SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-7865
HMG/COURTLAND PROPERTIES, INC.
(Name of small business issuer in its charter)
DELAWARE 59-1914299
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2701 S. Bayshore Drive, 33133
Coconut Grove, Florida (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (305) 854-6803
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
Share of Common Stock: on which registered:
Par value $1.00 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Total Number of Pages: 63 Exhibit Index: Page No.: 49
(continued)
(1)
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State the issuer's revenues for the most recent fiscal year:
$3,874,978
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: $2,111,834 based on the closing price of the stock as traded on
the American Stock Exchange on April 7, 1998. (Excludes shares of voting stock
held by directors, executive officers and beneficial owners of more than 10% of
the Registrant's voting stock; however, this does not constitute an admission
that any such holder is an "affiliate" for any purpose.)
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date: 1,166,835 shares of common
stock, $1 par value, as of April 7, 1998.
(2)
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Part I.
Item 1. Business.
HMG/Courtland Properties, Inc. (the "Company") invests in a portfolio of equity
interests in commercial real estate. The Company was organized in 1972 and
qualifies for taxation as a real estate investment trust ("REIT") under the
Internal Revenue Code. The Company's present investment policy is to invest
primarily in income-producing commercial properties.
To implement its investment policy, the Company directly and through its
subsidiaries has invested in improved properties and in the commercial
development of unimproved properties held in its portfolio or acquired for that
purpose.
The following table summarizes the Company's portfolio of real estate
investments as of December 31, 1997:
Percent of
Geographic Distribution Investments (1)
Florida 65%
Texas 30%
Northeastern United States (2) 5%
------
100%
Type of Property (3)
Undeveloped land 30%
Hotel and club facility 43%
Individual retail stores 4%
Yacht slips 9%
Restaurants and other 14%
-----
100%
-----------------
(1) For each category, the aggregate of cost less accumulated depreciation
divided by the aggregate of such investments in all real estate owned
directly by the Company or by joint ventures in which the Company has
a majority interest. The Company's minority interests in joint
ventures are not included in the above.
(2) New York, Massachusetts, Maine and Vermont.
(3) Based on predominant present or intended use.
Reference is made to Item 12. Certain Relationships and Related Transactions for
discussion of the Company's organizational structure and related party
transactions.
Consolidated Entities.
Courtland Investments, Inc. ("CII"). The Company owns a 95% equity interest in
CII (all non-voting). The other 5% equity interest (which is 100% of the voting
interest) is held by Masscap Investment Company, Inc. ("MICI"), a wholly-owned
subsidiary of Transco Realty Trust ("Transco") which is a 41% shareholder of the
Company. CII owns equity interests in certain corporations and partnerships that
(3)
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are passive (non-operating) in nature. CII also owns an interest in a
partnership which owns a 50 room hotel and private club (see discussion on Grove
Isle Associates, Ltd. "GIA"), a corporation (Grove Isle Club Inc."GICI") which
formerly operated the hotel and club and a joint venture owning the marina
adjacent to the hotel and club (Grove Isle Yacht Club Associates "GIYCA"). The
properties are located in Coconut Grove, Florida, and a more detailed
description of each follows:
Grove Isle Associates, Ltd. ("GIA"). This limited partnership (owned 15% by CII
and 85% by the Company) owns a 50 room hotel and private club facility (the
"facility") located on 7 acres of a private island in Coconut Grove, Florida,
known as "Grove Isle". In addition to the 50 hotel rooms, the facility includes
public space, tennis courts, and a pool. The facility is encumbered by a
mortgage note payable with an outstanding balance of $3.8 million and $4.3
million as of December 31, 1997 and 1996, respectively. On May 31, 1997, CII
sold a 45% partnership interest in Grove Isle Associates to the Company. The
ownership of GIA is now 85% directly by the Company and 15% by CII. This sale,
being between two consolidated entities, had no impact on the consolidated
financial statements of the Company.
