NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,
2007 and 2006
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and
Consolidation
. The 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. 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 comes from food and beverage operations,
marina dockage operations, commercial property rental operations and spa
operations.
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”).
A 95% owned corporation in which the Company holds a 95%
non-voting interest and Masscap Investments Company, Inc. ("Masscap") which
holds a 5% voting interest in CII. The Company and Masscap have had a
continuing arrangement with regard to the ongoing operations of CII, which
provides the Company with complete authority over all decision making relating
to the business, operations and financing of CII consistent with the Company’s
status as a real estate investment trust. Masscap is a wholly-owned
subsidiary of Transco Realty Trust which is a 46% shareholder of the
Company. CII files a separate tax return and its operations are not
part of the REIT tax return.
Courtland Bayshore Rawbar,
LLC (“CBSRB”).
This Florida limited liability company is
wholly owned by CII. CBSRB owns a 50% interest in Bayshore Rawbar,
LLC (“BSRB”) which operates the Monty’s restaurant. The other 50%
owner of BSRB is The Christoph Family Trust (“CFT”), an unrelated
entity.
HMG Bayshore, LLC
(“HMGBS”).
This Florida limited liability company owns a 50%
interest in the real property and marina operations of Bayshore Landing, LLC
(“BSL”). HMGBS and the CFT formed BSL for the purposes of acquiring
and operating the Monty’s property in Coconut Grove, Florida.
CII Spa, LLC
(“CIISPA
”). This Florida single-member limited liability company was
formed in 2004 and is wholly-owned by CII. CIISPA owns a 50% interest
in Grove Spa, LLC (“GS”), as discussed below.
In
September 2004 the Company entered into an agreement with Noble House
Associates, LLC (“NHA”), an affiliate of the Company’s tenant at its Grove Isle
property (Westgroup Grove Isle Associates, Ltd., or “Westgroup”), for the
purpose of developing and operating on the Grove Isle property a commercial
project consisting of a first class spa, together with related improvements and
amenities (the “Grove Isle Spa”). A wholly-owned subsidiary of the
Company, CIISPA and NHA formed a Delaware limited liability company. GS is owned
50% by CIISPA and 50% by NHA. Grove Isle Spa was developed by GS and
is sub-leased from Westgroup.
Grove Isle Associates, Ltd.
(“GIA”)
. This limited partnership (owned 85% by the Company and 15% by
CII) is the landlord of a luxury resort with a 50-room, hotel and private club
facility located on approximately 7 acres of a private island in Coconut Grove,
Florida known as “Grove Isle”. The tenant-operator of Grove Isle is
Noble House Resorts, a national operator of resorts in the U.S.
Grove Isle Yacht Club
Associates (“GIYCA”)
. This partnership (wholly-owned by CII)
was the developer of the 85 boat slips located at Grove Isle of which the
Company owns six as of December 31, 2007. All other slips are privately
owned. Grove Isle Marina, Inc. a wholly-owned subsidiary of GIYCA,
operates all aspects of the Grove Isle marina.
South Bayshore Associates
(“SBA”)
. This is a 75% owned joint venture wherein the major
asset is a receivable from the Company's 46% shareholder, Transco Realty
Trust.
260 River Corp
(“260”).
This is a wholly-owned corporation which owns a 70%
interest in a vacant retail store location in Montpelier, Vermont. Development
of this property is expected to begin in 2008.
Courtland/Key West, Inc.
(“CKWI”)
. This Florida corporation was formed in April 2007 and is
85%wholly-owned by CII. As of December 31, 2006, CKWI owned a 10%
interest in a limited liability company (Monty’s Key West, LLC) which owned and
operated a restaurant in Key West, Florida. CKWI (as of December 31,
2006) held a $1 million promissory note due from the principal owner of Monty’s
Key West, LLC. In February 2007 the restaurant was sold and CKWI was
repaid its $1 million loan plus accrued interest. As a result of the sale CKWI
wrote off its 10% equity interest in the restaurant which had a carrying value
of $383,000 (as restated).
Courtland Houston, Inc.
(“CHI”)
. This Florida corporation was formed in April 2007
and is
85% owned by CII and 15% owned by its sole employee. CHI was formed
with a $140,000 investment by CII and engages in commercial leasing activities
in Texas and earns commission revenue.
Preparation of Financial
Statements
. The preparation of 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 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’s 95%-owned 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
Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for
Income Taxes”. SFAS No. 109 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. Under SFAS No. 109, 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 (excluding CII) 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.
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
December 31, 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.
Depreciation and
Amortization
. Depreciation of properties held for
investment is computed using the straight-line method over the estimated useful
lives of the properties, which range up to 39.5 years. Deferred
mortgage and leasing costs are amortized over the shorter of the respective term
of the related indebtedness or life of the asset. Depreciation and
amortization expense for the years ended December 31, 2007 and 2006 was
approximately $1,298,000 and $1,157,000, respectively. The Grove Isle yacht
slips were being depreciated on a straight-line basis over their estimated
useful life of 20 years and are fully depreciated as of December 31,
2007. The Monty’s marina is being depreciated on a straight-line
basis over its estimated useful life of 15 years.
Fair Value of Financial
Instruments
. The carrying value of financial instruments
including other receivables, notes and advances due from related parties,
accounts payable and accrued expenses and mortgages and notes payable
approximate their fair values at December 31, 2007 and 2006, due to their
relatively short terms or variable interest rates.
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 comprehensive 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. At December 31, 2007 and 2006 there are no 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 collectibility of those balances.
Management's estimates of collectibility 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, 2007 and 2006, there were no receivables that required an
allowance.
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 EITF Topic D-46 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.
Comprehensive Income
(Loss)
. The Company reports comprehensive income (loss) in
both its consolidated statements of comprehensive income and the consolidated
statements of changes in stockholders' equity. Comprehensive income
(loss) is the change in equity from transactions and other events from nonowner
sources. Comprehensive income (loss) includes net income (loss) and
other comprehensive income (loss). For the years ended December 31, 2007 and
2006 comprehensive (loss) income consisted of unrealized (loss) gain from
interest rate swap agreement of approximately ($240,000) and $110,000,
respectively.
(Loss) earnings per common
share
. Net (loss) income per common share (basic and diluted) is based on
the net (loss) income divided by the weighted average number of common shares
outstanding during each year. Diluted net (loss) income per share
includes the dilutive effect of options to acquire common
stock. Common shares outstanding include issued shares less shares
held in treasury. The Company does not have any potentially dilutive shares
because net losses were reported in all periods presented.
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. Furthermore, gain on sales of properties has been
reduced by adviser's incentive fees of approximately $28,000 for the year ended
December 31, 2006. There were no sales of property in
2007.
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. The Company evaluates
these excess deposits and transfers amounts to brokerage accounts and other
banks to mitigate this exposure.
