UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

   
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended March 31, 2012

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934

 

For the transition period from                                                        to

 

Commission file number  1-7865

 

HMG/COURTLAND PROPERTIES, INC.

(Exact name of small business issuer as specified in its charter)

 

Delaware 59-1914299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

1870 S. Bayshore Drive, Coconut Grove, Florida 33133
(Address of principal executive offices) (Zip Code)

 

     
  305-854-6803  
  (Registrant’s telephone number, including area code)  
     
   Not Applicable  
   (Former name, former address and former fiscal year, if changed since last report)  
     

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o Accelerated filer  o Non-accelerated filer  o Smaller reporting company  x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act).
Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 1,010,426 Common shares were outstanding as of May 15, 2012.

 

HMG/COURTLAND PROPERTIES, INC.

 

Index

 

   

PAGE

NUMBER

PART I. Financial Information      
         
  Item 1. Financial Statements      
         
  Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011   1  
         
  Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)   2  
         
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)   3  
     
  Notes to Condensed Consolidated Financial Statements (Unaudited)   4  
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   11  
     
  Item 3. Quantitative and Qualitative Disclosures About Market Risks   14  
  Item 4. Controls and Procedures   14  
         
PART II. Other Information      
  Item 1. Legal Proceedings   14  
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   14  
  Item 3. Defaults Upon Senior Securities   14  
  Item 4. Mine Safety Disclosures   14  
  Item 5. Other Information   14  
  Item 6. Exhibits   14  
Signatures   15  

 

Cautionary Statement. This Form 10-Q contains certain statements relating to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company’s market; equity and fixed income market fluctuation; technological change; changes in law; changes in fiscal, monetary, regulatory and tax policies; monetary fluctuations as well as other risks and uncertainties detailed elsewhere in this Form 10-Q or from time-to-time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

 
 

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES      
CONDENSED CONSOLIDATED BALANCE SHEETS      
       
   March 31,  December 31,
   2012  2011
   (UNAUDITED)   
ASSETS          
Investment properties, net of accumulated depreciation:          
Commercial properties  $6,979,897   $7,057,005 
Hotel, club and spa facility   3,394,318    3,447,870 
Marina properties   1,893,482    1,893,452 
Land held for development   27,689    27,689 
Total investment properties, net   12,295,386    12,426,016 
           
Cash and cash equivalents   2,920,962    2,366,363 
Investments in marketable securities   1,910,947    2,019,476 
Other investments   3,675,345    3,745,327 
Investment in affiliate   2,704,070    2,686,887 
Loans, notes and other receivables   674,169    683,998 
Notes and advances due from related parties   700,772    696,909 
Deferred taxes   636,000    632,000 
Goodwill   5,628,627    5,628,627 
Other assets   559,262    710,227 
TOTAL ASSETS  $31,705,540   $31,595,830 
           
LIABILITIES          
Mortgages and notes payable  $14,417,903   $14,531,833 
Accounts payable, accrued expenses and other liabilities   774,860    740,618 
Interest rate swap contract payable   1,837,000    1,975,000 
TOTAL LIABILITIES   17,029,763    17,247,451 
           
STOCKHOLDERS’ EQUITY          
Excess common stock, $1 par value; 100,000 shares authorized: no shares issued        
Common stock, $1 par value; 1,200,000 shares authorized and 1,023,955 issued   1,023,955    1,023,955 
Additional paid-in capital   24,370,584    24,366,099 
Less: Treasury stock at cost (13,529 shares as of March 31, 2012 and December 31, 2011)   (60,388)   (60,388)
Undistributed gains from sales of properties, net of losses   41,572,120    41,572,120 
Undistributed losses from operations   (54,315,307)   (54,383,928)
Accumulated other comprehensive loss   (918,500)   (987,500)
Total stockholders’ equity   11,672,464    11,530,358 
Non controlling interest   3,003,313    2,818,021 
TOTAL EQUITY   14,675,777    14,348,379 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $31,705,540   $31,595,830 

