HMG COURTLAND PROPERTIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) Critical Accounting Policies and Estimates.
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions in applying our critical
accounting policies that affect the reported amounts of assets and liabilities
and the disclosure (if any) of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Our estimates and assumptions concern,
among things, potential impairment of our other investments and other long-lived
assets, uncertainties for Federal and state income tax and allowance for
potential doubtful accounts. We evaluate those estimates and assumptions on an
ongoing basis based on historical experience and on various other factors which
we believe are reasonable under the circumstances. Note 1 of the consolidated
financial statements, included elsewhere on this Form 10-K, includes a summary
of the significant accounting policies and methods used in the preparation of
the Company's consolidated financial statements. The Company believes the
following critical accounting policies affect the significant judgments and
estimates used in the preparation of the Company's consolidated financial
Marketable Securities. Consistent with the Company's overall investment
objectives and activities, management has classified its entire marketable
securities portfolio as trading. As a result, all unrealized gains and losses on
the Company's investment portfolio are included in the Consolidated Statements
of Comprehensive Income. Our investments in trading equity and debt marketable
securities are carried at fair value and based on quoted market prices or other
observable inputs. Marketable securities are subject to fluctuations in value in
accordance with market conditions.
Other Investments. The Company's other investments consist primarily of nominal
equity interests in various privately-held entities, including limited
partnerships whose purpose is to invest venture capital funds in growth-oriented
enterprises. The Company does not have significant influence over any investee
and the Company's investment represents less than 3% of the investee's
ownership. None of these investments meet the criteria of accounting under the
equity method and are carried at cost less distributions and other than
temporary unrealized losses. These investments do not have available quoted
market prices, so we must rely on valuations and related reports and information
provided to us by those entities. These valuations are by their nature subject
to estimates which could change significantly from period to period. The Company
regularly reviews the underlying assets in its other investment portfolio for
events, including but not limited to bankruptcies, closures and declines in
estimated fair value, that may indicate the investment has suffered an
other-than-temporary decline in value. When a decline is deemed
other-than-temporary, we permanently reduce the cost basis component of the
investments to its estimated fair value, and the loss is recorded as a component
of net income from other investments. As such, any recoveries in the value of
the investments will not be recognized until the investments are sold.
We believe our estimates of each of these items historically have been adequate.
However, due to uncertainties inherent in the estimation process, it is
reasonably possible that the actual resolution of any of these items could vary
significantly from the estimate and, accordingly, there can be no assurance that
the estimates may not materially change in the near term.
Real Estate. Land, buildings and improvements, furniture, fixtures and equipment
are recorded at cost. Tenant improvements, which are included in buildings and
improvements, are also stated at cost. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Renovations and/or
replacements, which improve or extend the life of the asset are capitalized and
depreciated over the shorter of their estimated useful lives, or the remaining
lease term (if leased).
Depreciation is computed utilizing the straight-line method over the estimated
useful lives of ten to forty years for buildings and improvements and five to
ten years for furniture, fixtures and equipment. Tenant improvements are
amortized on a straight-line basis over the shorter of the term of the related
leases or the assets useful life.
The Company is required to make subjective assessments as to the useful lives of
its properties for purposes of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income. Should the Company lengthen the
expected useful life of a particular asset, it would be depreciated over more
years, and result in less depreciation expense and higher annual net income.
Assessment by the Company of certain other lease related costs must be made when
the Company has a reason to believe that the tenant will not be able to execute
under the term of the lease as originally expected.
The Company periodically reviews the carrying value of certain of its properties
and long-lived assets in relation to historical results, current business
conditions and trends to identify potential situations in which the carrying
value of assets may not be recoverable. If such reviews indicate that the
carrying value of such assets may not be recoverable, the Company would estimate
the undiscounted sum of the expected future cash flows of such assets or analyze
the fair value of the asset, to determine if such sum or fair value is less than
the carrying value of such assets to ascertain if a permanent impairment exists.
If a permanent impairment exists, the Company would determine the fair value by
using quoted market prices, if available, for such assets, or if quoted market
prices are not available, the Company would discount the expected future cash
flows of such assets and would adjust the carrying value of the asset to fair
value. Judgments as to impairments and assumptions used in projecting future
cash flow are inherently imprecise.
Real estate interests held for sale.
