,000
|
|
|
$
|
(40,000
|
)
|
|
$
|
748,000
|
|
|
$
|
(68,000
|
)
|
5. FAIR VALUE INSTRUMENTS
In accordance with ASC Topic 820, the Company measures cash
and cash equivalents, marketable debt and equity securities at fair value on a recurring basis. Other investments are measured
at fair value on a nonrecurring basis.
The following are the major categories of assets and liabilities
measured at fair value on a recurring basis during the years ended December 31, 2016 and 2015, using quoted prices in active markets
for identical assets (Level 1) and significant other observable inputs (Level 2). For the year ended December 31, 2016 and 2015,
there were no major assets or liabilities measured at fair value on a recurring basis which uses significant unobservable inputs
(Level 3):
|
|
|
Fair value measurement at reporting date using
|
|
|
Description
|
|
Total
December 31,
2016
|
|
|
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
350,000
|
|
|
$
|
-
|
|
|
$
|
350,000
|
|
|
$
|
—
|
|
|
Money market mutual funds
|
|
|
2,182,000
|
|
|
|
2,182,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
714,000
|
|
|
|
—
|
|
|
|
714,000
|
|
|
|
—
|
|
|
Marketable equity securities
|
|
|
7,037,000
|
|
|
|
7,037,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Total assets
|
|
$
|
10,283,000
|
|
|
$
|
9,219,000
|
|
|
$
|
1,064,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
Description
|
|
Total
December 31,
2015
|
|
|
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
|
943,000
|
|
|
$
|
943,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
U.S. T-bills
|
|
|
9,478,000
|
|
|
|
9,478,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
737,000
|
|
|
|
—
|
|
|
|
737,000
|
|
|
|
—
|
|
|
Marketable equity securities
|
|
|
9,771,000
|
|
|
|
9,771,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Total assets
|
|
$
|
20,929,000
|
|
|
$
|
20,192,000
|
|
|
$
|
737,000
|
|
|
$
|
—
|
|
Carrying amount is the estimated fair value for corporate debt
securities and time deposits based on a market-based approach using observable (Level 2) inputs such as prices of similar assets
in active markets.
6. INVESTMENT IN AFFILIATE
Investment in affiliate consists of CII’s 49% equity interest
in T.G. I.F. Texas, Inc. (“T.G.I.F.”). T.G.I.F. is a Texas Corporation which holds promissory notes receivable from
its shareholders, including CII and Maurice Wiener, the Chairman of both the Company and T.G.I.F. Reference is made to Note 9 for
discussion on notes payable by CII to T.G.I.F. This investment is recorded under the equity method of accounting. For the years
ended December 31, 2016 and 2015, income from investment in affiliate amounted to approximately $12,000 and $22,000, respectively
and is included in net income from other investments in the consolidated statements of income. In 2016 and 2015 T.G.I.F. declared
and paid a cash dividend of $.07 per share. CII’s dividend amount received was approximately $193,000 each year. This dividend
is recorded as a reduction in the carrying amount of CII investment in T.G.I.F. as required under the equity method of accounting.
7. LOANS, NOTES AND OTHER RECEIVABLES
|
|
|
As of December 31,
|
|
|
Description
|
|
2016
|
|
|
2015
|
|
|
Promissory note and accrued interest due from purchaser of Grove Isle (a)
|
|
$
|
1,034,000
|
|
|
$
|
1,034,000
|
|
|
Promissory note and accrued interest due from individual (b)
|
|
|
78,000
|
|
|
|
204,000
|
|
|
Promissory note and accrued interest due from entity owning apartments (c)
|
|
|
500,000
|
|
|
|
-
|
|
|
Other
|
|
|
11,000
|
|
|
|
22,000
|
|
|
Total loans, notes and other receivables
|
|
$
|
1,623,000
|
|
|
$
|
1,260,000
|
|
|
|
(a)
|
In February 2013, the Company sold its interest in a hotel, resort and marina property known as Grove Isle and received a $1
million promissory note from the purchaser as part of the purchase proceeds. This note bears interest of 4% per annum and will
mature upon the earlier of ten years (February 25, 2023) or when any expansion or development occurs at Grove Isle (as defined
in the purchase agreement). All interest due on this loan has been collected.
|
|
|
(b)
|
In December 2007, the Company loaned $400,000 to a local real estate developer who is well known to the Company and which loan
is secured by numerous real estate interests. In 2010, $197,000 of principal payments were received. As of December 31, 2016 and
2015 the principal outstanding on this loan was $78,000 and $203,000, respectively. In June 2016, the loan was modified and the
maturity date was extended to March 31, 2017 at the same interest rate of 8% with monthly principal payments due of $25,000. All
interest and principal due on the loan has been collected.
|
|
|
(c)
|
In May 2016 the Company loaned $500,000 to an entity owned by the same local real estate developer mentioned above for the
purposes of purchasing apartment units located in Jacksonville, Florida. Nine of the purchased apartment units were provided as
collateral on the loan. The promissory note bears interest at 9.5% per annum payable on a quarterly basis beginning July 1, 2016.