Derivative
Instruments.
The
Company may or may not use derivative instruments to reduce interest rate risk.
The Company has established policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative instruments. The Company does
not hold derivative instruments for trading purposes.
Interest
rate swap contracts designated and qualifying as cash flow hedges are reported
at fair value. The gain or loss on the effective portion of the hedge initially
is included as a component of other comprehensive income and is subsequently
reclassified into earnings when interest on the related debt is
paid.
Inventories.
Inventories
consist primarily of food and beverage and are stated at the lower of cost or
market. Cost is determined on a first-in, first-out
basis.
Intangible
Assets.
Intangible assets consist primarily of goodwill and
deferred loan costs. Goodwill is carried at historical cost if its
estimated fair value is greater than its carrying value. However, if
its estimated fair value is less than the carrying amount, goodwill is reduced
to its estimated fair value through an impairment charge to the consolidated
statements of comprehensive income.
Goodwill
relates to the Company’s real estate rentals and food and beverage sales
segments and is assessed for impairment annually on December 31st and, more
frequently, if a triggering event occurs utilizing a valuation study. In
performing this assessment, management relies on a number of factors including
operating results, business plans, economic projections, anticipated future cash
flows, and transactions and market place data. There are inherent uncertainties
related to these factors and judgment in applying them to the analysis of
goodwill impairment. Since judgment is involved in performing goodwill valuation
analyses, there is a risk that the carrying value of our goodwill may be
overstated or understated. As of December 31, 2007 and 2006, the Company was not
aware of any items or events that would cause it to adjust the recorded value of
goodwill for impairment. Based upon the assessment performed as of December 31,
2007, the estimated fair value of the reporting unit exceeded its carrying
amount by approximately $1.7 million.
Management
believes the most significant assumption which would have an effect on the
estimated fair value of goodwill is the discount rate. Assuming a discount rate
of 10%, the Company estimates that a one percentage point increase in the
discount rate would decrease the fair value of the reporting unit by
approximately $1.8 million.
Deferred
loan costs are amortized on a straight line basis over the life of the
loan. This method approximates the effective interest rate
method.
Reclassifications
. Certain
amounts in the prior year's consolidated financial statements have been
reclassified to conform
to the current year's presentation. Effective in 2007 and
retroactively applied to the 2006 consolidated statements of comprehensive
income, net gain from investments in marketable securities, net income from
other investments and interest, dividend and other income have been classified
as other income instead of revenues as previously reported. Also, on
the consolidated statement of cash flows cash activities from investment sales
and purchases have been reclassified to investing activities from operating
activities.
Minority Interest
.
Minority interest represents the minority partners' proportionate share of the
equity of the Company's majority owned subsidiaries. A summary of minority
interest for the years ended December 31, 2007 and 2006 is as
follows:
|
2007
|
|
2006
|
Minority
interest balance at beginning of year
|
$3,127,000
|
|
$2,675,000
|
Minority
partners’ interest in operating losses of consolidated
subsidiaries
|
(372,000)
|
|
(531,000)
|
Net
contributions from minority partners
|
579,000
|
|
873,000
|
Unrealized
(loss) gain on interest rate swap agreement
|
(240,000)
|
|
110,000
|
Other
|
(42,000)
|
|
-
|
Minority
interest balance at end of year
|
$3,052,000
|
|
$3,127,000
|
Revenue
Recognition.
The Company is the lessor of various real estate
properties. All of the lease agreements are classified as operating
leases 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. Percentage rents are based upon tenant sales levels for
a specified period and are recognized on the accrual basis, based on the
lessee’s monthly sales. Reimbursed expenses for real estate taxes,
common area maintenance, utilities and insurance are recognized in the period in
which the expenses are incurred, based upon the provisions of the tenant’s
lease.
In
addition to base rent, the Company may receive participation rent consisting of
a portion of the tenant’s operating surplus, as defined in the lease
agreement. Participation rent is due at end of each lease year and
recognized when earned. Revenues earned from restaurant and marina operations
are in cash or cash equivalents with an insignificant amount of customer
receivables.
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.
Share-Based
Compensation.
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).
Recent Accounting
Pronouncements
.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R
replaces SFAS 141 and establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, including goodwill, the liabilities assumed and any
non-controlling interest in the acquiree. SFAS 141R also establishes disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. This statement is effective
for fiscal years beginning after December 15, 2008. We are currently
evaluating the impact the adoption of SFAS 141R will have on our consolidated
financial position and consolidated results of operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements”
(“SFAS 160”). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. This
standard is effective for fiscal years beginning after December 15, 2008.
We are currently evaluating the impact the adoption of SFAS 160 will have on our
consolidated financial position and consolidated results of
operations.
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.
2.
RESTATEMENT OF 2006
FINANCIAL STATEMENTS
As
previously reported on Form 8-K dated February 12, 2008, and in response to a
comment given to the Company by the Staff of the Securities and Exchange
Commission (“SEC”) concerning certain disclosures in our Form 10-KSB for the
fiscal year ended December 31, 2006, the Company‘s management has determined
that a revision should be made to the accounting for the Company’s investment in
its former restaurant in Key West, Florida, using the equity method in
accordance with EITF Topic D-46. A cumulative error of $117,000 is
related to the Company’s investment from its inception of the investment in 1999
through December 31, 2005. The error was the result of unavailable financial
information and an incorrect application of the equity method under the
applicable EITF accounting standard. As a result of the error described above,
the Company has restated its consolidated financial statements for the year
ended December 31, 2006, included herein.
The
correction of the error has been reported as a cumulative effect adjustment in
the amount of $117,000, as an adjustment to the opening balance of retained
earnings for 2006. Also, net loss for 2006 decreased by $117,000 as a
result of the restatement, and loss per share decreased by $.11 in
2006.
3.