In November 1996, GIA entered into a long-term lease with an unrelated tenant,
Westgroup Grove Isle Associates, Ltd. ("Westgroup") and a Master Agreement with
Westgroup whereby among other things Westgroup assumed the operations of the
Grove Isle hotel and club.
The leased premises includes all real property and all furniture, furnishings,
fixtures, appliances and other equipment used in connection with the operation
of the Grove Isle hotel, resort and membership club. The initial term of the
lease is ten years and calls for annual net base rent of $880,000 plus real
estate taxes and property insurance, payable in monthly installments. The lease
also called for an "initial payment" (as defined and as previously reported) of
$1,000,000. The "initial payment" of $1,000,000 was paid by Westgroup to GIA on
November 19, 1996 and the use of these funds was restricted in accordance with
the Master Agreement between GIA and Westgroup. GIA was obligated to provide to
Westgroup, upon receipt of required documentation, funds from the "initial
payment" for capital improvements made to the Grove Isle property and operating
shortfalls, as defined. As of November 1997, all restricted funds had been
disbursed in accordance with the Master Agreement and no restricted funds
remain. In addition to the "initial payment" and base net rent, Westgroup shall
also pay GIA participation rent consisting of a portion of Westgroup's operating
surplus, as defined in the lease agreement. Participation rent is due at end of
each lease year. No participation rent was due in 1997. Furthermore, also as
previously reported, in consideration for GICI relinquishment of its rights in
and to the original lease with GIA, GIA agreed to pay to GICI the sum of
$200,000 for each year that the Westgroup lease is in good standing and has also
assigned to GICI the aforementioned participation rent due from Westgroup. This
sum is payable annually commencing in November 1997, at which time the initial
payment was made.
During 1997 and in conjunction with the aforementioned agreements, GIA advanced
$500,000 to the principal owner of the tenant of the Grove Isle property. GIA
received a promissory note bearing interest at 8% per annum with interest
payments due quarterly beginning on July 1, 1997 and all principal due at
maturity in 2006. All interest payments due have been received.
Grove Isle Club, Inc. ("GICI"). This corporation operated the aforementioned
hotel and club through November 18, 1996. It's primary sources of revenues are
presently from the aforementioned $200,000 annual payment from GIA. As of
December 31, 1997 and 1996 GICI has amounts due to GIA (relating to prior year's
unpaid rent) of $1,759,000 and $1,841,000, respectively. This promissory note
bears interest at 8% per annum and is due on demand.
(4)
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Grove Isle Yacht Club Associates ("GIYCA"). This partnership was the original
developer of the 85 boat slips located at Grove Isle. As of December 31, 1997,
forty-one slips remain unsold and are encumbered by the aforementioned $3.8
million mortgage note payable by GIA. GIYCA (through a 100% owned subsidiary)
operates and maintains all aspects of the marina at Grove Isle in exchange for
an annual maintenance fee from the slip owners to cover operational expenses.
HMG-Fieber Associates ("Fieber"). HMG-Fieber Associates, a joint venture owned
65% by the Company and 35% by NAF Associates (NAF), a Connecticut general
partnership, owns 10 retail stores. Eight of the stores are leased to
Grossman's, Inc., a chain of home improvements stores, under net leases. Two
stores are not leased at the present time. During 1997 Fieber sold 4 of its
locations as described below. Also, effective January 1, 1997, each partner in
HMG-Fieber received its pro rata interest in the ventures' property located in
Vermont. The property was transferred at book value and resulted in no gain or
loss to the Company. All except one of the remaining leases contain renewal
options of at least five years.
Reference is made to Item 12. Certain Relationships and Related Transactions for
further information regarding the failure of Mr. Gray and Mr. Fieber to disclose
Mr. Gray's interest in NAF, the inquiry into that failure by a Special Committee
appointed by the Board of Directors and the actions taken by the Board of
Directors as a result of that inquiry.