 See notes to the condensed consolidated financial statements

1
 

HMG/COURTLAND PROPERTIES, INC.  AND SUBSIDIARIES      
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)   
    
   For the three months ended
   March 31,
   2012  2011
REVENUES          
Real estate rentals and related revenue  $475,188   $463,352 
Food & beverage sales   1,745,992    1,688,016 
Marina revenues   412,371    412,899 
Spa revenues   121,023    112,119 
Total revenues   2,754,574    2,676,386 
           
EXPENSES          
Operating expenses:          
Rental and other properties   115,219    182,003 
Food and beverage cost of sales   519,454    473,688 
Food and beverage labor and related costs   366,054    345,502 
Food and beverage other operating costs   521,178    537,860 
Marina expenses   213,288    218,781 
Spa expenses   124,530    102,820 
Depreciation and amortization   223,491    381,294 
Adviser’s base fee   255,000    255,000 
General and administrative   90,779    94,043 
Professional fees and expenses   45,672    87,126 
Directors’ fees and expenses   24,750    24,000 
Total operating expenses   2,499,415    2,702,117 
           
Interest expense   220,501    252,189 
Total expenses   2,719,916    2,954,306 
           
Income (loss) before other income (loss) and income taxes   34,658    (277,920)
           
Net realized and unrealized gains from investments in marketable securities   92,142    62,478 
Net income from other investments   47,548    9,334 
Realized loss on interest rate swap agreement       (198,400)
Other than temporary impairment losses from other investments   (27,666)    
Interest, dividend and other income   34,227    95,887 
Total other income (loss)   146,251    (30,701)
           
Income (loss) before income taxes   180,909    (308,621)
           
(Benefit from) provision for income taxes   (4,000)   9,000 
Net income (loss)   184,909    (317,621)
           
Less: Net (income) loss attributable to noncontrolling interest in consolidated entities   (116,288)   111,009 
Net income (loss) attributable to the Company  $68,621   $(206,612)
           
Other comprehensive income:          
  Unrealized gain on interest rate swap agreement  $69,000   $130,500 
Total other comprehensive income   69,000    130,500 
           
Comprehensive income (loss)  $137,621   $(76,112)
           
Net income (loss) Per Common Share:          
Basic and diluted  $0.07   $(0.20)
Weighted average common shares outstanding-Basic and diluted   1,010,426    1,010,426 
           

See notes to the condensed consolidated financial statements

2
 

HMG/COURTLAND PROPERTIES, INC.  AND SUBSIDIARIES      
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)   
    
   For the three months ended
March 31,
   2012  2011
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss) attributable to the Company  $68,621   $(206,612)
Adjustments to reconcile net income (loss) attributable to the Company to net cash provided by operating activities:          
Depreciation and amortization   223,491    381,294 
Non-employee stock compensation expense   4,485     
Net income from other investments, excluding impairment losses   (28,529)   (9,334)
Other than temporary impairment losses from other investments   27,666      
Net gain from investments in marketable securities   (92,142)   (62,478)
Realized loss on interest rate swap agreement       198,400 
Net income (loss) attributable to non controlling interest   116,288    (111,009)
Deferred income tax (benefit) expense   (4,000)   9,000 
Changes in assets and liabilities:          
Other assets and other receivables   146,589    89,850 
Accounts payable, accrued expenses and other liabilities   34,245    20,315 
Total adjustments   428,093    516,038 
Net cash provided by operating activities   496,714    309,426 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases and improvements of properties   (82,518)   (100,134)
Distributions from other investments   107,058    29,798 
Contributions to other investments   (73,190)   (55,125)
Net proceeds from sales and redemptions of securities   446,698    590,147 
Purchase of marketable securities   (226,233)   (164,860)
Net cash provided by investing activities   171,815    299,826 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayment of mortgages and notes payables   (113,930)   (1,841,418)
Partial settlement of interest rate swap contract       (198,400)
Withdrawals from restricted cash       2,379,947 
Distributions to minority partners       (51,181)
Net cash (used in) provided by financing activities   (113,930)   288,948 
           