INVESTMENT PROPERTIES
The
components of the Company’s investment properties and the related accumulated
depreciation information follow:
|
December
31, 2007
|
|
|
Accumulated
|
|
|
Cost
|
Depreciation
|
Net
|
Commercial
Properties:
|
|
|
|
Monty’s
restaurant and retail mall (Coconut Grove, FL) - Building &
Improvements (1)
|
$5,947,000
|
$468,412
|
$5,478,588
|
Monty’s
restaurant and retail mall (Coconut Grove, FL) - furniture,
fixtures
and equipment (F,F &E) (1)
|
1,685,225
|
443,274
|
1,241,951
|
Corporate
Office - (Coconut Grove, FL) – Building
|
641,572
|
182,152
|
459,420
|
Corporate
Office – (Coconut Grove, FL) – Land
|
325,000
|
-
|
325,000
|
Other
(Montpelier, Vermont) – Buildings
|
52,000
|
52,000
|
-
|
Other
(Montpelier, Vermont) - Land and improvements
|
99,530
|
-
|
99,530
|
|
8,750,327
|
1,145,838
|
7,604,489
|
Commercial Properties-
Construction in Progress:
|
|
|
|
Monty’s
restaurant and retail mall (Coconut Grove, FL) (1)
|
320,617
|
-
|
320,617
|
|
320,617
|
-
|
320,617
|
Grove Isle Hotel, club
and spa facility (Coconut Grove, FL):
|
|
|
|
Land
|
1,338,518
|
-
|
1,338,518
|
Hotel
and club building and improvements
|
6,819,032
|
5,446,810
|
1,372,222
|
Spa
building and improvements
|
2,261,197
|
305,153
|
1,956,044
|
Spa
F, F & E
|
429,457
|
210,913
|
218,544
|
|
10,848,204
|
5,962,876
|
4,885,328
|
Marina Properties
(Coconut Grove, FL):
|
|
|
|
Monty’s
marina - 132 slips and improvements (1)
|
3,465,479
|
685,189
|
2,780,290
|
Grove
Isle marina (6 slips company owned, 79 privately owned)
|
323,211
|
310,345
|
12,866
|
|
3,788,690
|
995,534
|
2,793,156
|
Land Held for
Development:
|
|
|
|
Hopkinton,
Rhode Island (approximately 50 acres)
|
27,689
|
-
|
27,689
|
|
27,689
|
-
|
27,689
|
|
|
|
|
Totals
|
$ 23,735,527
|
$ 8,104,248
|
$ 15,631,279
|
(1) The
Monty’s property is subject to a ground lease with the City of Miami, Florida
expiring in 2035. Lease payments due under the lease consist of
percentage rent ranging from 5% to 15% of gross revenues from various components
of the property.
|
December
31, 2006
|
|
|
Accumulated
|
|
|
Cost
|
Depreciation
|
Net
|
Commercial
Properties:
|
|
|
|
Monty’s
restaurant and retail mall (Coconut Grove, FL) - Building &
Improvements (1)
|
$5,685,946
|
$278,605
|
$5,407,341
|
Monty’s
restaurant and retail mall (Coconut Grove, FL) - furniture,
fixtures and equipment (F,F &E) (1)
|
1,293,570
|
201,059
|
1,092,511
|
Corporate
Office - (Coconut Grove, FL) – Building
|
640,186
|
166,716
|
473,470
|
Corporate
Office – (Coconut Grove, FL) – Land
|
325,000
|
-
|
325,000
|
Other
(Montpelier, Vermont) – Buildings
|
52,000
|
52,000
|
-
|
Other
(Montpelier, Vermont) - Land
|
87,535
|
-
|
87,535
|
|
8,084,237
|
698,380
|
7,385,857
|
Commercial Properties-
Construction in Progress:
|
|
|
|
Monty’s
restaurant and retail mall (Coconut Grove, FL) (1)
|
239,166
|
-
|
239,166
|
|
239,166
|
-
|
239,166
|
Grove Isle Hotel, club
and spa facility (Coconut Grove, FL):
|
|
|
|
Land
|
1,338,518
|
-
|
1,338,518
|
Hotel
and club building and improvements
|
6,819,032
|
5,078,618
|
1,740,414
|
Spa
building and improvements
|
2,255,931
|
192,143
|
2,063,788
|
Spa
F, F & E
|
426,662
|
135,882
|
290,780
|
|
10,840,143
|
5,406,643
|
5,433,500
|
Marina Properties
(Coconut Grove, FL):
|
|
|
|
Monty’s
marina - 132 slips and improvements (1)
|
3,465,478
|
439,420
|
3,026,058
|
Grove
Isle marina (6 slips company owned, 79 privately owned)
|
367,408
|
348,588
|
18,820
|
|
3,832,886
|
788,008
|
3,044,878
|
Land Held for
Development:
|
|
|
|
Hopkinton,
Rhode Island (approximately 50 acres)
|
27,689
|
-
|
27,689
|
|
27,689
|
-
|
27,689
|
|
|
|
|
Totals
|
$ 23,024,121
|
$ 6,893,031
|
$ 16,131,090
|
(1) The
Monty’s property is subject to a ground lease with the City of Miami, Florida
expiring in 2035. Lease payments due under the lease consist of
percentage rent ranging from 5% to 15% of gross revenues from various components
of the property.
4.
MONTY’S RESTAURANT, MARINA
AND OFFICE/RETAIL PROPERTY, COCONUT GROVE, FLORIDA
The
Company owns a 50% equity interest in two entities, Bayshore Landing, LLC
(“Landing”) and Bayshore Rawbar, LLC (“Rawbar”), (collectively, “Bayshore”)
which own and operate a restaurant, office/retail and marina property located in
Coconut Grove (Miami), Florida known as Monty’s (“Monty’s”). The other 50% owner
of Bayshore is The Christoph Family Trust (“CFT”). Members of CFT are
experienced real estate and marina operators. The Monty’s property is
subject to a ground lease with the City of Miami, Florida which expires on May
31, 2035. Under the lease Bayshore pays percentage rents ranging from
5% to 15% of gross revenues from various components of the
project. Total rent paid for the years ended December 31, 2007 and
2006 was approximately $826,000 and $721,000, respectively.
The
Monty’s property consists of a two story building with approximately 40,000
rentable square feet and approximately 3.7 acres of submerged land with a
132-boat slip marina. It includes a 16,000 square foot indoor-outdoor raw bar
restaurant and 24,000 square feet of office/retail space of which approximately
18,000 are presently leased to tenants operating boating and marina related
businesses. Total cost of improvements to the Monty’s property since
its acquisition in 2004 is approximately $4.9 million. As of December 31, 2007
there are approximately 4,000 square feet of potential leased retail space to be
developed.
The
excess of capitalized cost assigned to specific assets over the 2004 purchase
price of Monty’s is approximately $7,729,000 and was recorded as
goodwill. Since goodwill is an indefinite-lived intangible asset it
is reviewed for impairment at each reporting period or whenever an event occurs
or circumstances change that would more likely than not reduce fair value below
carrying amount. Goodwill is carried at historical cost if its estimated fair
value is greater than its carrying amounts. However, if its estimated
fair value is less than the carrying amount, goodwill is reduced to its
estimated fair value through an impairment charge to the consolidated statements
of comprehensive income. There was no impairment of goodwill at
December 31, 2007 and 2006.
Since
acquisition in August 2004 improvements were made to the Monty’s property
totaled approximately $5.6 million. These improvements primarily
consisted of the expansion of the restaurant to provide an indoor area,
improvements to the office/retail space which includes approximately 18,000
square feet leased as of December 31, 2007 and parking lot and landscaping
improvement to the property.
