hmg10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
 
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Quarterly period ended                 September 30, 2008

OR

[ X ]
TRANSITION 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)
 
                                                                  
Check 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [ ]     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.
1,023,955 Common shares were outstanding as of October 31, 2008.

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    [   ]      Accelerated filer       [   ]         Non-accelerated filer       [   ]        Smaller reporting company      [ X ]
                                                                         (Do not check if a smaller reporting company)

 
 
HMG/COURTLAND PROPERTIES, INC.

Index
 
PART I.
  
Financial Information
PAGE
NUMBER
   
Item 1.   Financial Statements
  
       
       
   
Condensed Consolidated Balance Sheets as of
  
   
September 30, 2008 (Unaudited) and December 31, 2007
       
   
Condensed Consolidated Statements of Comprehensive Loss for the
  
   
Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)
       
   
Condensed Consolidated Statements of Cash Flows for the
  
   
Nine Months Ended September 30, 2008 and 2007 (Unaudited)
       
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
       
   
Item 2.  Management's Discussion and Analysis of Financial
  
   
Condition and Results of Operations
       
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risks
       
   
Item 4T.  Controls and Procedures
       
 PART II. 
   Other Information  
    Item 1.  Legal Proceedings
    Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
    Item 3.   Defaults Upon Senior Securities 18
    Item 4.   Submission of Matters to a Vote of Security Holders 18
    Item 5.   Other Information 18
    Item 6.   Exhibits   18
Signatures     19

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.

 
 
 

 
           
           
             
   
September 30,
    
December 31,
  
   
2008
    
2007
  
ASSETS
  
(UNAUDITED)
        
Investment properties, net of accumulated depreciation:
            
  Commercial properties
   $ 8,057,202     $ 7,604,490  
  Commercial properties- construction in progress
     45,995       320,617  
  Hotel, club and spa facility
     4,467,732       4,885,328  
  Marina properties
     2,588,585       2,793,155  
  Land held for development
     27,689       27,689  
Total investment properties, net
     15,187,203       15,631,279  
                 
Cash and cash equivalents
     2,446,384       2,599,734  
Cash and cash equivalents-restricted
     2,011,113       -  
Investments in marketable securities
     3,215,025       4,818,330  
Other investments
     4,862,720       4,623,801  
Investment in affiliate
     3,173,812       3,132,117  
Loans, notes and other receivables
     813,144       1,218,559  
Notes and advances due from related parties
     661,096       700,238  
Deferred taxes
     513,000       233,000  
Goodwill
     7,728,627       7,728,627  
Other assets
     695,107       727,534  
TOTAL ASSETS
   $ 41,307,231     $ 41,413,219  
                 
LIABILITIES
                
Mortgages and notes payable
   $ 19,473,954     $ 19,981,734  
Accounts payable and accrued expenses
     2,003,822       1,613,734  
Interest rate swap contract payable
     677,000       525,000  
TOTAL LIABILITIES
     22,154,776       22,120,468  
                 
Minority interests
     4,017,930       3,052,540  
                 
STOCKHOLDERS' EQUITY
                
Preferred stock, $1 par value; 2,000,000 shares
                
   authorized; none issued
     -       -  
Excess common stock, $1 par value; 500,000 shares authorized;
                
   none issued
     -       -  
Common stock, $1 par value; 1,500,000 shares authorized;
                
   1,317,535 shares issued as of September 30, 2008 and
                
   December 31, 2007
     1,317,535       1,317,535  
Additional paid-in capital
     26,585,595       26,585,595  
Undistributed gains from sales of properties, net of losses
     41,572,120       41,572,120  
Undistributed losses from operations
     (51,436,391 )     (50,406,705 )
Accumulated other comprehensive loss
     (338,500 )     (262,500 )
      17,700,359       18,806,045  
Less:  Treasury stock, at cost (293,580 shares as of
                
   September 30, 2008 and December 31, 2007)
     (2,565,834 )     (2,565,834 )
TOTAL STOCKHOLDERS' EQUITY
     15,134,525       16,240,211  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   $ 41,307,231     $ 41,413,219  
                 
See notes to the condensed consolidated financial statements
                

(1)


 
 
 


SUBSIDIARIES
            
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE LOSS (UNAUDITED)
            