The loan matures on April 28, 2021, at which time all unpaid principal and interest is due. All interest due on the loan has been
received.
|
8. INVESTMENT IN RESIDENTIAL REAL ESTATE PARTNERSHIP
In September 2014, the Company, through a
wholly owned subsidiary (HMG Orlando LLC, a Delaware limited liability company), acquired a one-third equity membership interest
in JY-TV Associates, LLC a Florida limited liability company (“JY-TV”) and entered into the Amended and Restated Operating
Agreement of JY-TV (the “Agreement”). Also, as previously reported, on May 19, 2015, pursuant to the terms of a Construction
Loan Agreement, between JY-TV Associates LLC (“JY-TV” or the “Borrower”, which is one-third owned by a
wholly-owned subsidiary of the Company) and Wells Fargo Bank ("Lender"), Lender loaned to the Borrower the principal
sum of $27 million pursuant to a senior secured construction loan ("Loan"). The proceeds of the Loan were used to finance
the previously reported construction of multi-family residential apartments containing 240 units totaling approximately 239,000
net rentable square feet on a 9.5-acre site located in Orlando, Florida ("Project"). Construction of the Project which
commenced in June 2015, has been completed. A grand opening was held on October 15, 2016, and leasing activities are proceeding
as expected. Approximately 78% of the Project has been leased to date. For the year ended December 31, 2016 JY-TV reported a net
loss of approximately $849,000, which includes depreciation and amortization expense of $712,000 and interest expense of $289,000.
The Company’s portion of that loss is approximately $283,000.
The Company and certain affiliates of the
other two members of the Borrower ("Guarantors") entered into a Completion Guaranty Agreement ("Completion Guaranty")
and a Repayment Guaranty Agreement ("Repayment Guaranty") (collectively, the “Guaranties”) with the Lender.
Under the Completion Guaranty, Guarantors shall unconditionally guaranty, on a joint and several bases, lien free completion of
all improvements with respect to the Project and any construction or completion obligations required to be made by the Borrower
pursuant to any approved leases. Under the Repayment Guaranty, Guarantors shall provide an unconditional guaranty including the
repayment of $11.5 million of the principal balance of the Loan, repayment of all accrued but unpaid interest and payment of any
other sums payable under any of the Loan Agreement. Each Guarantor is required to maintain compliance at all times with certain
financial covenants, as defined. As of December 31, 2016 the Company was in compliance with all debt covenants. The construction
loan matures on May 19, 2018.
This investment is accounted for under the equity method.
9. NOTES AND ADVANCES DUE FROM AND TRANSACTIONS WITH RELATED
PARTIES
The Company has an agreement (the “Agreement”) with
HMGA, Inc. (the “Adviser”) for its services as investment adviser and administrator of the Company’s affairs.
All officers of the Company who are officers of the Adviser are compensated solely by the Adviser for their services.
The Adviser is majority owned by Mr. Wiener, the Company’s
Chairman, CEO and President. The officers and directors of the Adviser are as follows: Maurice Wiener, Chairman of the Board, President
and Chief Executive Officer; and Carlos Camarotti, Vice President - Finance and Assistant Secretary.
Under the terms of the Agreement, the Adviser serves as the
Company’s investment adviser and, under the supervision of the directors of the Company, administers the day-to-day operations
of the Company. All officers of the Company, who are officers of the Adviser, are compensated solely by the Adviser for their services.
The Agreement is renewable annually upon the approval of a majority of the directors of the Company who are not affiliated with
the Adviser and a majority of the Company’s shareholders. The contract may be terminated at any time on 120 days written
notice by the Adviser or upon 60 days written notice by a majority of the unaffiliated directors of the Company or the holders
of a majority of the Company’s outstanding shares.
In June 2016, the shareholders approved the renewal of the Advisory
Agreement between the Company and the Adviser for a term commencing January 1, 2017 and expiring December 31, 2017, under the same
terms as in 2016.
For the years ended December 31, 2016 and 2015, the Company
incurred Adviser fees of approximately $726,000 and $697,000, respectively, of which $660,000 represented regular compensation
for 2016 and 2015. In 2016 and 2015 Advisor fees include approximately $66,000 and $37,000 in incentive fee compensation, respectively.
The Adviser leases its executive offices from CII pursuant to
a lease agreement. This lease agreement calls for base rent of $52,900 per year payable in equal monthly installments. Additionally,
the Adviser is responsible for all utilities, certain maintenance, and security expenses relating to the leased premises. In 2016,
the lease term was extended one year, expiring in December 2017.
