NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1
.
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
In
the
opinion of the Company, the accompanying unaudited condensed consolidated
financial statements prepared in accordance with instructions for Form 10-QSB,
include all adjustments (consisting only of normal recurring accruals) which
are
necessary for a fair presentation of the results for the periods
presented. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the Company's
Annual Report for the year ended December 31, 2006. The balance sheet
as of December 31, 2006 was derived from audited financial statements as of
that
date. The results of operations for the three and nine months ended September
30, 2007 are not necessarily indicative of the results to be expected for the
full year.
The
condensed consolidated financial statements include the accounts of
HMG/Courtland Properties, Inc. (the "Company") and entities in which the Company
owns a majority voting interest or controlling financial interest. All material
transactions and balances with consolidated and unconsolidated entities have
been eliminated in consolidation or as required under the equity
method.
2.
RECENT ACCOUNTING PRONOUNCEMENT
In
May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, or “FSP FIN 48-1,”
which clarifies when a tax position is considered settled under FIN 48. The
FSP
explains that a tax position can be effectively settled on the completion of
an
examination by a taxing authority without legally being extinguished. For tax
positions considered effectively settled, an entity would recognize the full
amount of tax benefit, even if (1) the tax position is not considered more
likely than not to be sustained solely on the basis of its technical merits
and
(2) the statute of limitations remain open. FSP FIN 48-1 should be applied
upon the initial adoption of FIN 48. The impact of our adoption of FIN 48 (as
of
January 1, 2007) is in accordance with this FSP and the implementation has
not resulted in any changes to our consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits entities
to choose to measure eligible financial instruments at fair value. The
unrealized gains and losses on items for which the fair value option has been
elected should be reported in earnings. The decision to elect the fair value
options is determined on an instrument by instrument basis, it should be applied
to an entire instrument, and it is irrevocable. Assets and liabilities measured
at fair value pursuant to the fair value option should be reported separately
in
the balance sheet from those instruments measured using another measurement
attribute. SFAS No. 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. The Company is currently
analyzing the potential impact of adoption of SFAS No. 159 to its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ,
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The Company does not anticipate adoption
of
this standard will have a material impact on its consolidated financial
statements.
(4)
HMG/COURTLAND
PROPERTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
3.
SIGNIFICANT ACCOUNTING POLICIES
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
123 (revised 2004), ‘Share-Based Payments: (SFAS 123(R)’). The
Company adopted SFAS 123(R) using the modified prospective
basis. Under this method, compensation costs recognized beginning
January 1, 2006 included in costs related to 1) all share-based payments granted
prior to but not yet vested as of January 1, 2006, based on previously estimated
grant-date fair values, and 2) all share-based payments granted subsequent
to
December 31, 2005 based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123 (R). The Company has used the
Black-Scholes option pricing model to estimate the fair value of stock options
granted subsequent to the date of adoption of SFAS 123(R).
4.
RESULTS
OF OPERATIONS FOR MONTY’S RESTAURANT, MARINA AND OFFICE/RETAIL PROPERTY, COCONUT
GROVE, FLORIDA
The
Company, through two 50%-owned entities, Bayshore Landing, LLC (“Landing”) and
Bayshore Rawbar, LLC (“Rawbar”), (collectively, “Bayshore”) owns a restaurant,
office/retail and marina property located in Coconut Grove (Miami), Florida
known as Monty’s (the “Monty’s Property”).