   
Three months ended
September 30,
    
Nine months ended
September 30,
  
REVENUES
  
2008
    
2007
    
2008
    
2007
  
Real estate rentals and related revenue
   $ 436,401     $ 382,791     $ 1,242,281     $ 1,153,114  
Food & beverage sales
     1,350,509       1,334,074       5,206,324       4,762,052  
Marina revenues
     447,032       408,859       1,327,045       1,291,498  
Spa revenues
     227,991       156,815       652,063       535,651  
Total revenues
     2,461,933       2,282,539       8,427,713       7,742,315  
EXPENSES
                                
Operating expenses:
                                
  Rental and other properties
     209,237       207,739       478,813       489,554  
  Food and beverage cost of sales
     370,329       366,993       1,390,691       1,280,020  
  Food and beverage labor and related costs
     377,900       353,615       1,184,991       1,082,699  
  Food and beverage other operating costs
     524,415       503,762       1,654,115       1,742,184  
  Marina expenses
     243,845       244,477       733,529       791,429  
  Spa expenses
     236,928       205,454       604,891       623,739  
  Depreciation and amortization
     345,779       327,218       1,019,927       990,019  
  Adviser's base fee
     255,000       225,000       765,000       675,000  
  General and administrative
     85,760       93,240       246,987       264,383  
  Professional fees and expenses
     102,331       84,030       231,476       262,012  
  Directors' fees and expenses
     30,959       30,999       83,988       71,462  
Total operating expenses
     2,782,483       2,642,527       8,394,408       8,272,501  
                                 
Interest expense
     329,299       403,195       1,018,403       1,211,960  
Minority partners' interests in operating losses of
                                
         consolidated entities
     (174,946 )     (204,832 )     (4,904 )     (292,570 )
Total expenses
     2,936,836       2,840,890       9,407,907       9,191,891  
                                 
Loss before other income and income taxes
     (474,903 )     (558,351 )     (980,194 )     (1,449,576 )
                                 
Net realized and unrealized (loss) gain from investments in marketable securities
     (689,073 )     118,131       (903,723 )     368,536  
Net income from other investments
     6,969       23,871       165,000       765,746  
Interest, dividend and other income
     72,639       124,481       409,231       368,576  
                                     Total other (loss) income
     (609,465 )     266,483       (329,492 )     1,502,858  
                                 
(Loss) income before income taxes
     (1,084,368 )     (291,868 )     (1,309,686 )     53,282  
                                 
(Benefit from) provision for income taxes
     (322,000 )     164,000       (280,000 )     291,000  
Net loss
   $ (762,368 )   $ (455,868 )   $ (1,029,686 )   $ (237,718 )
Other comprehensive loss:
                                
   Unrealized loss on interest rate swap agreement
   $ (61,000 )   $ (17,500 )   $ (76,000 )   $ (40,000 )
       Total other comprehensive loss
     (61,000 )     (17,500 )     (76,000 )     (40,000 )
                                 
Comprehensive loss
   $ (823,368 )   $ (473,368 )   $ (1,105,686 )   $ (277,718 )
                                 
Net Loss Per Common Share:
                                
     Basic and diluted
   $ (0.74 )   $ (0.45 )   $ (1.01 )   $ (0.23 )
Weighted average common shares outstanding-basic &
diluted
     1,023,955       1,023,955       1,023,955       1,023,955  
                                 
See notes to the condensed consolidated financial
statements
                                
 
 (2)

 
 
 


           
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
        
       
   
Nine months ended September 30,
  
   
2008
    
2007
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
  Net loss
   $ (1,029,686 )   $ (237,718 )
   Adjustments to reconcile net loss to net cash provided by (used in)
                
     operating activities:
                
     Depreciation and amortization
     1,019,927       990,019  
     Net income from other investments
     (165,000 )     (765,746 )
     Net loss (gain) from investments in marketable securities
     903,723       (368,536 )
     Minority partners' interest in operating income
     (4,904 )     (292,570 )
     Deferred income tax (benefit) expense
     (280,000 )     291,000  
     Changes in assets and liabilities:
                