In October 1997, Fieber sold its property located in Pittsfield, Maine for
$75,000 and recognized a gain to the venture of approximately $33,000. The net
gain to the Company was approximately $19,000.
In August 1997, Fieber sold its property located on Presque Isle, Maine for
$150,000 and recognized a gain to the venture of approximately $102,000. The net
gain to the Company was approximately $60,000.
In March 1997, Fieber sold its store located in Vestal, New York for $350,000
and recognized a gain to the venture of approximately $226,000. The net gain to
the Company was approximately $132,000.
In January 1997, Fieber sold its store located in Springfield, Massachusetts for
approximately $937,000 and recognized a gain to the venture of approximately
$774,000. The net gain to the Company was approximately $452,000.
In November 1996, Fieber sold its store located in Bangor, Maine for $275,000
and recognized a gain to the venture of approximately $181,000. The net gain to
the Company was approximately $106,000.
In November 1996, Fieber sold its store located in Ithaca, New York for $750,000
and recognized a gain to the venture of approximately $656,000. The net gain to
the Company was approximately $384,000.
In November 1996, Fieber sold its store located in Johnstown, New York for
$445,000 and recognized a gain to the venture of approximately $347,000. The net
gain to the Company was approximately $203,000.
In September 1996, Fieber sold its store located in Portland, Maine for $1.2
million and recognized a gain to the venture of approximately $1 million. The
net gain to the Company was approximately $589,000.
(5)
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In September 1996, Fieber sold its store located in West Springfield,
Massachusetts for $460,000 and recognized a gain to the venture of approximately
$376,000. The net gain to the Company was approximately $220,000.
The Grove Towne Center - Texas, Ltd. ("TGTC"). The Grove Towne Center-Texas,
Ltd. is a limited partnership owned 65% by the Company (including a 1% general
partnership interest by a wholly-owned subsidiary of the Company). The remaining
35% partnership interest is held by two unrelated entities.
TGTC was formed in 1994 for the purpose of developing an entertainment/value
oriented retail center on a 41 acre site in suburban Houston, Texas. As
previously reported, during the fourth quarter of 1995, TGTC decided not to go
forward with the project as designed.
On January 1, 1998 a 10% limited partner of TGTC assigned its partnership
interest to the Company in exchange for the cancellation of a $677,000
promissory note due to the Company. This assignment has no impact on the
Company's consolidated financial statements.
In January 1998, TGTC sold 13.5 acres for $2.6 million. The net gain on this
sale to the Company was approximately $796,000. The partnership continues to own
approximately 23 acres held for investment and/or development.
In December 1997 TGTC was awarded approximately $380,000 from the State of Texas
in consideration for the condemnation of 28,000 square feet of its property to
be used to widen the adjacent freeway. The net gain to the Company was
approximately $181,000.
In February 1997, TGTC sold .7 acres for $244,000. The net gain to the Company
was approximately $68,000.
In January 1997, TGTC sold 3.15 acres for $823,000. The net gain to the Company
was approximately $146,000.
In December 1996, TGTC sold a .7 acre corner site for approximately $433,000.
The net gain to the Company was approximately $129,000.
South Bayshore Associates ("SBA"). SBA is a joint venture, formed in 1986 in
which Transco Realty Trust (Transco) and the Company hold interests of 25% and
75%, respectively. The major asset of SBA is a demand note bearing interest at
the prime rate from Transco with an outstanding balance as of December 31, 1997
and 1996 of approximately $450,000 and $425,000, respectively, in principal and
accrued interest.
The Company holds a demand note (which is eliminated in consolidation) from SBA
bearing interest at the prime rate plus 1% with an outstanding balance including
accrued interest as of December 31, 1997 and 1996 of approximately $935,000 and
$877,000, respectively, in principal and accrued interest.