Summarized
combined statement of income for Landing and Rawbar for the three and nine
months ended September 30, 2007 and 2006 is presented below (Note: the Company’s
ownership percentage in these operations is 50%):
Summarized
Combined statements of income
Bayshore
Landing, LLC and
Bayshore
Rawbar, LLC
|
|
For
the three months ended
September
30, 2007
|
|
|
For
the three months ended
September
30, 2006
|
|
|
For
the nine months ended
September
30, 2007
|
|
|
For
the nine months ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Food
and Beverage Sales
|
|
$
|
1,334,000
|
|
|
$
|
1,352,000
|
|
|
$
|
4,762,000
|
|
|
$
|
4,939,000
|
|
Marina
dockage and related
|
|
|
290,000
|
|
|
|
296,000
|
|
|
|
938,000
|
|
|
|
916,000
|
|
Retail/mall
rental and related
|
|
|
91,000
|
|
|
|
90,000
|
|
|
|
276,000
|
|
|
|
230,000
|
|
Total
Revenues
|
|
|
1,715,000
|
|
|
|
1,738,000
|
|
|
|
5,976,000
|
|
|
|
6,085,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of food and beverage sold
|
|
|
367,000
|
|
|
|
382,000
|
|
|
|
1,280,000
|
|
|
|
1,421,000
|
|
Labor
and related costs
|
|
|
292,000
|
|
|
|
236,000
|
|
|
|
918,000
|
|
|
|
802,000
|
|
Entertainers
|
|
|
61,000
|
|
|
|
56,000
|
|
|
|
164,000
|
|
|
|
160,000
|
|
Other
food and beverage related costs
|
|
|
137,000
|
|
|
|
137,000
|
|
|
|
417,000
|
|
|
|
420,000
|
|
Other
operating costs
|
|
|
52,000
|
|
|
|
58,000
|
|
|
|
197,000
|
|
|
|
197,000
|
|
Repairs
and maintenance
|
|
|
91,000
|
|
|
|
74,000
|
|
|
|
293,000
|
|
|
|
243,000
|
|
Insurance
|
|
|
155,000
|
|
|
|
167,000
|
|
|
|
485,000
|
|
|
|
344,000
|
|
Management
fees
|
|
|
69,000
|
|
|
|
98,000
|
|
|
|
339,000
|
|
|
|
290,000
|
|
Utilities
|
|
|
79,000
|
|
|
|
112,000
|
|
|
|
229,000
|
|
|
|
313,000
|
|
Ground
rent
|
|
|
251,000
|
|
|
|
198,000
|
|
|
|
698,000
|
|
|
|
600,000
|
|
Interest
|
|
|
244,000
|
|
|
|
253,000
|
|
|
|
734,000
|
|
|
|
747,000
|
|
Depreciation
and amortization
|
|
|
180,000
|
|
|
|
149,000
|
|
|
|
536,000
|
|
|
|
389,000
|
|
Total
Expenses
|
|
|
1,978,000
|
|
|
|
1,920,000
|
|
|
|
6,290,000
|
|
|
|
5,926,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(263,000
|
)
|
|
$
|
(182,000
|
)
|
|
$
|
(314,000
|
)
|
|
$
|
159,000
|
|
(5)
HMG/COURTLAND
PROPERTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
For
the
three and nine months ended September 30, 2007 Landing and Rawbar combined
operations reported losses of $263,000 and $314,000,
respectively. This is as compared with a loss of $182,000 for the
three months ended September 30, 2006 and income of $159,000 for the nine months
ended September 30, 2006. Losses for the three months ended September 30, 2007
as compared with the same period in 2006 increased by approximately $81,000
primarily due to increased ground rent of $53,000, increased labor (restaurant
management) of $26,000, increased repairs and maintenance of $17,000 and
increased depreciation expense of $31,000. These increases were
partially offset by decreased utilities expense of $43,000. Losses
for the nine months ended September 30, 2007 as compared with the same period
in
2006 increased by approximately $473,000 primarily due to increased depreciation
expense of $147,000, increased insurance costs of $141,000, increased labor
(restaurant management) of $116,000, increased ground rent of $98,000 and
increased management fees of $49,000. These increases were partially offset
by
decreased utilities expense of $84,000.
The
increase in depreciation expense is the result of increased property placed
in
service in 2007 versus 2006.
The
increase in management fees was the result of a change in restaurant managers.
Effective April 1, 2007, the Company amended the restaurant management contract
that was entered into when the property was purchased in 2004, and took over
management of the restaurant. The amendment provided for a one-time payment
of
$100,000 to the former manager for termination of the management services
portion of the contract. The former manager continues to perform
accounting and certain administrative services and is paid $15,000 per month.