       Other assets and other receivables
     6,820       67,001  
       Accounts payable and accrued expenses
     386,380       (155,862 )
    Total adjustments
     1,866,946       (234,694 )
    Net cash provided (used in) by operating activities
     837,260       (472,412 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
    Purchases and improvements of properties
     (553,851 )     (701,361 )
    Decrease (increase) in notes and advances from related parties
     39,142       (21,702 )
    Additions in mortgage loans and notes receivables
     (100,000 )     (211,000 )
    Collections of mortgage loans and notes receivables
     509,025       1,207,000  
    Distributions from other investments
     252,235       1,005,187  
    Contributions to other investments
     (495,298 )     (1,105,265 )
    Net proceeds from sales and redemptions of securities
     3,092,459       3,424,317  
    Increase in investments in marketable securities
     (2,265,429 )     (1,255,599 )
    Net cash provided by investing activities
     478,283       2,341,577  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
    Repayment of mortgages and notes payables
     (507,780 )     (783,807 )
    Cash deposited (restricted) to meet bank loan debt covenant
     (2,011,113 )     -  
    Contributions from minority partners
     1,050,000       479,850  
    Net cash used in financing activities
     (1,468,893 )     (303,957 )
                 
    Net (decrease) increase in cash and cash equivalents
     (153,350 )     1,565,208  
                 
    Cash and cash equivalents at beginning of the period
     2,599,734       2,412,871  
                 
    Cash and cash equivalents at end of the period
   $ 2,446,384     $ 3,978,079  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
          
  Cash paid during the period for interest
   $ 1,018,000     $ 1,212,000  
  Cash paid during the period for income taxes
     -       -  
See notes to the condensed consolidated financial statements
                


(3)
 
 
HMG/COURTLAND PROPERTIES, INC.
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 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, 2007.  The balance sheet as of December 31, 2007 was derived from audited financial statements as of that date. The results of operations for the three and nine months ended September 30, 2008 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 May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with U.S. Generally Accepted Accounting Principles (GAAP). The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In May, 2008 the FASB issued FASB Staff Position (FSP) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting APB 14-1 on its consolidated financial statements.

In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP 142-3 on its consolidated financial position and results of operations.

(4)
 
 
 HMG/COURTLAND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)

 
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirement for FASB Statement No. 133, "Derivative Instruments and Hedging Activities" ("SFAS No. 133"). It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company as of January 1, 2009.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)), which replaces SFAS No. 141, “Business Combinations” (SFAS 141). SFAS 141(R) retains the underlying concepts of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date, until either abandoned or completed, at which point the useful lives will be determined; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS No. 109, “Accounting for Income Taxes” (SFAS 109) such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also apply the provisions of SFAS 141(R). Early adoption is not permitted. Upon adoption, SFAS 141(R) will not have a significant impact on our Company’s consolidated financial position and results of operations; however, any business combination entered into after the adoption may significantly impact our consolidated financial position and results of operations when compared to acquisitions accounted for under existing GAAP.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact the adoption of SFAS 160 will have on our consolidated financial position and consolidated results of operations.
 

(5)
 
 
HMG/COURTLAND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)


Recently adopted accounting principles
In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements’’. This statement clarifies the definition of fair value of assets and liabilities, establishes a framework for measuring fair value of assets and liabilities and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, the FASB deferred the effective date of SFAS No. 157 until the fiscal years beginning after November 15, 2008 as it relates to the fair value measurement requirements for non-financial assets and liabilities that are initially measured at fair value, but not measured at fair value in subsequent periods. These non-financial assets include goodwill and other indefinite-lived intangible assets which are included within other assets. In accordance with SFAS No. 157, the Company has adopted the provisions of SFAS No. 157 with respect to financial assets and liabilities effective as of January 1, 2008 and its adoption did not have a material impact on its results of operations or financial condition. The Company is assessing the impact of SFAS No. 157 for non-financial assets and liabilities and expects that this adoption will not have a material impact on its results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure eligible financial instruments at fair value. The unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value options is determined on an instrument by instrument basis, it should be applied to an entire instrument, and it is irrevocable. Assets and liabilities measured at fair value pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using another measurement attribute. SFAS No. 159 is effective as of the beginning of the first fiscal year that began after November 15, 2007. The adoption of this standard in 2008 has not had a material impact on the Company's consolidated financial statements.