HMG Fashion Square, Inc. This wholly-owned subsidiary has a 90% partnership
interest in Fashion Square Partnership (the "partnership") formed in 1992 for
the purpose of developing a shopping center located on approximately 11.5 acres
near Jacksonville, Florida. The shopping center presently consists of four
operating restaurants and a Sears Homelife Center. Three of the four restaurant
operators are leasing the property from the partnership and the fourth operator
purchased the third and final out parcel from the partnership in November 1997,
as described below.
(6)
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In November 1997, the partnership sold its last out parcel, approximately one
acre, for $400,000. The net gain to the Company was approximately $175,000. The
purchaser is an operator of a chain of restaurants.
In December of 1996, the partnership entered into a lease with a tenant which is
an operator of a restaurant. The leased premises, a 6,242 square foot
restaurant, was constructed in 1996 and the partnership contributed $200,000
towards the cost of the restaurant building. The initial term of the lease is
ten years and calls for annual base rent of $80,000 for years one through five
and $88,000 for years six through ten. The lease also calls for percentage rent
of 3% of gross sales exceeding approximately $2.7 million for years one through
five and $2.9 million for years six through ten. No percentage rent was due in
1997. The lease also provides three five year renewal options for years eleven
through twenty-five with escalating base rent.
In November, 1994, the partnership entered into a ground lease with a tenant
which is an operator of a restaurant. In 1995, this tenant completed
construction of a restaurant on the 3/4 acres of land covered by the ground
lease. The initial term of the lease is twenty years and calls for base rent of
$60,000 per year with 12.5% increase every five years.
In March 1994, the partnership entered into a ground lease with a tenant which
is an operator of a 7,000 square foot restaurant on the one acre parcel covered
by the ground lease. The partnership agreed to contribute approximately $100,000
in improvements to the leased site. The initial term of the lease is ten years
and calls for base rent of $60,000 per year with 10% increases each subsequent
year. This property is encumbered by a mortgage loan of $300,000 which bears
interest at 9.75% which matured in November 1996 and was extended to July 1997.
HMG Sugargrove, Inc. This wholly-owned subsidiary owns approximately eight acres
of land held for development located in Houston, Texas and is encumbered by a
non-recourse mortgage loan which matured in February 1997 and was extended to
February 1998 and further extended to February 2000. This loan, as amended,
bears an annual rate of interest of 9.75% payable quarterly with principal
payments of approximately $16,000 due each February. The remaining principal
balances as of December 31, 1997 and 1996 were approximately $149,000 and
$165,000, respectively. In July 1997, a prospective buyer of the 8 acres
forfeited a $225,000 non-refundable deposit and did not close on the sale. This
amount has been recognized as other income.
Insurance, Environmental Matters and Other.
In the opinion of management, all assets of the Company are adequately covered
by insurance and the cost and effects of complying with environmental laws do
not have a material impact on the Company's operations.
(7)
<PAGE>
Other Transactions and Investments.
(a) Sales of Property.
During 1997, the Company sold approximately 9.4 acres of undeveloped land
located in Houston, Texas for approximately $997,000, and recognized a net
gain on the sales of approximately $131,000.
In December 1997, the Company was awarded approximately $1.1 million from
the State of Texas in consideration for the condemnation of certain
property in Houston, Texas. This property had been sold by the Company in
1994, but the rights to any condemnation proceeds were retained by the
Company per agreement with the buyer. The Company recognized a net gain of
approximately $663,000 on this condemnation.
Reference is made to the above sections of Item 1. Business and Item 6.
Management's Discussion and Analysis or Plan of Operation for information
concerning sales of properties.
(b) Other Investments.
Other Unconsolidated Investments of CII.