Net increase in cash and cash equivalents   554,599    898,200 
           
Cash and cash equivalents at beginning of the period   2,366,363    3,618,200 
           
Cash and cash equivalents at end of the period  $2,920,962   $4,516,400 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid during the period for interest  $221,000   $252,000 
Cash paid during the period for income taxes  $   $ 
           

See notes to the condensed consolidated financial statements

3
 

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-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, 2011. The balance sheet as of December 31, 2011 was derived from audited consolidated financial statements as of that date. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated financial statements include the accounts of HMG/Courtland Properties, Inc. (the “Company”) and entities in which the Company owns a majority voting interest or controlling financial interest. All material transactions and balances with consolidated and unconsolidated entities have been eliminated in consolidation or as required under the equity method. 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company has adopted this pronouncement and it did not have a material impact on its consolidated financial statements.

In June 2011, the FASB issued new guidance that gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total for comprehensive income. The entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements(s) where the components of net income and the components of other comprehensive income are presented. The guidance is to be applied retrospectively, for fiscal periods and interim periods within those years, beginning after December 15, 2011 and early adoption is permitted. In December 2011, the FASB issued new guidance deferring the changes in the June 2011 relating to presentation of classification adjustments. The Company’s adoption of the new guidance, other than that related to presentation of reclassification adjustments, as of January 1, 2012 pertained to disclosure and presentation only and did not have a material impact on its consolidated financial position, results of operations and cash flows.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). This ASU was issued to provide largely identical guidance about fair value measurement and disclosure requirements for entities that disclose the fair value of an asset, a liability, or an instrument classified in shareholders’ equity in their consolidated financial statements as that provided in the International Accounting Standards Board’s new IFRS 13, Fair Value Measurement. This ASU does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under GAAP. This guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that results from applying the ASU to quantify the total effect, if practicable. The Company has adopted this pronouncement and it did not have a material impact on its consolidated financial statements.

4
 

3. RESULTS OF OPERATIONS FOR MONTY’S RESTAURANT, MARINA AND OFFICE/RETAIL PROPERTY, COCONUT GROVE, FLORIDA

The Company, through two 50%-owned entities, Bayshore Landing, LLC (“Landing”) and Bayshore Rawbar, LLC (“Rawbar”), (collectively, “Bayshore”) owns a restaurant, office/retail and marina property located in Coconut Grove (Miami), Florida known as Monty’s (the “Monty’s Property”).

Summarized combined statements of income for Landing and Rawbar for the three months ended March 31, 2012 and 2011 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 three months ended
March 31, 2012
  For the three months ended
March 31, 2011
           
Revenues:          
Food and Beverage Sales  $1,746,000   $1,688,000 
Marina dockage and related   273,000    286,000 
Retail/mall rental and related   148,000    147,000 
Total Revenues   2,167,000    2,121,000 
           
Expenses:          
Cost of food and beverage sold   519,000    474,000 
Labor and related costs   317,000    298,000 
Entertainers   49,000    48,000 
Other food and beverage related costs   141,000    157,000 
Other operating costs   49,000    42,000 
Repairs and maintenance   77,000    106,000 
Insurance   133,000    124,000 
Management fees   57,000    84,000 
Utilities   53,000    54,000 
Ground rent   178,000    222,000 
Interest   163,000    201,000 
Depreciation and amortization   166,000    315,000 
Realized loss on interest rate swap       198,000 
Total Expenses   1,902,000    2,323,000 
           
Net income (loss)  $265,000   ($202,000)

4. 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.