In
December 2006 certain fixed assets (primarily the parking lot and air
conditioning systems) were replaced and a loss on the abandonment of these
assets of approximately $624,000 was incurred (the Company’s portion, net of
minority interest was $312,000).
The
Monty’s property was purchased with proceeds from a bank loan secured by the
property in the amount of $10.1 million plus approximately $3.9 million in
cash. The $10.1 million bank loan is part of a $13.275 million
acquisition and construction loan. As of December 31, 2007 and 2006
the outstanding balance of the loan was $12.4 million and $12.7 million,
respectively. The original terms of the loan called for interest only payments
until August 2005. In August
2005, the
loan was modified to allow for the continuance of interest only payments through
April 2006. At that time, and upon conversion to permanent terms,
monthly principal payments necessary to fully amortize the principal amount over
the remaining 15 years of the loan, plus accrued interest were made. The
outstanding principal balance of the bank loan bears interest at a rate of 2.45%
per annum in excess of the LIBOR Rate. However, Bayshore entered into
an interest rate swap agreement with the same lender to manage its exposure to
interest rate fluctuation through the entire term of the
mortgage. The effect of the swap agreement is to provide a fixed
interest rate of 7.57%.
Effective
from August 20, 2004 (date of acquisition) through March 31, 2007, the
operations of Monty’s restaurant were managed by RMI, Inc.
(“RMI”). The principal of RMI was the principal of the seller and
operated this restaurant since 1992. For the years ended December 31,
2007 and 2006 Rawbar paid RMI $300,000. Effective April 1, 2007 the
Company amended the restaurant management contract with RMI 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. RMI continues to perform accounting and
certain administrative services and was paid $15,000 per month from April 1
through December 31, 2007. Effective January 1, 2008 RMI will be paid
$9,000 per month for these accounting services. RMI is also a tenant
of Landing and pays monthly base rent of $1,500. Essentially all
employees of RMI as of March 31, 2007 were hired by Rawbar and there was no
disruption in operations as a result of the change in management.
Summarized
combined statements of income for Landing and Rawbar for the years ended
December 31, 2007 and 2006 are 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 year ended
December
31, 2007
|
For
the year ended
December
31, 2006
|
|
|
|
|
Revenues:
|
|
|
|
Food
and Beverage Sales
|
|
$6,344,000
|
$6,369,000
|
Marina
dockage and related
|
|
1,244,000
|
1,221,000
|
Retail/mall
rental and related
|
|
371,000
|
316,000
|
Total
Revenues
|
|
7,959,000
|
7,906,000
|
|
|
|
|
Expenses:
|
|
|
|
Cost
of food and beverage sold
|
|
1,720,000
|
1,810,000
|
Labor
and related costs
|
|
1,233,000
|
1,090,000
|
Entertainers
|
|
218,000
|
213,000
|
Other
food and beverage related costs
|
|
568,000
|
561,000
|
Other
operating costs
|
|
380,000
|
389,000
|
Repairs
and maintenance
|
|
392,000
|
377,000
|
Insurance
|
|
645,000
|
508,000
|
Management
fees
|
|
398,000
|
395,000
|
Utilities
|
|
311,000
|
413,000
|
Ground
rent
|
|
826,000
|
721,000
|
Interest
|
|
972,000
|
996,000
|
Depreciation
|
|
698,000
|
501,000
|
Loss
on abandonment/disposal-fixed assets (a)
|
|
-
|
624,000
|
Total
Expenses
|
|
8,361,000
|
8,598,000
|
|
|
|
|
Net
loss before minority interest
|
|
($402,000)
|
($692,000)
|
(a) During 2006 certain fixed assets
of Bayshore (primarily the parking lot and air conditioning systems) were
replaced and a loss on the abandonment of the replaced assets of approximately
$624,000 was incurred (before minority interest).
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 (see table below). These securities
are stated at market value, as determined by the most recently 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 and losses
on this portfolio are recorded in the consolidated statements of comprehensive
income. For the years ended December 31, 2007 and 2006 net unrealized (loss)
gain on trading securities were approximately ($135,000) and $248,000,
respectively.
|
December
31, 2007
|
|
December
31, 2006
|
|
Cost
|
|
Fair
|
|
Unrealized
|
Cost
|
|
Fair
|
|
Unrealized
|
Description
|
Basis
|
|
Value
|
|
Gain (loss)
|
|
Basis
|
|
Value
|
|
Gain (loss)
|
Real
Estate Investment Trusts
|
$403,000
|
|
$588,000
|
|
$185,000
|
|
$180,000
|
|
$484,000
|
|
$304,000
|
Mutual
Funds
|
1,014,000
|
|
1,129,000
|
|
115,000
|
|
1,046,000
|
|
1,229,000
|
|
183,000
|
Other
Equity
Securities
|
1,558,000
|
|
1,823,000
|
|
265,000
|
|
1,425,000
|
|
1,755,000
|
|
330,000
|
Total
Equity
Securities
|
2,975,000
|
|
3,540,000
|
|
565,000
|
|
2,651,000
|
|
3,468,000
|
|
817,000
|
Corporate
Debt
Securities
(a)
|
865,000
|
|
847,000
|
|
(18,000)
|
|
886,000
|
|
828,000
|
|
(58,000)
|
Government
Debt
Securities
(a)
|
500,000
|
|
431,000
|
|
(69,000)
|
|
1,406,000
|
|
1,260,000
|
|
(146,000)
|
Total
Debt
Securities
|
1,365,000
|
|
1,278,000
|
|
(87,000)
|
|
2,292,000
|
|
2,088,000
|
|
(204,000)
|
Total
|
$4,340,000
|
|
$4,818,000
|
|
$478,000
|
|
$4,943,000
|
|
$5,556,000
|
|
$613,000
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) As
of December 31, 2007, corporate and government debt securities are scheduled to
mature as follows:
|
|
Cost
|
|
Fair Value
|
2008
– 2012
|
|
$331,000
|
|
$340,000
|
2013-2017
|
|
393,000
|
|
394,000
|
2018
– thereafter
|
|
641,000
|
|
544,000
|
|
|
$1,365,000
|
|
$1,278,000
|
Net gain
from investments in marketable securities for the years ended December 31, 2007
and 2006 is summarized below:
Description
|
2007
|
2006
|
Net
realized gain from sales of securities
|
$249,000
|
$223,000
|
Unrealized
net gain (loss) in marketable securities
|
(135,000)
|
248,000
|
Total
net gain
|
$114,000
|
$471,000
|
Net
realized gain from sales of marketable securities consisted of approximately
$516,000 of gains net of $267,000 of losses for the year ended December 31,
2007. The comparable amounts in fiscal year 2006 were gains of
approximately $436,000 net of $213,000 of losses.