T.G.I.F. Texas, Inc. (T.G.I.F.). CII owns 2,798,232 shares of common stock
of T.G.I.F. Texas, Inc., a Texas publicly-held corporation (T.G.I.F.),
(representing 49.31% of T.G.I.F. equity) with a carrying value of
approximately $2.3 million. Mr. Wiener is a director and stockholder of
T.G.I.F. As of December 31, 1997 and 1996, CII had outstanding loans due to
T.G.I.F. of approximately $3.1 million and $2.5 million, respectively.
These loans are payable on demand and bear interest at the prime rate
(8.50% as of December 31, 1997). Interest is payable annually in January.
CII expects to repay these loans with proceeds from distributions of its
investments. The carrying value of CII's Investment in TGIF approximates
its net realizable value.
CII also owns investments primarily in the form of limited partnership
interests in companies whose purpose is to make equity investments in
growth oriented enterprises. The Company's ownership interest in these
partnerships represents less than 3% of each partnership's total ownership.
Competition.
The Company competes for suitable opportunities for real estate investments with
other real estate investment trusts, foreign investors, pension funds, insurance
companies and other investors. The Company also competes with other real estate
investors and borrowers for available sources of financing.
In addition, to the extent the Company directly and through its subsidiaries
leases properties, it must compete for tenants with other lessors offering
similar facilities. Tenants are sought by providing modern, well-maintained
facilities at competitive rentals. The Company has attempted to facilitate
successful leasing of its properties by investing in facilities that have been
developed according to the specifications of tenants and special local needs.
Employees.
The Company has no employees other than officers who are not compensated for
their services as such.
Advisory Agreement (the "Agreement").
Terms of the Agreement. Under the terms of the Agreement, amended and restated
on June 15, 1988, Courtland Group, Inc. (the "Advisor") serves as the Company's
investment advisor and, under
(8)
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the supervision of the directors of the Company, administers the day-to-day
operations of the Company. All officers of the Company who are officers of the
Advisor are compensated solely by the Advisor for their services. The Agreement
is renewable annually upon the approval of a majority of the directors of the
Company who are not affiliated with the Advisor and a majority of the Company's
shareholders. The contract may be terminated at any time on 120 days' written
notice by the Advisor or upon 60 days' written notice by a majority of the
unaffiliated directors of the Company or the holders of a majority of the
Company's outstanding shares.
Under the Agreement, as amended at the Company's 1992 annual meeting of
shareholders, the Advisor is entitled to receive a monthly fee of $72,917. The
Advisor is entitled to an annual incentive compensation equal to the sum of 10%
of net realized capital gains and extraordinary items of income for that year
and 10% of the amount, if any, by which net profits of the Company for such
fiscal year exceeded 8% per annum of the Average Net Worth of the Company, as
defined. The Advisor also is entitled to a monthly fee of 20% of the amount of
any unrefunded commitment fees received by the Company with respect to mortgage
loans and other commitments which the Company was not required to fund and which
expired within the next preceding calendar month.
New Advisory Agreement. As previously reported, on April 4, 1997, the Board of
Directors approved a new advisory agreement between the Company and HMG Advisory
Corp. effective for a term commencing January 1, 1998 through December 31, 1998.
This new advisory agreement was approved by a majority of the shareholders of
the Company at the 1997 Annual Meeting of Shareholders on June 27, 1997. The new
advisory agreement is substantially the same as the former advisory agreement
but with a 25% reduction in the regular compensation paid to the new advisor.
HMG Advisory Corp. is majority owned by Mr. Wiener with the remaining shares
owned by certain officers. The officers and directors of HMG Advisory Corp. are
as follows: Maurice Wiener, Chairman of the Board and Chief Executive Officer;
Lawrence I. Rothstein, President, Treasurer, Secretary and Director; Carlos
Camarotti, Vice President - Finance and Assistant Secretary; and Bernard Lerner,
Vice President.