The Company's classifies real estate interests in properties as held for sale
when certain criteria are met, in accordance with U.S generally accepted
accounting principles ("GAAP"). At that time we present the assets and
obligations of the property held for sale separately in our consolidated balance
sheet and we cease recording depreciation and amortization expense related to
that property. Real estate held for sale are reported at the lower of their
carrying amount or their estimated fair value, less estimated costs to sell. As
of December 31, 2012, our Grove Isle property was classified as held for sale
and a sale of Grove Isle was completed on February 25, 2013. As of March 31,
2013, the Monty's property was classified as held for sale and a sale of Monty's
was completed on March 31, 2013.
Results of Operations:
For the years ended December 31, 2013 and 2012, the Company reported net income
attributable to the Company of approximately $15.2 million ($15.11 per basic
share and $15.08 per diluted share) and $6,000 (or $.01 per share),
respectively. This increase in net income was primarily the result of income
from discontinued operations of approximately $16.3 million (or $16.25 per
share) due to the gain on sales of the Grove Isle and Monty's property in the
first quarter of 2013.
Total revenues for each of the years ended December 31, 2013 and 2012 were
$64,000 comprised of rental revenue from corporate office.
Total expenses for the year ended December 31, 2013 as compared to that of 2012
remained consistent; increasing approximately $16,000 (or less than 1%).
Rental and other properties operating expenses for the year ended December 31,
2013 as compared to that of 2012 decreased by $31,000 (or 30%) primarily as a
result of nonrecurring repairs of the corporate offices in 2012.
Professional fees and expenses increased by approximately $62,000 (or 55%) for
the year ended December 31, 2013 as compared to 2012. This was primarily due to
increased tax return preparation fees.
Net realized and unrealized gain (loss) from investments in marketable
Net gain (loss) from investments in marketable securities, including marketable
securities distributed by partnerships in which the Company owns minority
positions, for the years ended December 31, 2013 and 2012, is as follows:
Description 2013 2012
Net realized (loss) gain from sales of marketable securities ($ 119,000 ) $ 35,000
Net unrealized gain from marketable securities
Total net gain from investments in marketable securities $ 144,000
Net realized loss from sales of marketable securities consisted of approximately
$176,000 of losses net of $57,000 of gains for the year ended December 31, 2013.
The comparable amounts in fiscal year 2012 were gross gains of approximately
$152,000 of gains net of $117,000 of losses.
Consistent with the Company's overall current investment objectives and
activities, the entire marketable securities portfolio is classified as trading
(as defined by U.S generally accepted accounting principles). Unrealized gains
or losses from marketable securities are recorded as other income in the
consolidated statements of comprehensive income.
Investment gains and losses on marketable securities may fluctuate significantly
from period to period in the future and could have a significant impact on the
Company's net earnings. However, the amount of investment gains or losses on
marketable securities for any given period has no predictive value and
variations in amount from period to period have no practical analytical value.
Investments in marketable securities give rise to exposure resulting from the
volatility of capital markets. The Company attempts to mitigate its risk by
diversifying its marketable securities portfolio.
Net income from other investments is summarized below (excluding other than
temporary impairment losses):
2013 2012Partnerships owning real estate and related investments (a) $ 40,000 $ 223,000
Venture capital funds - diversified businesses (b)
Income from investment in 49% owned affiliate (c) 94,000 57,000
Total net income from other investments $ 249,000 $ 401,000
(a) The gain in 2013 and 2012 primarily consists of one cash distribution from
an investment in a partnership owning real estate investments.
(b) The gains in 2013 and 2012 consist of various cash distributions from an
investments owning diversified businesses which made cash distributions from the
sale or refinancing of operating companies.
(c) This gain represents income from the Company's 49% owned affiliate, T.G.I.F.
Texas, Inc. ("TGIF"). The increase in income is due to increased unrealized
gains from marketable securities in 2013 versus 2012. In 2013 and 2012 TGIF
declared and paid a cash dividend of which the Company's portion of was
approximately $196,000 each year. These dividends were recorded as reduction in
the investment carrying value as required under the equity method of accounting
Other than temporary impairment ("OTTI") losses from other investments
Technology and related ($ 50,000 ) -
Real estate and relate - ($ 28,000 )
Total other than temporary impairment loss from
other investments ($ 50,000 ) ($ 28,000 )
The OTTI loss for the year ended December 31, 2013 consists of a recognized
impairment loss in an investment in a partnership that invests in technology
related companies. The Company committed to fund $500,000 in this investment of
which $466,000 has been funded. As a result of this recognized impairment, the
investment's carrying value was decreased from $369,000 to $319,000.
