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-Q, 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 consolidated 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, 2013. The balance sheet as of December 31, 2013 was derived from audited consolidated financial
statements as of that date. The results of operations for the three and six months ended June 30, 2014 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. Amounts in footnotes are
rounded to the nearest thousands.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the consolidated financial
statements and footnotes thereto included in the HMG/Courtland Properties, Inc. Annual Report on Form 10-K for the year ended
December 31, 2013 for recent accounting pronouncements.
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue
recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services
are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those
goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and
estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective
for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods:
(i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to
elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09
recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of
our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we
will adopt the standard in 2017.
The Company does not believe that
any other recently issued, but not yet effective accounting standards, if currently adopted, will have a material effect on the
Company's consolidated financial position, results of operations and cash flows.
3.
INVESTMENTS IN MARKETABLE
SECURITIES
Investments in marketable securities
consist primarily of large capital corporate equity and debt securities in varying industries or issued by government agencies
with readily determinable fair values. These securities are stated at market value, as determined by the most recent traded price
of each security at the balance sheet date. Consistent with the Company’s overall current investment objectives and activities,
its entire marketable securities portfolio is classified as trading.
In April 2014, the Company purchased
approximately $3.5 million of preferred equity of large capital real estate investment trusts (REITS), consisting of approximately
20 preferred stock positions with no one position exceeding $400,000 in value as of June 30, 2014.
In March 2014, the Company purchased
approximately $3.5 million of marketable securities consisting of approximately 50 common stock positions in large capital REITS.
No one stock position of this purchase exceeds $400,000 in value as of June 30, 2014.
Net realized and unrealized gain
(loss) from investments in marketable securities for the three and six months ended June 30, 2014 and 2013 is summarized below:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
Description
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net realized gain from sales of securities
|
|
$
|
34,000
|
|
|
$
|
11,000
|
|
|
$
|
46,000
|
|
|
$
|
8,000
|
|
Unrealized net gain (loss) in trading securities
|
|
|
477,000
|
|
|
|
(81,000
|
)
|
|
|
592,000
|
|
|
|
25,000
|
|
Total net gain (loss) from investments in marketable securities
|
|
$
|
511,000
|
|
|
($
|
70,000
|
)
|
|
$
|
638,000
|
|
|
$
|
33,000
|
|
For the three and six months ended
June 30, 2014, net unrealized gains from trading securities were $477,000 and $592,000, respectively. This is compared to net
unrealized (losses) gains of ($81,000) and $25,000 for the three and six months ended June 30, 2013, respectively. The increase
in unrealized gains was primarily from REIT marketable securities purchased in 2014.
For the three months ended June 30,
2014, net realized gain from sales of marketable securities was approximately $34,000, and consisted of approximately $46,000
of gross gains and $12,000 of gross losses. For the six months ended June 30, 2014, net realized gain from sales of marketable
securities was approximately $46,000, and consisted of approximately $80,000 of gross gains net of $34,000 of gross losses.
For the three months ended June 30,
2013, net realized gain from sales of marketable securities was approximately $11,000, consisted of all gains, no losses. For
the six months ended June 30, 2013, net realized gain from sales of marketable securities was approximately $8,000, and consisted
of approximately $31,000 of gross gains net of $23,000 of gross losses.
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.
4.
OTHER INVESTMENTS
As of June 30, 2014, the Company’s
portfolio of other investments had an aggregate carrying value of approximately $4 million and we have commitments to fund
approximately $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 six months ended June 30, 2014, cash distributions received from
other investments totaled approximately $211,000 from several investments in privately owned partnerships owning diversified operating
companies. During the six months ended June 30, 2014, the Company made contributions to other investments of approximately $847,000.
This consisted primarily of two new investments of $300,000 each, one of $100,000 and various follow on contributions totaling
approximately $147,000.