Approximately
$140,000 and $64,000 of net realized gains in fiscal years 2007 and 2006,
respectively, were recognized from the sale of stock distributions from the
Company’s investments in privately held partnerships included in other
investments.
Consistent
with the Company’s overall current investment objectives and activities the
entire marketable securities portfolio is classified as trading (versus
available for sale, as defined by generally accepted accounting
principles). Unrealized gains or loss of marketable securities on
hand are recorded 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.
6. 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.
As of
December 31, 2007 and 2006, the Company’s portfolio of other investments
includes approximately 30 investments with an aggregate carrying value of $4.6
million and $4.3 million, respectively. The Company has committed to
fund 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 loss valuation
adjustments. During the years ended December 31, 2007 and 2006 the
Company contributed approximately $1.3 million and $831,000, respectively,
toward these commitments and received distributions from these investments
(including stock distributions) of $1.6 million and $1.8 million,
respectively.
The
Company made initial or full commitment contributions to two new investments in
2007. This included a total of $158,000 in two partnerships. One in
real estate and the other in international growth opportunities.
The
Company’s other investments are summarized below.
|
Carrying
values as of December 31,
|
Investment Focus
|
2007
|
|
2006
|
Venture
capital funds – technology and communications
|
$562,000
|
|
$637,000
|
Venture
capital funds – diversified businesses
|
1,009,000
|
|
516,000
|
Restaurant
development, operation and franchising
|
125,000
|
|
200,000
|
Real
estate and related
|
1,368,000
|
|
1,356,000
|
Stock
and debt funds
|
1,555,000
|
|
1,430,000
|
Other
|
5,000
|
|
155,000
|
Totals
|
$4,624,000
|
|
$4,294,000
|
|
|
|
|
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. For the years ended
December 31, 2007 and 2006, valuation losses were approximately $514,000 and
$383,000 (as restated), respectively, and discussed below.
Net gain
from other investments (including valuation losses) is as follows:
Net gain from other
investments is summarized below:
|
2007
|
2006 (as restated)
|
Venture
capital funds – diversified businesses (a)
|
$581,000
|
$404,000
|
Restaurant
development & operation (b)
|
(150,000)
|
(383,000)
|
Real
estate and related (c)
|
(6,000)
|
148,000
|
Venture
capital funds – technology & communications (d)
|
(125,000)
|
50,000
|
Income
from investment in 49% owned affiliate (e)
|
107,000
|
91,000
|
Other
(f)
|
320,000
|
6,000
|
Totals
|
$727,000
|
$316,000
|
(a)
|
In
2007 and 2006 amounts consist primarily of gains of approximately $438,000
and $226,000, respectively, on distributions from the Company’s investment
in two limited partnerships which own interests in various diversified
businesses, primarily in the manufacturing and production related
sectors. Also in 2007 and 2006 gains of approximately $143,000
and $178,000, respectively were recognized on distributions from a private
capital fund that invests in equities, debt or debt like securities of
distressed companies. The Company’s ownership percentage in all of these
investments is less than 1% of the total ownership and in each case gains
are only recognized after the total investment cost has been
recovered.
|
(b)
|
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. This
franchise entity was restructured in a reverse merger in which the Company
invested an additional $75,000 in December 2007. In December
2006 the Company elected to write off its entire 10% equity interest in a
restaurant located in Key West, Florida and recognized a loss of $383,000
(as restated – Reference is made to Form 8-K filed February 12, 2008)
. The restaurant was sold in February 2007 and proceeds from
the sale were not sufficient for the Company to recover its
investment.
|
(c)
|
In
December 2007 the Company elected to write off a $200,000 investment in a
real estate project located in Jacksonville, Florida as a result of
declining market conditions relating to projects of this sort (i.e. 256
unit apartment community with highly leveraged financing). The
Company had made its initial investment in this project in February 2006
and its investment represented approximately 1% of the total
project. As an offset to this loss the Company received
distributions from other real estate funds in excess of their carrying
value and recognized gains of approximately $194,000. The 2006
gain amount of $148,000 primarily consisted of gains on the distribution
of proceeds from the Company’s investment in a real estate
fund.
|
(d)
|
In
December 2007 the Company elected to write down its investment in
partnership having investments in technology and communications by
$164,000 as a result of an other than temporary decline in value based on
the general manager’s year end valuation of the partnerships investments.
In January 2007 the Company received a final cash distribution of $48,000
from its investment in another partnership having investments in
technology and recognized the amount as a gain. The 2006 gain
of $50,000 was also from a distribution from a technology
partnership.
|
(e)
|
This
gain represents income from the Company’s 49% owned affiliate, T.G.I.F.
Texas, Inc. The increase from the prior year is primarily as a result of
increased interest income. In December 2007 T.G.I.F. Texas
declared and paid a cash dividend of $.05 per share and the Company
received approximately $140,000 which was recorded as reduction in the
investment carrying value as required under the equity method of
accounting for investments.
|
(f)
|
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”).
|
Other
investments give rise to exposure resulting from credit risks and the volatility
in capital markets. The Company attempts to mitigate its risks by
diversifying its investment portfolio. 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.
7. 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 owns one net
leased property in Louisiana and holds promissory notes receivable from its
shareholders, including CII and Maurice Wiener, the Chairman of the Company and
T.G.I.F. Reference is made to Notes 8 and 10 for discussion on notes
payable by CII to T.G. I.F. and notes payable by Mr. Wiener to T.G.I.F. This
investment is recorded under the equity method of accounting. For the
years ended December 31, 2007 and 2006 income from investment in affiliate
amounted to approximately $107,000 and $91,000, respectively and is included in
gain from other investments in the consolidated statements of comprehensive
income. In December 2007 T.G.I.F. declared and paid a cash dividend
of $.05 per share. CII’s received $140,000 from this dividend and it
was recorded as a reduction in the carrying amount of CII investment in T.G.I.F.
as required under the equity method of accounting.
8. LOANS,
NOTES AND OTHER RECEIVABLES
|
As of December 31,
|
Description
|
2007
|
2006
|
Promissory
note and accrued interest due from principal of Grove Isle tenant
(a)
|
$500,000
|
$510,000
|
Various
mortgage loan participations
|
111,000
|
212,000
|
Promissory
note and accrued interest due from individual (b)
|
402,000
|
-
|
Other
|
206,000
|
176,000
|
Promissory
note and accrued interest due from Key West restaurant operator
(c)
|
-
|
1,013,000
|
Total
loans, notes and other receivables
|
$1,219,000
|
$1,911,000
|
(a)
|
In
1997, GIA advanced $500,000 to the principal owner of the tenant of the
Grove Isle property. GIA received a promissory note bearing interest at 8%
per annum with interest payments due quarterly beginning on July 1,
1997. All principal and accrued interest was received at
maturity (as extended) on January 31,
2008.
|
(b)
|
In
December 2007 the Company loaned $400,000 to an a local real estate
developer who is well known to the Company and which loan is secured by
numerous real estate interests. The loan calls for interest
only payments at an annual rate of 9% with all principal due on June 30,
2008.
|
(c)
|
In
July 2004 the Company loaned $1 million to an entity which owned and
operated a restaurant in Key West, Florida. In February 2007
the restaurant was sold and the Company was repaid the $1 million loan
plus accrued and unpaid interest of approximately
$26,000.
|
9.