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 statement of income for Landing and Rawbar for the three and nine months ended September 30, 2008 and 2007 is presented below (Note: the Company’s ownership percentage in these operations is 50%):
 
 
 
(6)
 
 

HMG/COURTLAND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)

 
Summarized Combined statements of income
Bayshore Landing, LLC and
Bayshore Rawbar, LLC
  
For the three months ended
September 30, 2008
    
For the three months ended
September 30, 2007
    
For the nine
months ended
September 30, 2008
    
For the nine months ended
September 30, 2007
  
                         
Revenues:
                        
Food and Beverage Sales
   $ 1,350,000     $ 1,334,000     $ 5,206,000     $ 4,762,000  
Marina dockage and related
     310,000       290,000       949,000       938,000  
Retail/mall rental and related
     135,000       91,000       341,000       276,000  
Total Revenues
     1,795,000       1,715,000       6,496,000       5,976,000  
                                 
Expenses:
                                
Cost of food and beverage sold
     371,000       367,000       1,391,000       1,280,000  
Labor and related costs
     324,000       292,000       1,020,000       918,000  
Entertainers
     53,000       61,000       164,000       164,000  
Other food and beverage related costs
     129,000       137,000       435,000       417,000  
Other operating costs
     50,000       52,000       119,000       197,000  
Repairs and maintenance
     115,000       91,000       317,000       293,000  
Insurance
     159,000       155,000       465,000       485,000  
Management fees
     79,000       69,000       216,000       339,000  
Utilities
     86,000       79,000       234,000       229,000  
Ground rent
     230,000       251,000       698,000       698,000  
Interest
     234,000       244,000       706,000       734,000  
Depreciation
     198,000       180,000       578,000       536,000  
Total Expenses
     2,028,000       1,978,000       6,343,000       6,290,000  
                                 
Net (Loss) income before minority interest
   $ (233,000 )   $ (263,000 )   $ 153,000     $ (314,000 )


For the three months ended September 30, 2008 Landing and Rawbar combined operations reported a loss of $233,000, and for the nine months ended September 30, 2008 reported net income of $153,000.  This is as compared to reported losses of $263,000 and $314,000 during the same comparable periods in 2007, respectively. For the nine month comparable periods the increase of income from a loss of $314,000 to income of $153,000 was primarily due to increased food and beverage revenues and decreased management fees.  Restaurant sales increased by 10% for the nine month periods ended September 30, 2008, as compared to the same period in 2007, respectively. Management fees for the nine month comparable periods decreased primarily due to a non-recurring $100,000 payment to the former manager for termination of the management services portion of the contract in April 2007.
 


(7)
 
 
HMG/COURTLAND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)


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.  The Company uses Level 1 inputs in measuring fair value of its marketable securities, that is, quoted prices in active markets for identical securities at the measurement date. Consistent with the Company's overall current investment objectives and activities its entire marketable securities portfolio is classified as trading.

Net (loss) gain from investments in marketable securities for the three and nine months ended September 30, 2008 and 2007 is summarized below:
 
   
Three months ended
 September 30,
    
Nine months ended
 September 30,
  
Description
  
2008
    
2007
    
2008
    
2007
  
Net realized gain (loss) from sales of securities
   $ 48,000     $ 106,000     $ (46,000 )   $ 311,000  
Unrealized net (loss) gain in trading securities
     (737,000 )     12,000       (858,000 )     58,000  
Total net (loss) gain from investments in marketable securities
   $ (689,000 )   $ 118,000     $ (904,000 )   $ 369,000  

For the three and nine months ended September 30, 2008 net realized gain (loss) from sales of marketable securities of approximately $48,000 and ($46,000), respectively, consisted of approximately $126,000 of gross gains net of $78,000 of gross losses for the three month period and $340,000 of gross losses net of $294,000 of gross gains for the nine month period.

For the three and nine months ended September 30, 2007, net realized gain from sales of marketable securities of approximately $106,000 and $311,000, respectively, consisted of approximately $121,000 of gross gains net of $15,000 of gross losses for the three month period and $501,000 of gross gains and $190,000 of gross losses for the nine month period.