The increase in labor costs (restaurant management) is the result of the Company
taking over the restaurant operations.
The
increase in insurance expense was consistent with the general increase in
premiums in South Florida.
The
decrease in utilities expense was the result of a new policy (since August
2006)
which requires all marina tenants to reimburse the Company for electrical
usage.
5.
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.
(6)
HMG/COURTLAND
PROPERTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Net
gain
from investments in marketable securities for the three and nine months ended
September 30, 2007 and 2006 is summarized below:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
Description
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
realized gain from sales of securities
|
|
$
|
106,000
|
|
|
$
|
34,000
|
|
|
$
|
311,000
|
|
|
$
|
147,000
|
|
Unrealized
net gain in trading securities
|
|
|
12,000
|
|
|
|
111,000
|
|
|
|
58,000
|
|
|
|
23,000
|
|
Total
net gain from investments in marketable securities
|
|
$
|
118,000
|
|
|
$
|
145,000
|
|
|
$
|
369,000
|
|
|
$
|
170,000
|
|
For
the
three and nine months ended September 30, 2007, net realized gain from sales
of
marketable securities of approximately $106,000 and $311,000, respectively,
consisted of approximately $121,000 of gross gains net of $15,000 of gross
losses for the three month period and $501,000 of gross gains and $190,000
of
gross losses for the nine month period.
For
the
three and nine months ended September 30, 2006 net realized gain from sales
of
marketable securities of approximately $34,000 and $147,000, respectively,
consisted of approximately $46,000 of gross gains net of $12,000 of gross losses
for the three month period and $357,000 of gross gains and $210,000 of gross
losses for the nine month period.
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.
6.
OTHER
INVESTMENTS
As
of
September 30, 2007, the Company has committed to invest approximately $12.8
million in other investments primarily in private capital funds, of which
approximately $11.1 million has been funded. The carrying value of other
investments (which reflects distributions and valuation adjustments) is
approximately $4.8 million as of September 30, 2007.
During
the nine months ended September 30, 2007, the Company made contributions to
three new investments for $240,000 and follow-on contributions to existing
investments totaling approximately $865,000. During this same period,
the Company received approximately $1,245,000 in cash and stock
distributions.
(7)
HMG/COURTLAND
PROPERTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
Net
income from other investments for the three and nine months ended September
30,
2007 and 2006, is summarized below:
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
Description
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Partnership
owning diversified businesses & distressed debt
|
|
$
|
140,000
|
|
|
$
|
58,000
|
|
|
$
|
418,000
|
|
|
$
|
166,000
|
|
Technology-related
venture fund
|
|
|
--
|
|
|
|
--
|
|
|
|
44,000
|
|
|
|
50,000
|
|
Real
estate development and operation
|
|
|
1,000
|
|
|
|
4,000
|
|
|
|
52,000
|
|
|
|
65,000
|
|
Income
from investment in 49% owned affiliate (T.G.I.F. Texas,
Inc.)
|
|
|
33,000
|
|
|
|
29,000
|
|
|
|
97,000
|
|
|
|
110,000
|
|
Restaurant
development and franchising
|
|
|
(150,000
|
)
|
|
|
--
|
|
|
|
(150,000
|
)
|
|
|
--
|
|
Others,
net
|
|
|
--
|
|
|
|
(6,000
|
)
|
|
|
305,000
|
|
|
|
4,000
|
|
Total
net income from other investments
|
|
$
|
24,000
|
|
|
$
|
85,000
|
|
|
$
|
766,000
|
|
|
$
|
395,000
|
|
In
September and August 2007, the Company received cash distributions from two
investments in partnerships owning diversified businesses and distressed debt
totaling approximately $140,000. These distributions were in excess
of the Company’s basis in these investments and have been recorded as
income.
In
September 2007, the Company elected to write off $150,000 of its investment
in a
restaurant development and franchise entity which is being restructured and
which, in the Company’s opinion, will result in an other-than-temporary decline
in value. The Company had invested $200,000 in this entity,
representing approximately 1% of its equity.