NOTES AND ADVANCES DUE FROM AND TRANSACTIONS WITH RELATED
PARTIES
The
Company has an agreement (the "Agreement") with HMG Advisory Corp. (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
Company has one employee who is a vice president of CII. This
employee assumed the responsibilities of the prior project manager of one of the
Company’s properties.
The
Adviser is majority owned by Mr. Wiener, the Company’s Chairman, with the
remaining shares owned by certain officers including Mr.
Rothstein. The officers and directors of the Adviser are as follows:
Maurice Wiener, Chairman of the Board and Chief Executive Officer; Lawrence I.
Rothstein, President, Treasurer, Secretary and Director; 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.
On August
16, 2007, the shareholders approved the renewal and amendment of the Advisory
Agreement between the Company and the Adviser for a term commencing January 1,
2008, and expiring December 31, 2008. The amendment to the Advisory
Agreement increased the Advisor’s regular compensation to $85,000 per month, or
$1,020,000 per year. This is an increase of $10,000 per month, or
$120,000 per year over the 2007 compensation.
For the
years ended December 31, 2007 and 2006, the Company and its subsidiaries
incurred Adviser fees of approximately $989,000 and $965,000, respectively, of
which $900,000 represented regular compensation and approximately $89,000 and
$65,000 represented incentive compensation for 2007 and 2006, respectively. The
Adviser is also the manager for certain of the Company's affiliates and received
management fees of approximately $41,000 and $33,000 in 2007 and 2006,
respectively for such services. Included in fees for 2007 and 2006 was $25,000
of management fees earned relating to management of the Monty’s restaurant
operations.
At
December 31, 2006, the Company had amounts due from the Adviser of approximately
$184,000. And as of December 31, 2006 the Company had amounts due from Courtland
Group, Inc. (CGI) (the former adviser) of approximately $253,000. In November
2007 CGI merged with the Advisor and as of December 31, 2007 the Advisor and its
subsidiaries had amounts due to the Company of $400,000. In December
the Advisory made a principal payment to the Company of $40,000. The amount due
from the Adviser and subsidiaries bears interest at prime plus 1% and is due on
demand.
The
Adviser leases its executive offices from CII pursuant to a lease
agreement. This lease agreement is at the going market rate for
similar property and calls for base rent of $48,000 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. The lease term is five years, expiring in November
2009.
In August
2004 HMG Advisory Bayshore, Inc. (“HMGABS”) (a wholly owned subsidiary of the
Adviser) was formed for the purposes of overseeing the Monty’s restaurant
operations acquired in August 2004. For the years ended December 31,
2007 and 2006 HMGABS earned approximately $25,000, in such management
fees.
The
Company, via its 75% owned joint venture (SBA), has a note receivable from
Transco (a 46% shareholder of the Company) of $300,000. This note
bears interest at the prime rate and is due on demand.
Mr.
Wiener is an 18% shareholder and the chairman and director of T.G.I.F. Texas,
Inc., a 49% owned affiliate of CII (See Note 6). As of December 31,
2007 and 2006, T.G.I.F. had amounts due from CII in the amount of approximately
$3,661,000. These amounts are due on demand and bear interest at the
prime rate. All interest due has been paid. T.G.I.F. also owns 10,000
shares of the Company’s common stock it purchased at market value in
1996.
As of
December 31, 2007 and 2006, 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 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 $52,000 and
$56,000 for the years ended December 31, 2007 and 2006,
respectively.
The
Company’s other assets consisted of the following as of December 31, 2007 and
2006:
Description
|
2007
|
2006
|
Deferred
loan costs, net of accumulated amortization
|
$185,000
|
$203,000
|
Prepaid
expenses and other assets
|
266,000
|
241,000
|
Food/beverage
& spa inventory
|
89,000
|
82,000
|
Utility
deposits
|
76,000
|
75,000
|
Deferred
leasing costs
|
112,000
|
118,000
|
Total
other assets
|
$728,000
|
$719,000
|
|
11.
MORTGAGES AND NOTES PAYABLES
|
|
|
December
31,
|
|
|
2007
|
|
2006
|
Collateralized by Investment Properties (Note
2)
|
|
|
|
|
Monty’s
restaurant, marina and retail rental space:
Mortgage
loan payable with interest 7.57% after taking into effect interest rate
swap; principal and interest payable in equal monthly principal payments
of approximately $127,000 per month until maturity on 2/19/21. See (a)
below.
|
|
$12,382,000
|
|
$12,907,000
|
Grove
Isle hotel, private club, yacht slips and spa:
Mortgage
loan payable with interest at 1-month LIBOR plus 2.5% (7.3% as of
12/31/07). Monthly payments of principal of $10,000 with
all unpaid principal and interest payable at maturity on
9/29/10.
|
|
3,939,000
|
|
4,059,000
|
Office
building:
Mortgage
loan payable, interest fixed at 5.5% until 8/25/07. Monthly payment of
$3,137 in principal and interest. All unpaid principal and
interest was paid in September 2007.
|
|
-
|
|
304,000
|
Other (unsecured)
(Note 7):
|
|
|
|
|
Note
payable to affiliate:
Note
payable is to affiliate T.G.I.F., interest at prime (7.25% at 12/31/07)
payable monthly. Principal outstanding is due on demand.
|
|
3,661,000
|
|
3,661,000
|
Totals
|
|
$19,982,000
|
|
$20,931,000
|
|
|
|
|
|
(a)
|
The
original loan obtained to acquire the Monty’s property was $10.1 million
plus a construction loan of $3.2 million. In 2006 the remaining
construction loan of $615,000 was drawn on and the period of interest only
payments concluded on 4/19/06. The loan is guaranteed by the Company
as well as a personal guaranty from the trustee of CFT. The loan
includes certain covenants including debt service coverage with which the
company was not in compliance as of December 31, 2007. On March
13, 2008, the Company obtained a notice of forbearance from the
bank, which expires on June 13, 2008, in which the bank has agreed to
not declare an event of default during the forbearance period. The
Company is in the process of restructuring the loan agreement to provide
compliance with the debt service coverage covenant on a going forward
basis. In the event a restructuring agreement is not
reached, the Company will take appropriate action to comply with the
covenant, and expects this will be accomplished without full repayment of
the loan.
|
See
Note 12 for discussion of interest rate swap agreement related to this
loan.