Net income from other investments
for the three and six months ended June 30, 2014 and 2013, is summarized below:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
Description
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Partnerships owning diversified businesses
|
|
$
|
74,000
|
|
|
$
|
14,000
|
|
|
$
|
77,000
|
|
|
$
|
40,000
|
|
Partnerships owning real estate and related
|
|
|
—
|
|
|
|
8,000
|
|
|
|
1,000
|
|
|
|
41,000
|
|
Income from investment in 49% owned affiliate (T.G.I.F. Texas, Inc.)
|
|
|
(2,000
|
)
|
|
|
32,000
|
|
|
|
6,000
|
|
|
|
62,000
|
|
Total net income from other investments (excluding other than temporary impairment losses)
|
|
$
|
72,000
|
|
|
$
|
54,000
|
|
|
$
|
84,000
|
|
|
$
|
143,000
|
|
The following tables present
gross unrealized losses and fair values for those investments that were in an unrealized loss position as of June 30, 2014 and
December 31, 2013, aggregated by investment category and the length of time that investments have been in a continuous loss
position:
|
|
As of June 30, 2014
|
|
|
|
12 Months or less
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
Investment Description
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Partnerships owning investments in technology related industries
|
|
|
—
|
|
|
|
—
|
|
|
$
|
370,000
|
|
|
$
|
(56,000
|
)
|
|
$
|
370,000
|
|
|
$
|
(56,000
|
)
|
Partnerships owning real estate and related investments
|
|
|
—
|
|
|
|
—
|
|
|
|
211,000
|
|
|
|
(7,000
|
)
|
|
|
211,000
|
|
|
|
(7,000
|
)
|
Other investments
|
|
$
|
231,000
|
|
|
$
|
(19,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
231,000
|
|
|
|
(19,000
|
)
|
Total
|
|
$
|
231,000
|
|
|
$
|
(19,000
|
)
|
|
$
|
581,000
|
|
|
$
|
(63,000
|
)
|
|
$
|
812,000
|
|
|
$
|
(82,000
|
)
|
|
|
As of December 31, 2013
|
|
|
|
Less than 12 Months
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
Investment Description
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Partnerships owning investments in technology related industries
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
346,000
|
|
|
$
|
(76,000
|
)
|
|
$
|
346,000
|
|
|
$
|
(76,000
|
)
|
Partnerships owning real estate and related investments
|
|
|
—
|
|
|
|
—
|
|
|
|
246,000
|
|
|
|
(11,000
|
)
|
|
|
246,000
|
|
|
|
(11,000
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
592,000
|
|
|
$
|
(87,000
|
)
|
|
$
|
592,000
|
|
|
$
|
(87,000
|
)
|
When evaluating the investments
for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has
been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell,
or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized
cost basis.
In accordance with ASC Topic
320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments there were no OTTI impairment valuation adjustments
for the three and six months ended June 30, 2014 and 2013.
5.
FAIR VALUE OF FINANCIAL
INSTRUMENTS
In accordance with ASC Topic
820, the Company measures cash and equivalents, marketable debt and equity securities at fair value on a recurring basis. Other
investments are measured at fair value on a nonrecurring basis.