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 September 30, 2008, the Company has funded $11.2 million of $12.5 million of commitments in other investments primarily in private capital funds. The carrying value of other investments (which reflects distributions and valuation adjustments) is approximately $4.9 million as of September 30, 2008.

During the nine months ended September 30, 2008 the Company made follow-on contributions to 12 existing investments totaling approximately $495,000.  During this same period the Company received a total of approximately $252,000 in distributions from 7 existing investments.

Net gain from other investments for the three and nine months ended September 30, 2008 and 2007 is summarized below:



(8)
 
 
HMG/COURTLAND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
 
   
Three months ended September 30,
    
Nine months ended September 30,
  
Description
  
2008
    
2007
    
2008
    
2007
  
Technology-related venture fund
   $ --       --     $ 22,000     $ 44,000  
Real estate development and
operation
     --     $ 1,000       --       52,000  
Partnership owning diversified businesses & distressed debt
     --       140,000       7,000       418,000  
Income from investment in 49% owned affiliate (T.G.I.F. Texas,
Inc.)
     7,000       33,000       42,000       97,000  
Restaurant development
     --       (150,000 )             (150,000 )
Others, net
     --       --       94,000       305,000  
Total net gain from other
investments
   $ 7,000     $ 24,000     $ 165,000     $ 766,000  

In April 2008, the Company received approximately $149,000 of cash proceeds from the redemption of a private equity fund resulting in a gain to the Company of $94,000.

In September and August 2007, the Company received cash distributions from two investments in partnerships owning diversified businesses and distressed debt totaling approximately $140,000.  These distributions were in excess of the Company’s basis in these investments and have been recorded as income.

In September 2007, the Company elected to write off $150,000 of its investment in a restaurant development and franchise entity which is being restructured and which, in the Company’s opinion, will result in an other-than-temporary decline in value.  The Company had invested $200,000 in this entity, representing approximately 1% of its equity.

In April 2007, the Company received approximately $449,000 of cash and stock from an investment in a privately-held bank which was purchased by a publicly-held bank.  The Company realized a gain of approximately $299,000 on this transaction (included in table above under “Others, net”).

In February 2007, the Company received cash distributions primarily consisting of a $222,000 cash distribution from one investment in a partnership in which one of its portfolio companies was recapitalized. This distribution exceeded the carrying amount of the investment and accordingly was recognized as income.
 

(9)
 
HMG/COURTLAND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)


6.  DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to interest rate risk through its borrowing activities.  In order to minimize the effect of changes in interest rates, the Company has entered into an interest rate swap contract under which the Company agrees to pay an amount equal to a specified rate of 7.57% times a notional principal approximating the outstanding loan balance, and to receive in return an amount equal to the one month LIBOR rate plus 2.45% times the same notional amount.  The Company designated this interest rate swap contract as a cash flow hedge.  The Company uses Level 2 inputs in measuring fair value of its derivative financial instruments, that is, model derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of September 30, 2008 the fair value (net of 50% minority interest) was an unrealized loss of $338,000 and as of December 31, 2007 the fair value (net of 50% minority interest) of the cash flow hedge was an unrealized loss of $262,000.  These amounts have been recorded as other comprehensive loss and will be reclassified to interest expense over the life of the swap contract.

7. MODIFICATION OF LOAN PAYABLE TO BANK
As previously reported, the loan secured by the Monty’s property includes certain covenants including debt service coverage with which the Company was not in compliance as of December 31, 2007. In March 2008, the Company obtained a notice of forbearance from the lender of the loan, in which the bank agreed to not declare an event of default during the forbearance period. In October 2008 the Company reached an agreement with the bank and amended the loan as described below:

-  
The Company’s 50%-owned subsidiaries Bayshore Landing, LLC and Bayshore Rawbar, LLC (“Borrower”) have granted to the bank a security interest in the Borrowers’ accounts having a balance of $2 million. Withdrawals from these pledged accounts are not permitted.
-  
Borrower has also pledged and granted to bank a security interest in a $375,000 cash flow reserve account which can be used for the purposes of calculating the debt coverage ratio. This reserve account was initially funded in October 2008.

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.