A summary
of scheduled principal repayments or reductions for all types of notes and
mortgages payable is as follows:
Year ending December
31
,
|
|
Amount
|
|
2008
|
|
$
|
4,345,000
|
|
2009
|
|
|
727,000
|
|
2010
|
|
|
4,362,000
|
|
2011
|
|
|
715,000
|
|
2012
|
|
|
768,000
|
|
2013
and thereafter
|
|
|
9,065,000
|
|
Total
|
|
$
|
19,982,000
|
|
12. 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 December 31, 2007 and 2006 the
fair value (net of 50% minority interest) of the cash flow hedge was a loss of
approximately $262,000 and $22,000, respectively, which has been recorded as
other comprehensive loss and will be reclassified to interest expense over the
life of the swap contract.
13. LEASE
COMMITMENTS
The
Company’s 50% owned subsidiary (Landing), as lessee, leases land and submerged
lands on which it operates the Monty’s property under a lease with the City of
Miami which expires on May 31, 2035. Under the lease, the Company
pays percentage rents ranging from 5% to 15% of gross revenues from various
components of the property’s operations. Total rent paid to the City
of Miami for the years ended December 31, 2007 and 2006 was approximately
$826,000 and $721,000, respectively.
14. INCOME
TAXES
The
Company (excluding CII) 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
Company’s 95%-owned 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 Statement of Financial
Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. SFAS
No. 109 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. Under SFAS No. 109, 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 a result of
timing differences associated with the carrying value of other investments and
depreciable assets and the future benefit of a net operating loss, the Company
has recorded a net deferred tax asset as of December 31, 2007 and 2006 of
$233,000 and $76,000, respectively. A valuation allowance against
deferred tax asset has not been established as it is more likely than not, based
on the Company’s previous history, that these assets will be
realized.
As of
December 31, 2007 the Company (excluding CII) has an estimated net operating
loss carryover of approximately $1.66 million of which $304,000 expires in 2027,
$786,000 expires in 2026 and $571,000 in 2025.
As of
December 31, 2007 CII has estimated net operating loss carryover of
approximately $193,000 of which $12,000 expires in 2026, $15,000 expires in 2024
and $166,000 expires in 2022.
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, 2007 and
2006 were as follows:
|
|
2007
|
|
|
2006(as
restated)
|
|
Loss
before income taxes
|
|
$
|
(600,000
|
)
|
|
$
|
(532,000
|
)
|
Computed
tax at federal statutory rate of 34%
|
|
$
|
(204,000
|
)
|
|
$
|
(181,000
|
)
|
State
taxes at 5.5%
|
|
|
(33,000
|
)
|
|
|
(29,000
|
)
|
REIT
related adjustments – current year
|
|
|
83,000
|
|
|
|
136,000
|
|
Investment
write offs for book in excess of tax
|
|
|
203,000
|
|
|
|
151,000
|
|
Recaptured
tax loss from investments
|
|
|
348,000
|
|
|
|
-
|
|
Utilization
of net operating loss carry forward
|
|
|
(390,000
|
)
|
|
|
-
|
|
Other
items, net
|
|
|
(164,000
|
)
|
|
|
(65,000
|
)
|
(Benefit
from) provision for income taxes
|
|
$
|
(157,000
|
)
|
|
$
|
12,000
|
|
The REIT
related adjustments – current year represents the difference between estimated
taxes on undistributed income and/or capital gains and book taxes computed on
the REIT’s income before income taxes. In 2007 the Company incurred
valuation losses from other investments of approximately $514,000 which are not
deductible for tax purposes in the current year. The estimated tax
effect of these book losses was $203,000. Also, in 2007 the
Company had taxable income in excess of book as a result of recaptured of tax
losses from its investment and note receivable from its Key West restaurant
which was sold in February 2007. The estimated tax effect of this
recapture was approximately $348,000.
The
(benefit from) provision for income taxes in the consolidated statements of
comprehensive income consists of the following:
Year
ended December 31,
|
2007
|
2006
|
Current:
|
|
|
Federal
|
-
|
-
|
State
|
-
|
-
|
|
-
|
-
|
Deferred:
|
|
|
Federal
|
($141,000)
|
$11,000
|
State
|
(16,000)
|
1,000
|
|
(157,000)
|
12,000
|
Total
|
($157,000)
|
$12,000
|
As of
December 31, 2007 and 2006, the components of the deferred tax assets and
liabilities are as follows:
|
|
As
of December 31, 2007
|
|
|
As
of December 31, 2006
|
|
|
|
Deferred
tax
|
|
|
Deferred
tax
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Net
operating loss carry forward
|
|
$
|
73,000
|
|
|
|
|
|
$
|
457,000
|
|
|
|
|
Excess
of book basis of 49% owned
corporation
over tax basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
702,000
|
|
|
|
|
|
|
|
672,000
|
|
Excess
of tax basis over book basis
of investment property
|
|
|
260,000
|
|
|
|
|
|
|
|
246,000
|
|
|
|
|
|
Unrealized
gain/loss on marketable securities
|
|
|
|
|
|
|
94,000
|
|
|
|
|
|
|
|
111,000
|
|
Excess
of tax basis over book basis of other investments
|
|
|
758,000
|
|
|
|
62,000
|
|
|
|
544,000
|
|
|
|
388,000
|
|
Totals
|
|
$
|
1,091,000
|
|
|
$
|
858,000
|
|
|
$
|
1,247,000
|
|
|
$
|
1,171,000
|
|
15. STOCK-BASED
COMPENSATION
In
November 2000, the Company’s Board of Directors authorized the 2000 Stock Option
Plan, which was approved by the shareholders in June 2001. The Plan provides for
the grant of options to purchase up to 120,000 shares of the Company’s common
stock to the officers and directors of the Company. Under the 2000
Plan, options are vested immediately upon grant and may be exercised at any time
within ten years from the date of grant. Options are not transferable
and expire upon termination of employment, except to a limited extent in the
event of retirement,
disability
or death of the grantee. On June 25, 2001, options were granted to
all officers and directors to purchase an aggregate of 86,000 common shares at
no less than 100% of the fair market value at the date of grant.
The average exercise
price of the options granted in 2001 was $7.84 per share. The
Company’s stock price on the date of grant was $7.57 per share.
There
were no options granted or exercised in 2007 and 2006. There were no
options forfeited in 2007 and 5,000 options were forfeited in 2006.