Advisory Fees. For the year ended December 31, 1997, the Company and its
subsidiaries paid the Advisor approximately $1,260,000 in fees, of which
$875,000 represented regular compensation and approximately $385,000 represented
incentive compensation, including approximately $130,000 paid by CII to the
Advisor relating to capital gains realized by CII. In 1996, the Advisor's
regular compensation amounted to $875,000, while its incentive compensation
amounted to approximately $192,000, including approximately $26,000 paid by CII.
to the Advisor relating to capital gains realized by CII. The Advisor is also
the manager for certain of the Company's affiliates and received fees of $30,000
in 1997 and 1996, for such services.
Item 2. Description of Property.
The principal executive offices of the Company and the Advisor are located at
2701 South Bayshore Drive, Coconut Grove, Florida, 33133, in premises furnished
by the Advisor pursuant to the terms of the Agreement. Reference is made to Item
1. Business for a description of the Company's properties.
Item 3. Legal Proceedings.
As previously reported, the Company has made certain claims and took certain
other actions against Lee Gray, a former officer and Director of the Company,
Norman A. Fieber, a former Director of the Company, and certain related parties.
The Company's claims and actions arose from the failure of Messrs. Gray and
Fieber to disclose Mr. Gray's and Mr. Gray's sister's interest in the Company's
HMG-Fieber Wallingford Associates and HMG- Fieber Associates joint ventures (the
"Joint Ventures") and the inquiry into Messrs.
(9)
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Gray's and Fieber's failure to disclose Mr. Gray's interest in HMG-Fieber
Associates by a Special Committee appointed by the Board of Directors (the
"Inquiry"). The Company is currently party, as both plaintiff and defendant, to
litigation in three jurisdictions stemming from the Inquiry and the actions
taken by the Company and Courtland Group, Inc., a Delaware corporation ("CGI"),
subsequent to the Inquiry.
HMG Courtland Properties, Inc. v. Lee Gray et al.
On July 2, 1997, the Company filed suit in the Court of Chancery of the State of
Delaware in and for New Castle County against Lee Gray (individually and as a
partner in Martine Avenue Associates), Norman A. Fieber (individually and as a
partner in NAF Associates), Betsy Gray Saffell (Lee Gray's sister) (individually
and as a partner in Martine Avenue Associates), Martine Avenue Associates, (a
New York general partnership in which Mr. Gray and Mrs. Saffell are the general
partners) ("Martine"), NAF Associates (a Connecticut general partnership in
which Mr. Fieber and Martine are general partners, and the Company's joint
venture partner in HMG-Fieber Associates ("NAF"), and The Jim Fieber Trust ( a
trust for beneficiaries including Mr. Fieber and Martine, and the Company's
joint venture partner in HMG-Fieber Wallingford Associates, which has James A
Fieber, son of Norman A. Fieber, as trustee) (the "Trust").
The Company's lawsuit is based on the facts underlying the Board of Directors'
conclusion , based upon the report of the Special Committee following the
Inquiry and in consultation with counsel, that Mr. Gray breached his fiduciary
duties to the Company and CGI by failing to disclose his and his sister's
interest in the Joint Ventures, and that Mr. Fieber breached his fiduciary duty
to the Company and assisted Mr. Gray by failing to disclose Mr. Gray's and Mr.
Gray's sister's interest in the Joint Ventures. The Company's suit makes the
following claims: (I) breach of fiduciary duty against Mr. Gray; (ii) breach of
fiduciary duty against Mr. Fieber; (iii) aiding and abetting against Mr. Fieber,
Mrs. Saffell, Martine, NAF and the Trust; (iv) usurpation of a corporate
opportunity against all defendants; (v) common law fraud against Messrs. Gray
and Fieber; and (vi) conspiracy against all defendants. Relief being sought by
the Company includes: (I) damages; (ii) imposition of constructive trust for the
benefit of the Company over, and an accounting of, the defendants' interests in
the Joint Ventures; (iii) a recision of the transactions which created the Joint
Ventures; and (iv) a disgorgement of all interests and profits derived by all
the defendants from the Joint Ventures. The lawsuit is currently in the early
stages of discovery. The Company believes strongly that its claims are
meritorious and intends to vigorously pursue all legal remedies against all
defendants.