 


(10)
 
 
HMG/COURTLAND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)

8.  SEGMENT INFORMATION (continued)
   
Three months ended
    
Nine months ended
  
   
September 30,
    
September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Net Revenues:
                        
Real estate and marina rentals
   $ 883,000     $ 792,000     $ 2,569,000     $ 2,445,000  
Food and beverage sales
     1,351,000       1,334,000       5,207,000       4,762,000  
Spa revenues
     228,000       157,000       652,000       535,000  
Total Net Revenues
   $ 2,462,000     $ 2,283,000     $ 8,428,000     $ 7,742,000  
                                 
Income (loss) before income taxes:
                                
Real estate and marina rentals
   $ 118,000     $ 40,000     $ 365,000     $ 185,000  
Food and beverage sales
     (97,000 )     (84,000 )     85,000       (73,000 )
Other investments and related income
     (1,105,000 )     (248,000 )     (1,760,000 )     (59,000 )
Total (loss) income before income taxes
   $ (1,084,000 )   $ (292,000 )   $ (1,310,000 )   $ 53,000  


9. INCOME TAXES
We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
     
Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2005, 2006 and 2007, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2008.
     
We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.
 
 

(11)
 
 
Item 2.          Management's Discussion and Analysis of
Financial Condition and Results of Operations

RESULTS OF OPERATIONS
The Company reported net losses of approximately $762,000 (or $.74 per share) and approximately $1,030,000 (or $1.01 per share) for the three and nine months ended September 30, 2008, respectively. This is as compared with net losses of approximately $456,000 (or $.45 per share) and $238,000 (or $.23 per share) for the three and nine months ended September 30, 2007, respectively.

As discussed below, total revenues for the three and nine months ended September 30, 2008 as compared with the same periods in 2007, increased by approximately $179,000 (8%) and $685,000 (9%), respectively.  Total expenses for the three and nine months ended September 30, 2008, as compared with the same periods in 2007, increased by approximately $96,000 (3%) and $216,000 (2%), respectively.

REVENUES
Rentals and related revenues for the three and nine months ended September 30, 2008 as compared with the same periods in 2007 increased by $54,000 (14%) and $89,000 (8%). The increases were primarily due to increased rental revenue from the Monty’s retail space.

Restaurant operations:
Summarized statements of income for the Company’s Monty’s restaurant for the three and nine months ended September 30, 2008 and 2007 is presented below:
 
   
For the three months
    
For the nine months
  
   
ended September 30,
    
ended September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Revenues:
                        
Food and Beverage Sales
   $ 1,350,000     $ 1,334,000     $ 5,206,000     $ 4,762,000  
                                 
Expenses:
                                
Cost of food and beverage sold
     371,000       367,000       1,391,000       1,280,000  
Labor and related costs
     324,000       292,000       1,020,000       918,000  
Entertainers
     54,000       61,000       165,000       164,000  
Other food and beverage direct costs
     64,000       48,000       213,000       173,000  
Other operating costs
     66,000       89,000       222,000       244,000  
Repairs and maintenance
     60,000       53,000       158,000       175,000  
Insurance
     77,000       78,000       232,000       250,000  
Management and accounting fees
     47,000       52,000       104,000       284,000  
Utilities
     66,000       53,000       194,000       147,000  
Rent (as allocated)
     143,000       143,000       530,000       486,000  
Total Expenses
     1,272,000       1,236,000       4,229,000       4,121,000  
                                 
Income before depreciation and minority interest
   $ 78,000     $ 98,000     $ 977,000     $ 641,000  

 
 

 
(12)
 
 
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

The following table summarizes the amounts on the table above as a percentage of sales:

             
All amounts as a percentage of sales
  
For the three months
    
For the nine months
  
   
ended September 30,
    
ended September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Revenues:
                        
Food and Beverage Sales
     100 %     100 %     100 %     100 %
                                 
    Expenses:
                                
Cost of food and beverage sold
     27 %     27 %     27 %     27 %
Labor and related costs
     24 %     22 %     20 %     19 %
Entertainers
     4 %     5 %     3 %     4 %
Other food and beverage direct costs
     5 %     4 %     4 %     4 %
Other operating costs
     5 %     7 %     4 %     5 %
Repairs and maintenance
     4 %     4 %     3 %     4 %
Insurance
     6 %     5 %     4 %     5 %
Management fees
     3 %     4 %     2 %     6 %
Utilities
     5 %     4 %     4 %     3 %
Rent (as allocated)
     11 %     11 %     10 %     10 %
Total Expenses
     94 %     93 %     81 %     87 %
                                 
Income before depreciation and minority interest
     6 %     7 %     19 %     13 %


For the three and nine months ended September 30, 2008 as compared with the same periods in 2007 restaurant sales increased by approximately $16,000 (or 1%) and $444,000 (or 9%), respectively.