A summary
of the status of the Company’s stock option plan as of December 31, 2007 and
2006, and changes during the years ending on those dates are presented
below:
|
As
of December 31, 2007
|
As
of December 31, 2006
|
|
Shares
|
Weighted-Average
Exercise
Price
|
Shares
|
Weighted-Average
Exercise
Price
|
|
|
|
|
|
Outstanding
at beginning of year
|
102,100
|
$8.83
|
107,100
|
$8.77
|
Granted
|
--
|
--
|
--
|
--
|
Exercised
|
--
|
--
|
--
|
--
|
Forfeited
|
--
|
--
|
(5,000)
|
$7.57
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at end of year
|
102,100
|
$8.83
|
102,100
|
$8.83
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
102,100
|
$8.83
|
102,100
|
$8.83
|
Weighted
average fair value of
options
granted during the year
|
--
|
--
|
--
|
--
|
16. OPERATING
LEASES AS LESSOR
Lease of Grove Isle hotel
property
. In November 1996, the Company entered into a
long-term lease and a Master Agreement with Westgroup Grove Isle Associates,
Ltd. (“Westgroup”), an affiliate of Noble House Resorts, Inc. which is a
national operator of hotels and resorts. The Master Agreement, among
other things, transferred the operations of the Grove Isle hotel and club to
Westgroup.
The term
of the lease with Westgroup (as amended in 2004, see below) expires in November
2016 and calls for annual net base rent (as amended in 1999), of $918,400, plus
real estate taxes and property insurance, payable in monthly
installments. In addition to the base rent Westgroup pays GIA
participation rent consisting of a portion of Westgroup’s operating surplus, as
defined in the lease agreement. Participation rent is due at end of
each lease year. There has been no participation rent since the
inception of the lease. The lease also calls for an increase in base
rent commencing January 1, 2002 in accordance with changes in the Consumer Price
Index (“CPI”). Base rent for 2007 was approximately $1,105,000
increasing to $1,137,000 in 2008. Participation rent if due will be
reduced by the amount by which base rent increases solely as a result of CPI
increases for the lease year.
In
September 2004 the Company entered into an agreement with Noble House
Associates, LLC (“NHA”), an affiliate of the Westgroup, for the purpose of
developing and operating on the Grove Isle property, a commercial project
consisting of a first class spa, together with related improvements and
amenities (the “Grove Isle Spa”). A subsidiary of the Company, CII
Spa, LLC (“CIISPA”) and NHA formed a Delaware limited liability company, Grove
Spa, LLC (“GS”) which is owned 50% by CIISPA and 50% by NHA. Construction of the
Grove Isle Spa was completed in the first quarter of 2005 and operations
commenced in March 2005. GS sub-leases the Grove Isle Spa property from
Westgroup. The initial term of the sublease commenced on September
15, 2004 and ends on November 30, 2016, with the GS having the right to extend
the term for two additional consecutive 20 year terms on the same terms as the
original sublease. Annual base rent of the sublease is $10,000, plus
GS shall pay real estate taxes, insurance, utilities and all other costs
relating to Grove Isle Spa.
In
conjunction with the development of Grove Isle Spa, the Company amended and
restated its lease with Westgroup to extend the term of the lease from December
31, 2006 to December 31, 2016 including two options to extend the lease term
each for an additional 20 years. Furthermore, the lease’s termination payment,
as defined, was amended and restated to mean 50% of the amount by which the
value of the leased property on the date of termination, as amended, exceeds
$11,480,000, plus the value of NHA’s percentage ownership interest in
GS.
Lease of Monty’s
property.
Bayshore, as landlord, leases various office and
dock space under non-cancelable operating leases that expire at various dates
through 2035. Annual minimum lease payments due from leases to
non-combined, third party tenants under non-cancelable operating leases are
included in the table below.
Minimum lease payments
receivable
. The Company leases its commercial and
industrial properties under agreements for which substantially all of the leases
specify a base rent and a rent based on tenant sales (or other benchmark)
exceeding a specified percentage. There was no percentage rent in
2007 and 2006.
These
leases are classified as operating leases and generally require the tenant to
pay all costs associated with the property. Minimum annual rentals on
non-cancelable leases in effect at December 31, 2007, are as
follows:
Year ending December
31
,
|
|
Amount
|
|
2008
|
|
$
|
1,947,000
|
|
2009
|
|
|
1,959,000
|
|
2010
|
|
|
1,941,000
|
|
2011
|
|
|
1,718,000
|
|
2012
|
|
|
1,711,000
|
|
Subsequent
years
|
|
|
7,944,000
|
|
Total
|
|
$
|
17,220,000
|
|
17. 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,
receivables and the Grove Isle spa operations which individually do not meet the
criteria as a reportable segment.
|
|
|
For
the years ended December 31,
|
|
|
|
|
2007
|
2006
|
|
Net
Revenues:
|
|
|
(as
restated)
|
|
|
Real
estate rentals
|
$ 3,258,839
|
$ 3,071,580
|
|
|
Food
and beverage sales
|
6,344,133
|
6,369,018
|
|
|
Spa
revenues
|
|
740,890
|
621,378
|
|
|
Total
Net Revenues
|
|
$ 10,343,862
|
$ 10,061,976
|
|
|
|
|
|
|
|
(Loss) income before
income taxes and sales of property:
|
|
|
|
|
Real
estate and marina rentals
|
$ 152,255
|
$ (538,499)
|
|
|
Food
and beverage sales
|
(95,453)
|
15,176
|
|
|
Other
investments and related income
|
(656,398)
|
(265,424)
|
|
|
Total
loss before sales of properties and income taxes
|
$ (599,596)
|
$ (788,747)
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 31,
|
|
Identifiable
Assets:
|
|
2007
|
2006
|
|
|
Real
estate rentals
|
$ 15,894,385
|
$ 16,751,352
|
|
|
Food
and beverage sales
|
1,014,080
|
646,824
|
|
|
Other
investments and related income
|
16,776,127
|
17,598,202
|
|
|
Total
Identifiable Assets
|
$ 33,684,592
|
$ 34,996,378
|
|
|
|
|
|
|
|
A
summary of changes in the Company’s goodwill during the years ended
December 31, 2007 and 2006 is as follows:
|
|
|
|
|
Summary of changes in
goodwill:
|
|
01/01/07
|
Acquisitions
|
12/31/07
|
|
|
Real
estate rentals
|
$ 4,776,291
|
-
|
4,776,291
|
|
Food
& Beverage sales
|
2,952,336
|
-
|
2,952,336
|
|
Other
investments and related income
|
-
|
-
|
-
|
|
Total
goodwill
|
|
$ 7,728,627
|
-
|
7,728,627
|
|
|
|
|
|
|
|
|
|
01/01/06
|
Acquisitions
|
12/31/06
|
|
Real
estate rentals
|
$ 4,776,291
|
-
|
4,776,291
|
|
Food
& Beverage sales
|
2,952,336
|
-
|
2,952,336
|
|
Other
investments and related income
|
-
|
-
|
-
|
|
Total
goodwill
|
|
$ 7,728,627
|
-
|
7,728,627
|