The OTTI loss for the year ended December 31, 2012 consists of a recognized
impairment loss in an investment in a partnership which operates and leases
executive suites in Miami, Florida. The Company has funded $120,000 to date in
this investment and the losses incurred were primarily associated with the
initial start up of the venture in 2010.
Net income or loss from other investments may fluctuate significantly from
period to period in the future and could have a significant impact on the
Company's net earnings. However, the amount of investment gain or loss from
other investments for any given period has no predictive value and variations in
amount from period to period have no practical analytical value.
Interest, dividend and other income
Interest, dividend and other income for the year ended December 31, 2013 as
compared with 2012 increased by approximately $88,000 (or 61%), primarily due to
increased dividend and interest income from equity and debt marketable
Provision for (benefit from) income taxes:
Provision for income taxes for the year ended December 31, 2013 was
approximately $2,508,000, is netted in income from discontinued operations and
includes $915,000 of deferred income tax expense (described below).
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amount and
the tax basis of assets and liabilities at each year-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. As a result of timing differences
associated with the carrying value of other investments, unrealized gains and
losses of marketable securities, depreciable assets and the future benefit of a
net operating loss, as of December 31, 2013 and 2012, the Company has recorded a
net deferred tax (liability) asset of ($217,000) and $698,000, respectively, and
resulted in deferred tax expense of $915,000. A valuation allowance against
deferred tax asset has not been established as management believes it is more
likely than not, based on the Company's previous history and expectation of
future taxable income before expiration, that these assets will be realized.
Benefit from income taxes for the year ended December 31, 2012 was $66,000.Effect of Inflation.
Inflation affects the costs of maintaining the Company's investments.
Liquidity, Capital Expenditure Requirements and Capital Resources. The Company's
material commitments primarily consist of a note payable to the Company's 49%
owned affiliate, T.G.I.F. Texas, Inc. ("TGIF") of approximately $2.5 million due
on demand (see Item 13. Certain Relationships and Related Transactions and
Director Independence.) and contributions committed to other investments of
approximately $912,000 due upon demand. The funds necessary to meet these
obligations are expected from the proceeds from the sales of investments,
distributions from investments and available cash.
A summary of the Company's contractual cash obligations at December 31, 2013 is
Payments Due by Period
Obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
Note payable $ 2,503,000 $ 2,503,000 - - -
commitments 912,000 912,000 - - -
Total $ 3,415,000 $ 3,415,000 - - -
The timing of amounts due under commitments for other investments is determined
by the managing partners of the individual investments.
Material Changes in Operating, Investing and Financing Cash Flows.
As previously reported, the Company sold its interests in the Grove Isle and
Monty's properties. The remaining proceeds of such sales are temporarily held in
cash and cash equivalents. The Company will continue to evaluate potential
investments of such proceeds, while also maintaining its status as a REIT.
The Company's cash flows are generated primarily from its real estate net rental
and related activities, sales of marketable securities, distributions from other
investments and borrowings.
For the year ended December 31, 2013, net cash used in operating activities was
approximately $1.5 million, primarily consisting of the Advisers regular fee of
$1,020,000 and other general and administrative expenses.
For the year ended December 31, 2013, net cash provided by investing activities
was approximately $21.9 million and consisted primarily of net cash proceeds
from the sale of real estate interests of approximately $23.0 million, proceeds
from sales of marketable securities of $1.3 million, distributions from other
investments of $517,000, collections in notes and advances from related parties
of $697,000 and distribution from affiliate (TGIF) of $196,000. These sources
were partially offset by uses of funds of $3.7 million for purchase of
marketable securities and $136,000 of contributions to other investments.
For the year ended December 31, 2013, net cash used in financing activities was
approximately $4.3 million and consisted primarily the dividend paid of $4.2
million and principal repayment of note payable to affiliate (TGIF) of $311,000.
These uses in funds are partially offset by $161,000 of proceeds from the
exercise of stock options.
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