The following are the major
categories of assets and liabilities measured at fair value on a recurring basis during the three and six months ended June 30,
2014 and for the year ended December 31, 2013, using quoted prices in active markets for identical assets (Level 1) and significant
other observable inputs (Level 2). For the periods presented, there were no major assets measured at fair value on a recurring
basis which uses significant unobservable inputs (Level 3):
Assets and liabilities measured
at fair value on a recurring basis are summarized below:
|
|
Fair value measurement at reporting date using
|
|
|
|
Total
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
Markets for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
2014
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
$
|
4,170,000
|
|
|
$
|
4,170,000
|
|
|
$
|
—
|
|
|
|
—
|
|
Money market mutual funds
|
|
|
1,502,000
|
|
|
|
1,502,000
|
|
|
|
—
|
|
|
|
—
|
|
Time deposits
|
|
|
55,000
|
|
|
|
—
|
|
|
|
55,000
|
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
11,076,000
|
|
|
|
11,076,000
|
|
|
|
—
|
|
|
|
—
|
|
Corporate debt securities
|
|
|
979,000
|
|
|
|
—
|
|
|
|
979,000
|
|
|
|
—
|
|
Total assets
|
|
$
|
17,782,000
|
|
|
$
|
16,748,000
|
|
|
$
|
1,034,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
Total
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Markets for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
2013
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
55,000
|
|
|
|
—
|
|
|
$
|
55,000
|
|
|
|
—
|
|
Money market mutual funds
|
|
|
1,257,000
|
|
|
$
|
1,257,000
|
|
|
|
—
|
|
|
|
—
|
|
U.S. T-bills
|
|
|
15,305,000
|
|
|
$
|
15,305,000
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
1,065,000
|
|
|
|
—
|
|
|
|
1,065,000
|
|
|
|
—
|
|
Marketable equity securities
|
|
|
3,658,000
|
|
|
|
3,658,000
|
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
21,340,000
|
|
|
$
|
20,220,000
|
|
|
$
|
1,120,000
|
|
|
$
|
—
|
|
Assets measured at fair value
on a nonrecurring basis are summarized below:
|
|
Fair value measurement at reporting date using
|
|
|
Total gains
|
|
|
|
Total
|
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
Significant
|
|
|
(losses) for three
|
|
|
|
June 30,
|
|
|
Markets for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
and six months ended
|
|
Description
|
|
2014
|
|
|
(Level 1)
|
|
|
(Level 2) (a)
|
|
|
(Level 3) (b)
|
|
|
6/30/2014
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments by investment focus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology & Communication
|
|
$
|
495,000
|
|
|
$
|
—
|
|
|
$
|
495,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Diversified businesses
|
|
|
1,132,000
|
|
|
|
—
|
|
|
|
1,132,000
|
|
|
|
—
|
|
|
|
—
|
|
Real estate and related
|
|
|
1,766,000
|
|
|
|
—
|
|
|
|
721,000
|
|
|
|
1,045,000
|
|
|
|
—
|
|
Other
|
|
|
625,000
|
|
|
|
—
|
|
|
|
|
|
|
|
625,000
|
|
|
|
—
|
|
|
|
$
|
4,018,000
|
|
|
$
|
—
|
|
|
$
|
2,348,000
|
|
|
$
|
1,670,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
Total
|
|
|
|
Total
|
|
|
Quoted
Prices in Active
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
losses
for
|
|
|
|
December
31,
|
|
|
Markets
for Identical Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
year ended
|
|
Description
|
|
2013
|
|
|
(Level
1)
|
|
|
(Level
2) (a)
|
|
|
(Level
3) (b)
|
|
|
12/31/2013
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments by investment focus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
& Communication
|
|
$
|
472,000
|
|
|
$
|
—
|
|
|
$
|
472,000
|
|
|
$
|
—
|
|
|
$
|
50,000
|
|
Diversified businesses
|
|
|
1,098,000
|
|
|
|
—
|
|
|
|
1,098,000
|
|
|
|
—
|
|
|
|
—
|
|
Real estate and related
|
|
|
1,409,000
|
|
|
|
—
|
|
|
|
462,000
|
|
|
|
947,000
|
|
|
|
—
|
|
Other
|
|
|
325,000
|
|
|
|
—
|
|
|
|
|
|
|
|
325,000
|
|
|
|
—
|
|
|
|
$
|
3,304,000
|
|
|
$
|
—
|
|
|
$
|
2,032,000
|
|
|
$
|
1,272,000
|
|
|
$
|
50,000
|
|
|
(a)
|
Other investments measured
at fair value on a non-recurring basis include investments in certain entities that calculate net asset value per share (or its
equivalent such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets
is attributed, “NAV”). This class primarily consists of private equity funds that have varying investment focus. These
investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are
received through the liquidation of the underlying assets of the fund. If these investments were held it is estimated that the
underlying assets of the fund would be liquidated over 5 to 10 years. As of June 30, 2014, it is probable that all of the investments
in this class will be sold at an amount different from the NAV of the Company’s ownership interest in partners’ capital.