Net realized and unrealized gain (loss) from investments in marketable securities for the three months ended March 31, 2012 and 2011 is summarized below:

   Three Months Ended March 31,
Description  2012  2011
Net realized gain from sales of securities  $49,000   $79,000 
Unrealized net gain (loss) in trading securities   43,000    (17,000)
Total net gain from investments in marketable securities  $92,000   $62,000 

For the three months ended March 31, 2012 net realized gain from sales of marketable securities of approximately $49,000 consisted of approximately $65,000 of gross gains net of $16,000 of gross losses. For the three months ended March 31, 2011 net realized gain from sales of marketable securities of approximately $79,000 consisted of approximately $94,000 of gross gains net of $15,000 of gross losses.

5
 

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.

5. OTHER INVESTMENTS

As of March 31, 2012, the Company’s portfolio of other investments had an aggregate carrying value of approximately $3.7 million. As of March 31, 2012, the Company has committed to fund approximately $966,000 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 three months ended March 31, 2012, the Company contributed an additional $23,000 toward fulfilling capital commitments on existing investments, plus a new investment in a medical technology related company for $51,000 which was fully funded in January 2012. Cash distributions received from other investments for the three months ended March 31, 2012 totaled approximately $107,000 from one investment in a privately owned partnership owning diversified operating companies.

Net income from other investments for the three months ended March 31, 2012 and 2011, is summarized below:

    2012    2011 
Partnership owning diversified businesses  $31,000   $ 
Venture capital fund – technology        
Income from investment in 49% owned affiliate (T.G.I.F. Texas, Inc.)   17,000    9,000 
Total net income from other investments  $48,000   $9,000 

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2012 and December 31, 2011, aggregated by investment category and the length of time that investments have been in a continuous loss position

   As of March 31, 2012
   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  $   $   $379,000   $(54,000)  $379,000   $(54,000)
Partnerships owning diversified businesses           231,000    (58,000)   231,000    (58,000)
Partnerships owning real estate and related investments           257,000    (35,000)   257,000    (35,000)
Total  $   $   $867,000   $(147,000)  $867,000   $(147,000)

   As of December 31, 2011
   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  $327,000   $(20,000)  $47,000   $(39,000)  $374,000   $(59,000)
Partnerships owning diversified businesses           228,000    (61,000)   228,000    (61,000)
Partnerships owning real estate and related investments           256,000    (56,000)   256,000    (56,000)
Total  $327,000   $(20,000)  $531,000   $(156,000)  $858,000   $(176,000)

6
 

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 as of March 31, 2012 the Company recorded a loss of approximately $28,000 from 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 associated with the initial start up of the venture in 2010.There were no OTTI impairment valuation adjustments for the three months ended March 31, 2011.

6. INTEREST RATE SWAP CONTRACT

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 2.45% plus the one-month LIBOR Rate times the same notional amount. The Company designated this interest rate swap contract as a cash flow hedge.

As of March 31, 2012 the fair value of this hedge was an unrealized loss of approximately $1,837,000, as compared with an unrealized loss of $1,975,000 as of December 31, 2011 which resulted in an unrealized gain of $138,000 (or $69,000, net of noncontrolling interest) for the three months ended March 31, 2012. This amount has been recorded as other comprehensive income and will be reclassified to interest expense over the life of the contract.

The following tables present the required disclosures in accordance with ASC Topic 815-10:

Fair Values of Derivative Instruments:

     Liability Derivative   
   March 31, 2012     December 31, 2011
    Balance         Balance      
    Sheet    Fair    Sheet    Fair 
    Location    Value    Location    Value 
                     
Derivatives designated as hedging instruments:                    
                     
Interest rate swap contract   Liabilities   $1,837,000    Liabilities   $1,975,000 
Total derivatives designated as hedging instruments under ASC Topic 815       $1,837,000        $1,975,000 

 

The Effect of Derivative Instruments on the Statements of Comprehensive Income
for the Three Months Ended March 31, 2012 and 2011:

   Amount of Gain  
   Recognized in OCI on  
   Derivative  
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships  (Effective Portion) 
   For the three   For the three 
   Months ended   Months ended 
   March 31, 2012   March 31, 2011 
          
Interest rate swap contracts  $69,000   130,500 
Total  $69,000   130,500 

7
 

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with ASC Topic 820, the Company measures cash equivalents, marketable securities, other investments and interest rate swap contract at fair value. Our cash equivalents, marketable securities and interest rate swap contract are classified within Level 1 or Level 2. This is because our cash equivalents, marketable securities and interest rate swap are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Our other investments are classified within Level 3 because they are valued using valuation models which use some inputs that are unobservable and supported by little or no market activity and are significant.

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 
     March 31,    Markets for Identical Assets    Observable Inputs    Unobservable Inputs 
Description    2012    (Level 1)    (Level 2)    (Level 3) 
Assets:                     
Cash equivalents:                     
Time deposits   $54,251       $54,251     
Money market mutual funds    1,546,291   $1,546,291         
Marketable securities:                     
Corporate debt securities    903,118        903,118     
Marketable equity securities    1,007,831    1,007,831         
Total assets   $3,511,491   $2,554,122   $957,369   $ 
                      
Liabilities:                     
Interest rate swap contract    1,837,000        1,837,000     
Total liabilities   $1,837,000       $1,837,000     

 

    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    2011    (Level 1)    (Level 2)    (Level 3) 
Assets:                     
Cash equivalents:                     
Time deposits   $54,104       $54,104     
Money market mutual funds    1,536,787   $1,536,787    —      
Marketable securities:                     
Corporate debt securities    885,252        885,252     
Marketable equity securities    1,134,225    1,134,225    —      
Total assets   $3,610,368   $2,671,012   $939,356   $ 
                      
Liabilities:                     
Interest rate swap contract    1,975,000        1,975,000     
Total liabilities   $1,975,000       $1,975,000     

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Assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

   Fair value measurement at reporting date using 
   Total March 31,  Quoted Prices in Active Markets for Identical Assets  Significant Other Observable Inputs  Significant Unobservable Inputs  Total gains (losses) for three months ended
Description  2012  (Level 1)  (Level 2) (a)  (Level 3) (b)  3/31/2012
Assets:                         
Other investments by investment focus:                         
Technology & Communication  $508,159   $   $508,159   $   $ 
Diversified businesses   1,411,411        1,411,411         
Real estate and related   1,455,755        502,760    953,015    (27,666) 
Other   300,000            300,000     
   $3,675,345   $   $2,422,330   $1,253,015   $(27,666) 
                          
Goodwill (Bay shore)   5,628,000              5,628,000      
Total assets  $9,303,345   $   $2,422,330   $6,881,015   $(27,666) 

   Fair value measurement at reporting date using 
   Total December 31,  Quoted Prices in Active Markets for Identical Assets  Significant Other Observable Inputs  Significant Unobservable Inputs  Total losses for year ended
Description  2011  (Level 1)  (Level 2) (a)  (Level 3) (b)  12/31/2011
Assets:               
Other investments by investment focus:                    
Technology & Communication  $477,646   $   $477,646   $   $(2,437)
Diversified businesses   1,444,521        1,444,521         
Real estate and related   1,523,159        542,478    980,681    (84,270)
Other   300,000            300,000     
   $3,745,326   $   $2,464,645   $1,280,681   $(86,707)
                          
Goodwill (Bayshore)   5,628,000              5,628,000     
Total assets  $9,373,326   $   $2,464,645   $6,908,681   $ 
                          

(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 March 31, 2012, 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. In January 2012 the Company invested approximately $51,000 in a medical technology entity representing the full commitment to this investment. As of March 31, 2012, the amount of the Company’s unfunded commitments related to the aforementioned investments is approximately $966,000.