Lee Gray v. HMG/Courtland Properties, Inc et al.
On May 22, 1997, Lee Gray, a former director and officer and a shareholder of
the Company and a former officer and director and a shareholder of CGI, which
currently serves as the Company's advisor pursuant to an advisory agreement
which expires December 31, 1997, filed suit in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida against the following
defendants: (I) the Company; (ii) all of the directors and certain of the
officers of the Company and of CGI; (iii) CGI; and (iv) HMG Advisory Corp., a
Delaware corporation that will serve as the Company's advisor commencing January
1, 1998 pursuant to the advisory agreement approved by the shareholders at the
Company's Annual Meeting held on June 27, 1997.
In his lawsuit, Mr. Gray, individually and derivatively as a shareholder of CGI,
alleges, among other things, that his removal as an officer of the Company, his
failure to be nominated for reelection as Director of the Company, his
subsequent removal as an officer and director of CGI and the Board of Directors'
decision not to renew the Company's former advisory agreement with CGI, were the
product of a conspiracy involving certain officers and Directors of the Company
and of CGI who wanted to force Mr. Gray out of the Company and CGI, and to
terminate the Company's advisory agreement with CGI, for their own financial
gain. Mr. Gray has also alleged that he was libeled in the discussion of
(10)
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the Inquiry and the results thereof in certain documents, including documents
filed with the Securities and Exchange Commission. Mr. Gray is seeking money
damages in excess of $15,000, punitive damages, and temporary and permanent
injunctive relief on the following grounds: (I) breach of fiduciary duty against
the directors and certain of the officers of the Company; (ii) libel against the
Company and the directors and certain of the officers of the Company; (iii)
breach of fiduciary duty against the officers and directors of CGI; and (iv)
tortious interference with an advantageous business relationship against
defendants HMG Advisory Corp. and the officers and directors of CGI.
On July 10, 1997, the Company filed a motion to dismiss the portion of the
lawsuit directed against it and its directors. The motion to dismiss was granted
November 18, 1997. On December 1, 1997, Mr. Gray filed an amended complaint that
seeks to reinstate the libel claim against the Company. The Company has moved to
dismiss the amended complaint. The motion is currently subjudice. The Company
and its officers and directors believe strongly that they have meritorious
defenses to, and intend to vigorously defend against, the claims made by Mr.
Gray.
CGI also filed a motion to dismiss the tortious interference claims described in
(iv) above which was granted. HMGA filed a motion to dismiss which was granted.
HMGA is no longer a defendant.
Norman A. Fieber v. HMG/Courtland Properties, Inc. et al.
On July 8, 1997, Norman A. Fieber, NAF Associates and James A. Fieber, Trustee
(collectively, the "Fieber Plaintiffs") filed a separate lawsuit against the
Company in the Superior Court of the State of Connecticut, Fairfield/Bridgeport
Judicial District. In their lawsuit, the Fieber Plaintiffs are seeking a
declaratory judgement absolving them of any liability to the Company on
essentially all of the issues and claims being considered in the Company's
lawsuit in Delaware discussed above.
On August 27, 1997, the Company moved to dismiss, or in the alternative, stay
this action on the grounds that the declaratory judgement action was
inappropriate given the pendency of the Company's prior pending lawsuit in
Delaware. This motion is currently subjudice. The Company intends to vigorously
oppose the Fieber Plaintiffs' declaratory judgment action.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
(11)
<PAGE>
Part II.
Item 5. Market Price for Common Equity and Related Stockholder Matters.