Therefore, the fair values of the investments in this class have been estimated using recent observable information such as audited
financial statements and/or statements of partners’ capital obtained directly from investees on a quarterly or other regular
basis. During the six months ended June 30, 2014, the Company received distributions of approximately $211,000 from this type
of investment primarily from investments in diversified businesses and real estate. During the six months ended June 30, 2014,
the Company made contributions totaling $447,000 in this type of investment. As of June 30, 2014, the amount of the Company’s
unfunded commitments related to the aforementioned investments is approximately $1.8 million.
|
|
(b)
|
Other investments above
which are measured on a nonrecurring basis using Level 3 unobservable inputs consist of investments primarily in commercial real
estate in Florida through private partnerships, two investments in the stock of private banks in Florida and Texas, and others.
The Company does not know when it will have the ability to redeem the investments and has categorized them as a Level 3 fair value
measurement. The Level 3 real estate and related investments of approximately $1,045,000 include one investment in a commercial
building located near the Company’s offices purchased in 2005 with a carrying value as of June 30, 2014 of $724,000. These
investments are measured using primarily inputs provided by the managing member of the partnerships with whom the Company has
done similar transactions in the past and is well known to management. The fair values of these real estate investments have been
estimated using the net asset value of the Company’s ownership interest in partners’ capital. The fair values of these
investments have been estimated using the cost method less distributions received and other than temporary impairments. These
investments are valued using inputs provided by the management of the investee.
|
The activity in investments
classified within level 3 of the fair value hierarchy for the six months ended June 30, 2014 primarily consisted of contributions
to new investments.
6.
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.
As of June 30, 2014
the Company (excluding CII) had no net operating loss carryover, and it has estimated a tax loss of approximately $292,000 for
the six months ended June 30, 2014.
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.
As of June 30, 2014,
CII has an estimated net operating loss carryover of approximately $297,000. CII has no current provision or benefit for state
and federal income taxes for the six months ended June 30, 2014
The Company accounts
for income taxes in accordance with ASC Topic 740, “Accounting for Income Taxes”. ASC Topic 740 requires a Company
to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized
for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect
on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred
taxes only pertain to CII. As a result, primarily of timing differences associated with the carrying value of other investments
and the future benefit of a net operating loss, the Company has recorded a net deferred tax liability as of June 30, 2014 and
December 31, 2013 of $308,000 and $217,000, respectively. This increase of $91,000 is a deferred tax expense and was primarily
the result of a net increase in investments with book basis in excess of tax of approximately $245,000.
The provision
for income taxes in the consolidated statements of comprehensive income consists of the following:
Six months ended June 30,
|
|
2014
|
|
|
2013
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
144,000
|
|
State
|
|
|
—
|
|
|
|
75,000
|
|
|
|
|
—
|
|
|
|
219,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
82,000
|
|
|
$
|
764,000
|
|
State
|
|
|
9,000
|
|
|
|
85,000
|
|
|
|
|
91,000
|
|
|
|
849,000
|
|
Total
|
|
$
|
91,000
|
|
|
$
|
1,068,000
|
|
We adopted the provisions of ASC
Topic 740-10, “Accounting for Uncertainty in Income Taxes” on January 1, 2007. This topic clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC Topic 740, “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. Topic 740-10 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have
concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements.
Our evaluation was performed for the tax years ended since December 31, 2010 which are the tax years which remain subject
to examination by major tax jurisdictions as of June 30, 2014.
We may from time to time be assessed
interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial
to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in
the consolidated financial statements as selling, general and administrative expense.
7.
DISCONTINUED OPERATIONS
AND REAL ESTATE INTERESTS HELD FOR SALE
As previously reported, on February
25, 2013 the Company completed the sale of its interests in Grove Isle Associates LLLP, Grove Isle Yacht Club Associates, Grove
Isle Investments Inc. and CII Yacht Club, Inc., which represent interests in the Grove Isle hotel, club, tennis courts and marina
(collectively, the “Grove Isle Property”) to Grove Isle Yacht & Tennis, LLC, a Florida limited liability company
and an unrelated entity (“the Purchaser”), pursuant to a purchase agreement entered into on the same day (the “Agreement”).