(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 and two investments in the stock of private banks in Florida and Texas. 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 million primarily consist of one investment in a commercial building located near the Company’s offices purchased in 2005. This investment is 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 investments in private bank stocks include a private bank and trust located in Coral Gables, Florida in the amount of $250,000 made in 2009, and a $50,000 investment in a bank located in El Campo, Texas made in 2010. The fair values of these bank stock investments have been estimated using the cost method less distributions received and other than temporary impairments. This investment is valued using inputs provided by the management of the banks.

 

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The following table includes a roll-forward of the investments classified within level 3 of the fair value hierarchy for the three months ended March 31, 2012:

   Level 3 Investments:
Balance at January 1, 2012  $1,300,000 
Additional investment in limited partnership    
Other than temporary impairment loss   (28,000)
Transfers from Level 2    
Balance at March 31, 2012  $1,272,000
      

8. SEGMENT INFORMATION

The Company has three reportable segments: Real estate rentals; Food and Beverage sales; and Other investments and related income. The Real estate and rentals segment primarily includes the leasing of its Grove Isle property, marina dock rentals at both Monty’s and Grove Isle marinas, and the leasing of office and retail space at its Monty’s property. The Food and Beverage sales segment consists of the Monty’s restaurant operation. Lastly, the Other investment and related income segment includes all of the Company’s other investments, marketable securities, loans, notes and other receivables and the Grove Isle spa operations which individually do not meet the criteria as a reportable segment.

   For the three months ended March 31,
   2012  2011
Net revenues:          
Real estate and marina rentals  $888,000   $876,000 
Food and beverage sales   1,746,000    1,688,000 
Spa revenues   121,000    112,000 
Total net revenues  $2,755,000   $2,676,000 
           
Income (loss) before income taxes:          
Real estate and marina rentals  $278,000   $255,000 
Food and beverage sales   86,000    58,000 
Other investments and related income   (299,000)   (511,000)
Total net income (loss) before income taxes attributable to the Company  $65,000   ($198,000)

 

9. INCOME TAXES

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 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 consolidated financial statements. Our evaluation was performed for the tax years ended December 31, 2008, 2009, 2010 and 2011, the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2012.

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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

The Company reported net income of approximately $69,000 ($.07 per share) for the three months ended March 31, 2012. For the three months ended March 31, 2011 the Company reported a net loss of approximately $207,000 ($.20 per share).

As discussed further below, total revenues for the three months ended March 31, 2012 as compared with the same period in 2011, increased by approximately $78,000 or 3%. Total expenses for the three months ended March 31, 2012, as compared with the same period in 2011, decreased by approximately $234,000 or 8%.

REVENUES

Rentals and related revenues for the three months ended March 31, 2012 as compared with the same period in 2011 increased by $12,000 ( or 3%), primarily as a result of an inflation adjustment in rent due from the tenant at Grove Isle.

Restaurant operations:

Summarized statements of income for the Company’s Monty’s restaurant for the three months ended March 31, 2012 and 2011 is presented below:

 

Summarized statements of income of
Monty’s restaurant
  Three months ended
March 31, 2012
  Percentage of
sales
  Three months ended
March 31, 2011
  Percentage of
sales
Revenues:                    
Food and beverage sales  $1,746,000    100%  $1,688,000    100%
                    

Expenses:

                    
Cost of food and beverage sold   519,000    29.7%   474,000    28.0%
Labor, entertainment and related costs   366,000    21.0%   346,000    20.5%
Other food and beverage direct costs   78,000    4.5%   67,000    4.0%
Other operating costs   110,000    6.3%   135,000    8.0%
Insurance   80,000    4.6%   76,000    4.5%
Management and accounting fees   35,000    2.0%   38,000    2.3%
Utilities   55,000    3.1%   63,000    3.7%
Rent (as allocated)   164,000    9.4%   158,000    9.4%
Total Expenses   1,407,000    80.6%   1,357,000    80.4%
                     
Income before depreciation and noncontrolling interest  $339,000    19.4%  $331,000    19.6%

For the three months ended March 31, 2012 as compared with the same period in 2011 restaurant sales increased by approximately $58,000 (or 3%), with food sales increasing by $43,000 (or 4%) and beverage sales increasing $15,000 (or 2%).