In
April
2007, the Company received approximately $449,000 of cash and stock from an
investment in a privately-held bank which was purchased by a publicly-held
bank. The Company realized a gain of approximately $299,000 on this
transaction (included in table above under “Others, net”).
In
February 2007, the Company received cash distributions primarily consisting
of a
$222,000 cash distribution from one investment in a partnership in which one
of
its portfolio companies was recapitalized. This distribution exceeded the
carrying amount of the investment and accordingly was recognized as
income.
(8)
HMG/COURTLAND
PROPERTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
7.
DERIVATIVE
FINANCIAL INSTRUMENTS
The
Company is exposed to interest rate risk through its borrowing
activities. In order to minimize the effect of changes in interest
rates, the Company has entered into an interest rate swap contract under which
the Company agrees to pay an amount equal to a specified rate of 7.57% times
a
notional principal approximating the outstanding loan balance, and to receive
in
return an amount equal to the one month LIBOR rate plus 2.45% times the same
notional amount. The Company designated this interest rate swap
contract as a cash flow hedge. As of September 30, 2007 and December
31, 2006, the fair value (net of 50% minority interest) was an unrealized loss
of $40,000 and $22,500, respectively. These amounts have been recorded as other
comprehensive loss and will be reclassified to interest expense over the life
of
the swap contract.
8.
SEGMENT
INFORMATION
The
Company has three reportable segments: Real estate rentals; Food and Beverage
sales; and Other investments and related income. The Real estate and
rentals segment primarily includes the leasing of its Grove Isle property,
marina dock rentals at both Monty’s and Grove Isle marinas, and the leasing of
office and retail space at its Monty’s property. The Food and
Beverage sales segment consists of the Monty’s restaurant
operation. Lastly, the Other investment and related income segment
includes all of the Company’s other investments, marketable securities, loans,
notes and other receivables and the Grove Isle spa operations which individually
do not meet the criteria as a reportable segment. These operating segments,
as
presented in the financial statements, reflect how management internally reviews
each segment’s performance. Management also makes operational and
strategic decisions based on this same information.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate and marina rentals
|
|
$
|
792,000
|
|
|
$
|
766,000
|
|
|
$
|
2,445,000
|
|
|
$
|
2,279,000
|
|
Food
and beverage sales
|
|
|
1,334,000
|
|
|
|
1,353,000
|
|
|
|
4,762,000
|
|
|
|
4,940,000
|
|
Other
investments and related income
|
|
|
423,000
|
|
|
|
506,000
|
|
|
|
2,038,000
|
|
|
|
1,470,252
|
|
Total
Net Revenues
|
|
$
|
2,549,000
|
|
|
$
|
2,625,000
|
|
|
$
|
9,245,000
|
|
|
$
|
8,689,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate and marina rentals
|
|
$
|
40,000
|
|
|
$
|
(18,000
|
)
|
|
$
|
185,000
|
|
|
$
|
37,000
|
|
Food
and beverage sales
|
|
|
(84,000
|
)
|
|
|
(67,000
|
)
|
|
|
(73,000
|
)
|
|
|
76,000
|
|
Other
investments and related income
|
|
|
(248,000
|
)
|
|
|
(121,000
|
)
|
|
|
(59,000
|
)
|
|
|
(439,000
|
)
|
Total
income (loss) before income taxes
|
|
$
|
(292,000
|
)
|
|
$
|
(206,000
|
)
|
|
$
|
53,000
|
|
|
$
|
(325,000
|
)
|
(9)
HMG/COURTLAND
PROPERTIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
9.
INCOME TAXES
We
adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109” (“FIN 48”), on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement 109,
“Accounting for Income Taxes”, 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. FIN 48 also provides
guidance on derecognition, 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 financial statements. Our evaluation
was
performed for the tax years ended December 31, 2003, 2004, 2005 and 2006,
the tax years which remain subject to examination by major tax jurisdictions
as
of September 30, 2007.
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 financial statements as selling,
general and administrative expense.
(10)