For the three and nine months ended September 30, 2008 labor and related costs as a percentage of sales was 24% and 20%, respectively, as compared to 22% and 19% for the three and nine months ended September 30, 2007, respectively.  These increases are primarily a result of higher management wages.

 

 
(13)
 
 
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

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)


   
For the three months
    
For the nine months
  
   
ended September 30,
    
ended September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Marina Revenues:
                        
Monty's dockage fees and related income
   $ 310,000     $ 290,000     $ 949,000     $ 937,000  
Grove Isle marina slip owners dues and dockage fees
     137,000       119,000       378,000       354,000  
Total marina revenues
     447,000       409,000       1,327,000       1,291,000  
                                 
    Marina Expenses:
                                
Labor and related costs
     57,000       50,000       177,000       168,000  
Insurance
     51,000       50,000       148,000       150,000  
Management fees
     19,000       19,000       58,000       54,000  
Utilities, net of tenant reimbursement
     9,000       15,000       3,000       48,000  
Rent and bay bottom lease expense
     59,000       56,000       181,000       178,000  
Repairs and maintenance
     24,000       45,000       94,000       124,000  
Other
     25,000       10,000       73,000       69,000  
Total marina expenses
     244,000       245,000       734,000       791,000  
                                 
Income before depreciation and minority interest
   $ 203,000     $ 164,000     $ 593,000     $ 500,000  


Marina revenues for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 increased by 9% and 3%, respectively, primarily as a result of increased dues at the Grove Isle marina. Marina expenses for the nine months ended September 30, 2008 as compared to the same period in 2007 decreased by approximately $57,000 (or 7%) primarily due to decreased repairs and maintenance expenses.
 



(14)
 
 
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

Spa operations:
Below are summarized statements of income for Grove Isle spa operations. The Company owns 50% of the Grove Isle Spa with the other 50% owned by an affiliate of the Noble House Resorts, the tenant of the Grove Isle Resort:

Summarized statements of income of spa operations
  
Three months
ended
September 30,
2008
    
Three months
ended
September 30,
 2007
    
Nine months
ended September
30, 2008
    
Nine months
ended September
30, 2007
  
Revenues:
                        
Services provided
   $ 215,000     $ 143,000     $ 612,000     $ 496,000  
Membership and other
     13,000       13,000       40,000       40,000  
Total spa revenues
     228,000       156,000       652,000       536,000  
Expenses:
                                
Cost of sales (commissions and other)
     86,000       38,000       201,000       141,000  
Salaries, wages and related
     64,000       66,000       185,000       208,000  
Other operating expenses
     91,000       81,000       179,000       203,000  
Management and administrative fees
     11,000       9,000       31,000       34,000  
Other non-operating expenses
     (15,000 )     11,000       9,000       38,000  
Total Expenses
     237,000       205,000       605,000       624,000  
                                 
(Loss) income before interest, depreciation and
minority interest
   $
 
(9,000
 )   $ (49,000 )   $ 47,000     $ (88,000 )

Spa revenues for the three and nine months ended September 30, 2008 as compared with the same periods in 2007 increased by $72,000 (or 46%) and $116,000 (or 22%).  The spa is benefiting from increased occupancy and overall improved operations at the Grove Isle resort during 2008.

Net (loss) gain from investments in marketable securities:
Net loss from investments in marketable securities for the three and nine months ended September 30 2008 was approximately $689,000 and $904,000, respectively, as compared with a net gain from investments in marketable securities of approximately $118,000 and $368,000 for the same comparable periods in 2007. For further details refer to Note 4 to Condensed Consolidated Financial Statements (unaudited).