Restaurant expenses for the three months ended March 31, 2012 as compared with the same period in 2011 remained consistent as a percentage of sales.

 

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Marina operations:

Summarized and combined statements of income for marina operations:

(The Company owns 50% of the Monty’s marina and 95% of the Grove Isle marina)

 

   Combined marina
operations
  Combined marina
operations
Summarized statements of income of marina operations  Three months
ended March 31,
2012
  Three months
ended March 31,
2011
Revenues:          
Monty’s dockage fees and related  $286,000   $301,000 
Grove Isle marina slip owners dues and dockage fees   126,000    112,000 
Total marina revenues   412,000    413,000 
          

Expenses:

          
Labor and related costs   64,000    71,000 
Insurance   26,000    22,000 
Management fees   18,000    18,000 
Bay bottom lease   54,000    56,000 
Repairs and maintenance   33,000    41,000 
Other   18,000    11,000 
Total Expenses   213,000    219,000 
           
Income before interest, depreciation and noncontrolling interest  $199,000   $194,000 

There were no significant changes in marina operations for the three months ended March 31, 2012 as compared to the same period in 2011.

Spa operations:

Below are summarized statements of income for Grove Isle spa operations for the three months ended March 31, 2012 and 2011. The Company owns 50% of the Grove Isle Spa with the other 50% owned by an affiliate of Grand Heritage, the tenant of the Grove Isle Resort:

Summarized statements of income of spa operations  Three months
ended March 31,
2012
  Three months
ended March 31,
2011
Revenues:          
Services provided  $104,000   $94,000 
Membership and other   17,000    18,000 
Total spa revenues   121,000    112,000 
          

Expenses:

          
Cost of sales   21,000    18,000 
Salaries, wages and related   38,000    32,000 
Other operating expenses   58,000    44,000 
Management and administrative fees   5,000    6,000 
Other non-operating expenses   3,000    3,000 
Total Expenses   125,000    103,000 
           
(Loss) income before depreciation and noncontrolling interest  ($4,000)  $9,000 

Spa revenues for the three months ended March 31, 2012 as compared with the same period in 2011 increased by $9,000 (or 8%). This came at the expense of higher promotional costs which was the main reason Spa expenses for the three months ended March 31, 2012 as compared with the same period in 2011 increased by $22,000 (or 21%).

Net realized and unrealized gain from investments in marketable securities:

Net realized and unrealized gain from investments in marketable securities for the three months ended March 31, 2012 and 2011 was approximately $92,000 and $62,000, respectively. For further details refer to Note 4 to Condensed Consolidated Financial Statements (unaudited).

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Net income from other investments:

Net income from other investments for the three months ended March 31, 2012 and 2011 was approximately $48,000 and $9,000, respectively. For further details refer to Note 5 to Condensed Consolidated Financial Statements (unaudited).

 

Realized loss from interest rate swap contract:

In conjunction with amendment of the Bayshore bank loan in March 2011 the interest rate swap contract liability was paid down by $198,400 (in the same proportion as the amount of the loan principal paid down). As a result, the Company reclassified a previously unrealized loss of $198,400 from accumulated other comprehensive income to realized loss on interest rate swap contract within the condensed consolidated statements of comprehensive income for the three months ended March 31, 2011. There was no realized loss from the interest rate swap contract for the three months ended March 31, 2012.

EXPENSES

Expenses for rental and other properties for the three months ended March 31, 2012 and 2011 were $115,000 and $182,000, respectively. This decrease of $67,000 (or 37%) was primarily due to decreased ground rent at the Monty’s property due to prior period rent adjustments.

