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HMG > SEC Filings for HMG > Form 10-K on 22-Mar-2013All Recent SEC Filings

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Form 10-K for HMG COURTLAND PROPERTIES INC


22-Mar-2013

Annual Report


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 other things, goodwill impairment, impairment of our other investments and other long-lived assets, uncertainties for Federal and state income tax and allowance for 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 financial statements:

Goodwill.

The Company's goodwill balance as of December 31, 2012 and 2011 relates entirely to its 2004 acquisition of 50% of the Monty's restaurant, marina and office rental facility located in Miami, Florida.

Goodwill is recorded at its carrying value and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of goodwill might not be recoverable. The Company elected an annual goodwill impairment testing date of December 31.

In 2012 our goodwill impairment analysis consisted of assessing certain qualitative factors to determine whether it is more likely than not that the fair value of the reporting entity is lower than its carrying value. Our last year's analysis supported no goodwill impairment and the financial performance of the reporting entity has improved since then and there are no negative indications that future profitability may be impaired. Therefore we have concluded that there is no goodwill impairment for the year ended December 31, 2012.

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 Comprehensive 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. 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, including but not limited to bankruptcies, closures and declines in estimated fair value, that may indicate the investment has suffered an other-than-temporary decline in 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 also 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.

Real estate interests held for sale.

The Company's classifies real estate interests in properties as held for sale when certain criteria are met, in accordance with GAAP. At that time we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Real estate held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. As of December 31, 2012, our Grove Isle property was classified as held for sale and a sale of Grove Isle was completed on February 25, 2013.

Results of Operations:

For the years ended December 31, 2012, reported net income attributable to the Company of approximately $6,000 (or $.01 per share) and for the year ended December 31, 2011, the Company reported net loss attributable to the Company of $940,000 (or $.93 per share).

Revenues:

Total revenues for the year ended December 31, 2012 as compared with that of 2011 increased by approximately $408,000 (or 5%).

Real estate and related revenue:

Real estate rentals and related revenue increased by approximately $50,000 (or 7%) for the year ended December 31, 2012 as compared with 2011. This increase was primarily from new tenant rentals at our Monty's property.

Monty's restaurant operations:

Summarized statement of income of the Monty's restaurant operations for the years ended December 31, 2012 and 2011 is presented below (Note: for comparative purposes the information below represents 100% of the restaurant operations. The Company's ownership percentage in these operations is 50%):

                                       Year ended                          Year ended
Summarized statements of income of    December 31,      Percentage of     December 31,      Percentage of
        Monty's restaurant                2012              sales             2011              sales
             Revenues:
Food and Beverage Sales               $   6,179,000               100 %   $   5,857,000               100 %

             Expenses:
Cost of food and beverage sold            1,770,000              28.7 %       1,682,000              28.7 %
Labor, entertainment and related
costs                                     1,432,000              23.2 %       1,317,000              22.4 %
Other food and beverage related
costs                                       275,000               4.5 %         250,000               4.3 %
Other operating costs                       490,000               7.9 %         478,000               8.2 %
Insurance                                   304,000               4.9 %         343,000               5.9 %
Management and accounting fees              141,000               2.3 %         148,000               2.5 %
Utilities                                   224,000               3.6 %         245,000               4.2 %
Rent (as allocated)                         632,000              10.2 %         599,000              10.2 %
Total Expenses                            5,268,000              85.3 %       5,062,000              86.4 %

Income before depreciation and
minority interest                     $     911,000              14.7 %   $     795,000              13.6 %

The Monty's restaurant is subject to seasonal fluctuations in sales. January through May sales typically account for over 50% of annual sales. Restaurant sales in 2012 as compared with 2011 increased by approximately 5% primarily due to a improved operations and good weather in 2012 season as compared with 2011.

The increase in cost of food as a percentage of sales in 2012 as compared to 2011 was primarily due to higher food costs for substantially all categories. The increase in food costs was partially offset by the decrease in labor costs due to more efficient management structure.

All other 2012 restaurant related expenses, as a percentage of sales were consistent with that of 2011.

Monty's marina operations:

The Monty's marina has approximately 4,400 total square feet available for rent to the public.

Summarized and combined statements of income from Monty's marina operations:

(The Company owns 50% of the Monty's marina)

                                                          Year ended December 31,
                                                         2012                 2011
                   Revenues:
Dockage fees and related income                     $     1,100,000      $    1,065,000
Total marina revenues                                     1,100,000           1,065,000
                   Expenses:
Insurance                                                    26,000              27,000
Management fees                                              34,000              32,000
Utilities (net of reimbursements)                           (30,000 )           (36,000 )
Bay bottom lease                                            177,000             171,000
Repairs and maintenance                                      85,000              75,000
Other                                                       172,000              69,000
Total Expenses                                              464,000             337,000

Income before interest, depreciation and
noncontrolling interest                             $       636,000      $      728,000

Marina revenues and expenses for the year ended December 31, 2012 as compared with 2011 remained consistent, except for a $100,000 bad debt expense reported in 2012 related to one tenant.

Expenses:

Total expenses for the year ended December 31, 2012 as compared to that of 2011 remained consistent; decreasing approximately $50,000 (or less than 1%).

Food and beverage costs and marina expenses are solely from the Monty's operations. Summarized income statements and discussion of significant changes in expenses for each of these operations are presented above.

Depreciation and amortization expense decreased by approximately $147,000 (or 18%) as comparable with 2011, primarily due to decreased amortization expense relating to loan costs associated with the Monty's loan modifications completed in 2011.