The purchase price was $24.4 million, consisting of $23.4 million in cash and a $1 million promissory note due from the Purchaser.
Approximately $2.7 million of the proceeds were used to pay off the existing mortgage on the Grove Isle Property. The Company
realized gain on the sale of these interests (including amounts received in June 2013 described below) of approximately $19 million
(or $19 per share) net of incentive fee due to the Adviser of approximately $2.1 million.
In June 2013 the Company received
approximately $327,000 of past due rental payments from the Grove Isle tenant. This amount is included in the realized gain on
the sale of Grove Isle. Also in June 2013 the Purchaser exercised its option to purchase our 50% interest in the spa for $100,000
as provided in the Agreement. There was no gain or loss realized on this transaction.
As previously reported,
on March 29, 2013, pursuant to a Membership Interests Purchase Agreement (the “Agreement”) entered into in December
2012, HMG/Courtland Properties, Inc. and its 95% owned subsidiary, Courtland Investments, Inc. (the “Company”), completed
the sale of the Company’s 50% membership interests in Bayshore Landing LLC, Bayshore Rawbar LLC and Bayshore Restaurant
LLC, (collectively the “Monty’s property) to the other 50% owner, The Christoph Family Trusts, which are unrelated
entities. The purchase price for the membership interests of $3 million was paid in cash. The Company realized a loss on the sale
of these interests of approximately $28,000 (or $.03 per share).
We have classified the results of
operations for the real estate interests discussed above into discontinued operations in the accompanying condensed consolidated
financial statements of comprehensive income.
|
|
For the three months
|
|
|
For the six months
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
Revenues:
|
|
2013
|
|
|
2013
|
|
Rental and related revenue
|
|
$
|
—
|
|
|
$
|
171,000
|
|
Food & beverage sales
|
|
|
—
|
|
|
|
1,950,000
|
|
Marina revenue
|
|
|
—
|
|
|
|
382,000
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
Total revenue
|
|
$
|
—
|
|
|
$
|
2,503,000
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Rental operating expenses
|
|
|
—
|
|
|
|
97,000
|
|
Food & beverage operation expenses
|
|
|
—
|
|
|
|
1,430,000
|
|
Marina expenses
|
|
|
—
|
|
|
|
178,000
|
|
Professional fees
|
|
|
—
|
|
|
|
53,000
|
|
Interest expense
|
|
|
—
|
|
|
|
190,000
|
|
Depreciation, amortization and other expenses
|
|
|
—
|
|
|
|
199,000
|
|
Total expenses
|
|
$
|
—
|
|
|
$
|
2,147,000
|
|
|
|
|
|
|
|
|
|
|
Less: noncontrolling interest sold
|
|
|
—
|
|
|
|
(212,000
|
)
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
|
313,000
|
|
|
|
18,839,000
|
|
|
|
|
|
|
|
|
|
|
Benefit from (provision for) income tax expense on gain on sale of discontinued ops
|
|
|
296,000
|
|
|
|
(1,068,000
|
)
|
Income from discontinued operations
|
|
$
|
609,000
|
|
|
$
|
17,915,000
|
|
Item 2.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
The Company reported net income of
approximately $606,000 ($.58 per share) and approximately $427,000 ($.41 per share) for the three and six months ended June 30,
2014, respectively. For the three and six months ended June 30, 2013, we reported net income of $247,000 ($.26 per basic share
and $.21 per diluted share) and $17,244,000 ($17.73 per basic shares and $16.60 per diluted shares), respectively.
REVENUES
Rentals and related revenues for
the three and six months ended June 30, 2014 and 2013 primarily consists of rent from the Advisor to CII for its corporate office.
Net realized and unrealized gain
from investments in marketable securities:
Net realized gain from investments
in marketable securities for the three and six months ended June 30, 2014 was approximately $34,000 and $46,000, respectively.