Mr. Wiener is a 19% shareholder and the chairman and director
of T.G.I.F. Texas, Inc., a 49% owned affiliate of CII. As of December 31, 2016 and 2015, T.G.I.F. had amounts due from CII in the
amount of approximately $1,600,000 and $1,800,000, respectively. These amounts are due on demand and bear interest at the prime
rate (3.75 % at December 31, 2016). All interest due has been paid.
As of December 31, 2016 and 2015, T.G.I.F. owns 10,200 shares
of the Company’s common stock.
As of December 31, 2016 and 2015, T.G.I.F. had amounts due from
Mr. Wiener in the amount of approximately $707,000. These amounts bear interest at the prime rate (3.75% at December 31, 2016)
and principal and interest are due on demand. All interest due has been paid.
Mr. Wiener received consulting and director’s fees from
T.G.I.F totaling approximately $25,000 and $23,000 for each of the years ended December 31, 2016 and 2015, respectively.
10. INCOME TAXES
The Company as a qualifying real estate investment trust (“REIT”)
distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not
required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be
carried forward to reduce future taxable income but cannot be carried back.
Distributed capital gains on sales of real estate as they relate
to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax.
As previously reported, in January 2017 and 2016, the Company
paid a cash dividend of approximately $501,000 and $517,000 (or $.50 per share) to shareholders of record as of December 29, 2016
and December 31, 2015, respectively. The dividends were a return of capital to shareholders.
The Company’s 95%-owned taxable REIT subsidiary, CII,
files a separate income tax return and its operations are not included in the REIT’s income tax return.
The Company accounts for income taxes in accordance with ASC Topic
740, “Accounting for Income Taxes”. ASC Topic 740 requires a Company to use the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences”
by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of December 31, 2016 and 2015,
the Company has a net deferred tax liability of approximately $76,000 and $217,000, respectively, as a result of timing differences
associated with the carrying value of the investment in affiliate (TGIF) and other investments. CII’s NOL carryover to 2017
is estimated at $1.1 million expiring beginning in 2028 and is fully reserved due to due to CII historically having tax losses.
The components of income before income taxes and the effect
of adjustments to tax computed at the federal statutory rate for the years ended December 31, 2016 and 2015 were as follows:
|
|
|
2016
|
|
|
2015
|
|
|
Loss before income taxes
|
|
$
|
(538,000
|
)
|
|
$
|
(1,078,000
|
)
|
|
Computed tax at federal statutory rate of 34%
|
|
$
|
(183,000
|
)
|
|
$
|
(367,000
|
)
|
|
State taxes at 5.5%
|
|
|
(16,000
|
)
|
|
|
(33,000
|
)
|
|
REIT related adjustments
|
|
|
199,000
|
|
|
|
250,000
|
|
|
Adjustment to valuation allowance
|
|
|
(149,000
|
)
|
|
|
121,000
|
|
|
Other items, net
|
|
|
37,000
|
|
|
|
29,000
|
|
|
Benefit from income taxes
|
|
$
|
(112,000
|
)
|
|
$
|
-
|
|
The REIT related adjustments represent the difference between
estimated taxes on undistributed income and/or capital gains and book taxes computed on the REIT’s income before income taxes, including tax on prohibited REIT income.
The benefit from income taxes in the consolidated statements
of comprehensive income consists of the following:
|
Year ended December 31,
|
|
2016
|
|
|
2015
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
28,000
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
28,000
|
|
|
|
-
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,000
|
|
|
$
|
(104,000
|
)
|
|
State
|
|
|
-
|
|
|
|
(17,000
|
)
|
|
|
|
|
9,000
|
|
|
|
(121,000
|
)
|
|
(Reduced) additional valuation allowance
|
|
|
(149,000
|
)
|
|
|
121,000
|
|
|
Total
|
|
$
|
(112,000
|
)
|
|
$
|
-
|
|
As of December 31, 2016 and 2015, the components of the deferred
tax assets and liabilities are as follows:
|
|
|
As of December 31, 2016
Deferred tax
|
|
|
As of December 31, 2015
Deferred tax
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Net operating loss carry forward
|
|
$
|
391,000
|
|
|
|
|
|
|
$
|
444,000
|
|
|
|
|
|
|
Excess of book basis of 49% owned corporation over tax basis
|
|
|
|
|
|
$
|
393,000
|
|
|
|
|
|
|
$
|
407,000
|
|
|
Unrealized (gain) losses on marketable securities
|
|
|
-
|
|
|
|
22,000
|
|
|
|
30,000
|
|
|
|
-
|
|
|
Excess of tax basis over book basis of other investments
|
|
|
339,000
|
|
|
|
-
|
|
|
|
256,000
|
|
|
|
-
|
|
|
Valuation allowance
|
|
|
(391,000
|
)
|
|
|
|
|
|
|
(540,000
|
)
|
|
|
|
|
|
Totals
|
|
$
|
339,000
|
|
|
$
|
415,000
|
|
|
$
|
190,000
|
|
|
$
|
407,000
|
|
