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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 statements: 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. 8 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. Revenues: Total revenues for each of the years ended December 31, 2013 and 2012 were $64,000 comprised of rental revenue from corporate office. Expenses: 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 $62,000 (or 55%) for the year ended December 31, 2013 as compared to 2012. This was primarily due to increased tax return preparation fees. 9 Other Income: Net realized and unrealized gain (loss) from investments in marketable securities: Net gain (loss) from investments in marketable securities, including marketable securities distributed by partnerships in which the Company owns minority positions, for the years ended December 31, 2013 and 2012, is as follows: Description 2013 2012 Net realized (loss) gain from sales of marketable securities ($ 119,000 ) $ 35,000 Net unrealized gain from marketable securities 263,000 86,000 Total net gain from investments in marketable securities $ 144,000 $ 121,000 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) 115,000 121,000 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 $196,000 each year. These dividends were recorded as reduction in the investment carrying value as required under the equity method of accounting for investments. Other than temporary impairment ("OTTI") losses from other investments 2013 2012 Technology and related ($ 50,000 ) - Real estate and relate - ($ 28,000 ) Total other than temporary impairment loss from other investments ($ 50,000 ) ($ 28,000 ) 10 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 securities. 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. 11 A summary of the Company's contractual cash obligations at December 31, 2013 is as follows: Payments Due by Period Contractual Obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years Note payable $ 2,503,000 $ 2,503,000 - - - Other investments 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. |