Net realized gain from investments in marketable securities for the three and six months ended June 30, 2013 was approximately
$11,000 and $8,000, respectively. Net unrealized (loss) gain from investments in marketable securities for the three and six months
ended June 30, 2014 was approximately $477,000 and $592,000, respectively. Net unrealized (loss) gain from investments in marketable
securities for the three and six months ended June 30, 2013 was approximately ($81,000) and $25,000, respectively. For further
details refer to Note 3 to Condensed Consolidated Financial Statements (unaudited).
Net income from other investments:
Net income from other investments
for the three and six months ended June 30, 2014 was approximately $72,000 and $84,000, respectively. Net income from other investments
for the three and six months ended June 30, 2013 was approximately $54,000 and $143,000, respectively. For further details refer
to Note 4 to Condensed Consolidated Financial Statements (unaudited).
Interest, dividend and other income:
Interest, dividend and other income
for the three and six months ended June 30, 2014 was approximately $418,000 and $488,000, respectively. Interest, dividend and
other income for the three and six months ended June 30, 2013 was approximately $55,000 and $97,000, respectively. The increase
in the three and six months ended June 30, 2014 as compared with the same periods in 2013 was approximately $363,000 (662%) and
$391,000 (405%), respectively. These increases are primarily the result of a gain from the dissolution of South Bayshore Associates
(SBA). In 2014 SBA was dissolved and the note payable to the Company of $905,000 was distributed 75% to the Company and 25% to
Transco. Transco repaid its portion of the note (approximately $226,000) in June 2014 and recognized this amount as other income.
Also, interest and dividends from marketable securities have increased by $77,000 and $90,000 for the three and six months ended
June 30, 2014, respectively, as compared with the same periods in 2013.
EXPENSES
Adviser’s base fee for the
three and six months ended June 30, 2014 as compared with the same periods in 2013 decreased by $90,000 (35%) and $180,000 (35%),
respectively. As previously reported, on September 19, 2013, the shareholders approved the renewal and amendment of the Advisory
Agreement between the Company and the Adviser for a term commencing January 1, 2014 and expiring December 31, 2014. The sole amendment
to the Advisory Agreement was the change in the remuneration of the Advisor to decrease the Advisor’s current regular monthly
compensation from $85,000 to $55,000, or $1,020,000 to $660,000 annually.
Professional
fees and expenses for the three and six months ended June 30, 2014 as compared with the same periods in 2013 increased by approximately
$42,000 (231%) and $54,000 (63%), respectively, primarily due to increased legal fees.
General and
administrative expenses for the three and six months ended June 30, 2014 as compared with the same periods in 2013 decreased by
approximately $15,000 (25%) and $54,000 (35%), respectively, primarily due to decreased costs associated with Courtland Houston,
Inc. a subsidiary that was dissolved on December 31, 2013.
EFFECT
OF INFLATION
Inflation affects the costs of holding
the Company’s investments. Increased inflation would decrease the purchasing power of our mainly liquid investments.
LIQUIDITY, CAPITAL EXPENDITURE
REQUIREMENTS AND CAPITAL RESOURCES
The Company’s material commitments
primarily consist of a note payable to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of approximately
$2.4 million due on demand and contributions committed to other investments of approximately $1.8 million due upon demand. The
funds necessary to meet these obligations are expected to come from the proceeds from the sales of investments, distributions
from investments and available cash.
MATERIAL COMPONENTS OF CASH
FLOWS
For the six months ended June 30,
2014, net cash used in operating activities was approximately $4.6 million. This primarily consisted of federal and state tax
payments of approximately $1.6 million and $2.1 million in payments to the Adviser for 2013 incentive fees.
For the six months ended June 30,
2014, net cash used in investing activities was approximately $7.3 million and consisted primarily of approximately $8 million
in purchases of marketable securities, $847,000 of contributions to other investments, less proceeds from sales of marketable
securities of $1.3 million.
For the six months ended June 30,
2014, net cash used in financing activities was $103,000, consisting of a principal payment on the loan due to affiliate.