Net income from other investments:
Net income from other investments for the three and nine months ended September 30, 2008 was approximately $7,000 and $165,000, respectively, as compared with net income of approximately $24,000 and $766,000 for the same comparable periods in 2007. The decrease in income was primarily from a non-recurring 2007 cash distribution from an investment in a bank and in a partnership owning diversified businesses.  For further details refer to Note 5 to Condensed Consolidated Financial Statements (unaudited).

Interest, dividend and other income:
Interest and dividend income for the three and nine months ended September 30, 2008 was approximately $73,000 and $409,000, respectively, as compared with approximately $124,000 and $368,000, for the same periods in 2007. The decrease from last year in the three month periods of $51,000 (or 41%), was primarily due to lower interest rates and lower dividend income.  The increase from last year in the nine month periods of $41,000 (or 11%) was primarily the result of real estate commission earned by Courtland Houston, Inc. of approximately $168,000 in June 2008, partially offset by lower interest and dividend income.

 
 
(15)
 
 
 
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)


EXPENSES
Expenses for rental and other properties for the three and nine months ended September 30, 2008 were consistent with that for the three and nine months ended September 30, 2007.

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.

Adviser’s base fee for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 increased by $30,000 (or 13%) and $90,000 (or 13%).  This was the result of the amendment to the Advisory Agreement effective January 1, 2008, as previously reported.

Professional fees for the three months ended September 30, 2008 as compared to the same period in 2007 increased by $18,000 (or 22%), primarily due to legal costs related to loan restructuring.  Professional fees decreased for the nine months ended September 30, 2008 primarily due to non-recurring restaurant consulting fees of approximately $28,000 paid in May 2007.

Interest expense for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 decreased by $74,000 (or 18%) and $194,000 (or 16%).  This was primarily due to lower interest rates in 2008 versus 2007.

Minority partner’s interest in operating (gains) losses for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 decreased by $30,000 (or 15%) and $288,000 (or 98%).  This was primarily the result of increased operating gains from the Monty’s operations and from the Grove Isle Spa operations.

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 in 2008 primarily consist of maturities of debt obligations of approximately $4 million and commitments to fund private capital investments of approximately $1.3 million due upon demand.  The funds necessary to meet these obligations are expected to be available from the proceeds of sales of properties or investments, refinancing, distributions from investments and available cash. The majority of maturing debt obligations for 2008 is a note payable to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of approximately $3.7 million.  This amount is due on demand.  The obligation due to TGIF will be paid with funds available from distributions from the Company’s investment in TGIF and from available cash.



(16)
 
 
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

MATERIAL COMPONENTS OF CASH FLOWS
For the nine months ended September 30, 2008, net cash provided by operating activities was approximately $837,000 primarily due to improved restaurant and spa operations.

For the nine months ended September 30, 2008, net cash provided by investing activities was approximately $478,000. This consisted primarily of approximately $3.1 million in net proceeds from sales of marketable securities and collections of notes receivable of approximately $500,000, partially offset by increased investments in marketable securities of $2.3 million, contributions to other investments of $495,000 and improvements to the Monty’s property of approximately $554,000.

For the nine months ended September 30, 2008, net cash used in financing activities was approximately $1.5 million consisting of $2 million restricted cash relating to the loan modification discussed in Note 7. $1 million of this restricted cash was contributed by the Company 50% partner in the Monty’s property.  Repayments of loans accounted for the other $508,000 cash used in financing activities.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Not applicable

Item 4T.  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 as of September 30, 2008.

(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.
 




(17)
 

PART II.   OTHER INFORMATION
Item 1.     Legal Proceedings: None.

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

Item 3.     Defaults Upon Senior Securities: None.

Item 4.     Submission of Matters to a Vote of Security Holders: None
 
Item 5.     Other Information: None
 

Item 6.     Exhibits:
 
(a)  Certifications pursuant to 18 USC Section 1350-Sarbanes-Oxley Act of 2002. Filed herewith.


 


(18)
 
 
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.
   
   
   
   
 
____________________________________
Dated:  November 14, 2008
/s/ Lawrence Rothstein
 
President, Treasurer and Secretary
 
Principal Financial Officer
   
   
 
____________________________________
Dated:  November 14, 2008
/s/Carlos Camarotti
 
Vice President- Finance and Controller
 
Principal Accounting Officer
 




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