Professional fees and expenses decreased by approximately $116,000 (or 39%) for the year ended December 31, 2012 as compared to 2011. This was primarily due to decreased accruals of audit and tax return preparation fees.

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, 2012 and 2011, is as follows:

                  Description                            2012                2011
Net realized gain from sales of marketable
securities                                          $       35,000      $      130,000
Net unrealized gain  (loss) from marketable
securities                                                  86,000            (189,000 )
Total net gain (loss) from investments in
marketable securities                               $      121,000      $      (59,000 )

Net realized gain from sales of marketable securities consisted of approximately $152,000 of gains net of $117,000 of losses for the year ended December 31, 2012. The comparable amounts in fiscal year 2011 were gross gains of approximately $212,000 of gains net of $82,000 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 comprehensive 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.

Net income from other investments is summarized below (excluding other than temporary impairment losses):

                                                                2012          2011
Partnerships owning real estate and related investments (a)   $ 223,000     $      -
Venture capital funds - diversified businesses (b)              121,000       27,000
Income from investment in 49% owned affiliate (c)                57,000       41,000
Other                                                                 -        1,000
Total net income from other investments                       $ 401,000     $ 69,000

(a) The gain in 2012 primarily consists of one cash distribution from an investment in a partnership owning real estate investments.

(b) The gains in 2012 and 2011 consist of various cash distributions from an investments owning diversified businesses which made cash distributions from the sale or refinancing of operating companies.

(c) This gain represents income from the Company's 49% owned affiliate, T.G.I.F. Texas, Inc. ("TGIF"). The increase in income is due to increased gains from investments in 2012 versus 2011. In 2012 and 2011 TGIF declared and paid a cash dividend of which the Company's portion of was approximately $196,000 and $168,000. 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

                                                         2012                2011
Real estate and related                             $      (28,000 )    $      (84,000 )
Other                                                            -              (3,000 )
Total other than temporary impairment loss from
other investments                                   $      (28,000 )    $      (87,000 )

The OTTI loss for the year ended December 31, 2012 and 20111 primarily consists of a recognized impairment loss in an investment in a partnership which operates and leases executive suites in Miami, Florida. The Company has funded $120,000 to date in this investment and the losses incurred were primarily associated with the initial start up of the venture in 2010.

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, 2012 as compared with 2011 decreased by approximately $58,000 (or 29%), primarily due to decreased interest and dividend income from debt and equity marketable securities of approximately $8,000 and decreased service fee income from Courtland Houston, Inc. of $50,000.

In conjunction with the amendment of the Bayshore bank loan in March 2011, the interest rate swap contract liability was paid down by $198,400 (in the same proportion as the amount of the loan principal paid down). This amount represents a previously unrealized loss which upon pay down of the swap was reclassified from accumulated other comprehensive income and recorded as a realized loss on interest rate swap contract within the consolidated statements of comprehensive income for the year ended December 31, 2011.

Benefit from income taxes:

Benefit from income taxes for the years ended December 31, 2012 and 2011 was $66,000 and $152,000, respectively.

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, 2012 and 2011, the Company has recorded a net deferred tax asset of $698,000 and $632,000, respectively. A valuation allowance against deferred tax asset has not been established as management believes it is more likely than not, based on the Company's previous history and expectation of future taxable income before expiration, that these assets will be realized.

Effect of Inflation.

Inflation affects the costs of operating and maintaining the Company's investments. In addition, rentals under certain leases are based in part on the lessee's sales and tend to increase with inflation, and certain leases provide for periodic adjustments according to changes in predetermined price indices.

Liquidity, Capital Expenditure Requirements and Capital Resources. The Company's material commitments primarily consist of maturities of debt obligations of approximately $3.2 million in 2013 and contributions committed to other investments of approximately $795,000 due upon demand. The funds necessary to meet these obligations are expected from the proceeds from the sales of properties or investments, refinancing of existing bank loans, distributions from investments and available cash.

Included in the maturing debt obligations for 2013 is a note payable to the Company's 49% owned affiliate, T.G.I.F. Texas, Inc. ("TGIF") of approximately $2.8 million due on demand.(see Item 13. Certain Relationships and Related Transactions and Director Independence.) The obligation due to TGIF will be paid with funds available from distributions from its investment in TGIF and from available cash.

A summary of the Company's contractual cash obligations at December 31, 2012 is as follows:

                                                                  Payments Due by Period
                                                    Less than 1
Contractual Obligations               Total             year          1 - 3 years       4 - 5 years       After 5 years
Mortgages and notes payable        $ 11,005,000     $  3,186,000     $     830,000     $     859,000     $     6,130,000
Other investments commitments           795,000          795,000                 -                 -                   -
Total                              $ 11,800,000     $  3,981,000     $     830,000     $     859,000     $     6,130,000

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 real estate net rental and related activities, sales of marketable securities, distributions from other investments and borrowings.

For the year ended December 31, 2012, the Company's net cash provided by operating activities was approximately $330,000. This was primarily from real estate net rental and related activities. The Company believes that there will be sufficient cash flows in the next year to meet its operating requirements.

For the year ended December 31, 2012, the net cash provided by investing activities was approximately $315,000. This included purchases of marketable securities of $1.2 million, purchases and improvements of fixed assets of $353,000 and, contributions to other investments of $244,000. These uses of cash were partially offset by sources of cash consisting of proceeds from the sales and redemptions of marketable securities of $1.3 million, cash distributions from other investments of $662,000 and distribution from affiliate of $196,000.

For the year ended December 31, 2012, net cash used in financing activities was approximately $1,074,000. This primarily consisted of loan principal repayments of $831,000 and purchases of treasury stock of $243,000.

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