For comparisons of all food and beverage related expenses refer to Restaurant Operations (above) summarized statement of income for Monty’s restaurant.

For comparisons of all marina related expenses refer to Marina Operations (above) for summarized and combined statements of income for marina operations.

For comparisons of all spa related expenses refer to Spa Operations (above) for summarized statements of income for spa operations.

Depreciation and amortization expense for the three months ended March 31, 2012 and 2011 were $223,000 and $381,000, respectively. This decrease of approximately $158,000 (or 41%) was primarily due to non-recurring amortization of loan costs associated with the Monty’s loan modification completed in March 2011.

Professional fees and expenses for the three months ended March 31, 2012 and 2011 were $46,000 and $87,000, respectively. This decrease of $41,000 (or 47%) was primarily due to lower legal expenses at the Monty’s property and lower professional fees at the corporate level.

Interest expense for the three months ended March 31, 2012 and 2011 were $220,000 and $252,000, respectively. This decrease of $32,000 (or 13%) was primarily due to lower outstanding loan balance as a result of the previously reported refinancing of the Monty’s property bank loan in March 2011.

EFFECT OF INFLATION:

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

LIQUIDITY, CAPITAL EXPENDITURE REQUIREMENTS AND CAPITAL RESOURCES

The Company’s material commitments primarily consist of maturities of debt obligations of approximately $6.2 million in 2012 and contributions committed to other investments of approximately $966,000 due upon demand. The funds necessary to meet these obligations are expected from the proceeds from the sales of properties or investments, bank construction loan, refinancing of existing bank loans, distributions from investments and available cash.

Included in the maturing debt obligations for 2012 is a note payable to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of approximately $3.2 million due on demand. The obligation due to TGIF will be paid with funds available from distributions from its investment in TGIF and from available cash.

MATERIAL COMPONENTS OF CASH FLOWS

For the three months ended March 31, 2012, net cash provided by operating activities was approximately $497,000. This was primarily from the Company’s rental operations cash flow.

For the three months ended March 31, 2012, net cash provided by investing activities was approximately $172,000. This consisted primarily of approximately $447,000 in net proceeds from sales of marketable securities and distributions from other investment of $107,000. These sources of funds were partially offset by purchases of marketable securities of $226,000, contributions to other investments of $73,000 and additions to fixed assets of $83,000.

For the three months ended March 31, 2012, net cash used in financing activities was approximately $114,000 consisting solely of loan principal repayments.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q have concluded that, based on such evaluation, our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our consolidated subsidiaries, which we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, was made known to them by others within those entities and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting.

There were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation of such internal control over financial reporting that occurred during our last fiscal quarter which have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company was a co-defendant in two lawsuits in the circuit court in Miami Dade County Florida. These cases arose from claims by a condominium association and resident seeking a declaratory judgment regarding certain provisions of the declaration of condominium relating to the Grove Isle Club and the developer. The claim by the association has been dismissed as to all counts related to the Company; however the association has filed an appeal.  The Company believes that the claims are without merit and intends to vigorously defend its position. The ultimate outcome of this litigation cannot presently be determined. However, in management’s opinion the likelihood of a material adverse outcome is remote. Accordingly, adjustments, if any that might result from the resolution of this matter have not been reflected in the financial statements.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds: None

Item 3. Defaults Upon Senior Securities: None.

Item 4. Mine Safety Disclosures: None

Item 5. Other Information: None

Item 6. Exhibits:

(a) Certifications pursuant to 18 USC Section 1350-Sarbanes-Oxley Act of 2002. Filed herewith.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  HMG/COURTLAND PROPERTIES, INC.
 
  /s/ Larry Rothstein
 Dated: May 15, 2012 Larry Rothstein
  President, Treasurer and Secretary
  Principal Financial Officer
   
  /s/ Carlos Camarotti
 Dated: May 15, 2012 Carlos Camarotti
  Vice President- Finance and Controller
  Principal Accounting Officer

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