The high and low per share sales prices of the Company's stock on the American
Stock Exchange for each quarter during the past two years were as follows:
High Low
March 31, 1996 7 3/4 7 1/4
June 30, 1996 7 1/4 6 7/8
September 30, 1996 6 7/8 6 1/2
December 30, 1996 6 3/8 4 5/8
March 31, 1997 4 7/8 4 1/8
June 30, 1997 4 7/8 4 1/8
September 30, 1997 4 7/8 4 1/8
December 31, 1997 4 7/8 4 1/8
The Company stopped paying dividends, beginning in the fourth quarter of 1990,
in order to preserve its cash in light of the overall economic conditions and
for future development opportunities. The Company's policy has been to pay such
dividends as are necessary for it to qualify for taxation as a REIT under the
Internal Revenue Code. The Company continues to meet all qualifications for
taxation as a REIT.
As of April 7, 1998, there were 223 holders of record of the Company's common
stock.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Discussion of Balance Sheet Items:
At December 31, 1997, the balance sheet reflected assets consisting primarily of
equity interests in real estate investment properties and investments in
unconsolidated entities. Liabilities at December 31, 1997 consisted principally
of mortgages on individual properties.
Significant changes and/or activity in specific balance sheet items between
December 31, 1997 and 1996 are described below:
Assets:
Commercial and industrial properties as of December 31, 1997 remained consistent
with that of 1996 at approximately $3.0 million. During 1997, however, CII
purchased an office building located in Coconut Grove, Florida for approximately
$575,000. This increase was partially offset by the sales of four properties
held by HMG-Fieber Associates with a total net book value of $304,000 and the
sale of an out parcel by Fashion Square Partnership with a net book value of
$150,000.
The carrying value of the hotel and club facility decreased from approximately
$8.1 million to approximately $7.3 million, a decrease of approximately $800,000
(or 10%). This was primarily the result of depreciation expense of approximately
$872,000.
(12)
<PAGE>
Land held for development decreased from approximately $6.7 million to
approximately $5.1 million, a decrease of approximately $1.6 million (or 24%).
This was primarily as the result of sales of land located in Houston, Texas.
Investments in and receivables from unconsolidated entities increased from
approximately $3.1 million to approximately $4.1 million, an increase of
approximately $1 million (or 32%). This was primarily as a result of
approximately $378,000 of additional investments (net of distributions) by CII
in limited partnerships whose primary purpose is to make equity investments in
growth-oriented enterprises and an increased investment balance in TGIF Texas,
Inc. of approximately $538,000.
Notes and advances due from related parties decreased from approximately
$842,000 to approximately $656,000, a decrease of approximately $186,000 (or
22%). This was primarily due to repayments of amounts due from Courtland Group,
Inc.
The Company's consolidated balance in cash and cash equivalents increased from
approximately $1.4 million to approximately $2.5 million, an increase of
approximately $1.1 million (or 76%) . This increase is primarily the result of
increased proceeds from the disposal of properties and increased other income
and gains from unconsolidated entities.
Restricted cash decreased by $1 million as the result of the disbursement during
1997 of the initial payment received by Grove Isle Associates, Ltd. in
connection with the lease agreement and master agreement entered into with
Westgroup in November 1996. Reference is made to the above sections of Item 1.
Business for discussion regarding the Grove Isle lease.
Other assets increased from approximately $618,000 to approximately $895,000, an
increase of approximately $277,000 (or 45%). This was primarily the result of
$250,000 of funds in escrow relating to the condemnation of certain property
located in Houston, Texas on December 31, 1997.
Liabilities:
Accounts payable and accrued expenses decreased from approximately $1.6 million
to approximately $900,000, a decrease of approximately $700,000 (or 44%). This
was primarily as a result of decreased accounts payable balances of The Grove
Towne Center, Ltd., Fashion Square partnership and Grove Isle Club, Inc.
Mortgages and notes payable increased from approximately $10.1 million to
approximately $10.2 million, an increase of approximately $100,000 (or 1%). The
activity during the year consisted of additional borrowing of $350,000 by
Fashion Square Partnership from a bank, additional borrowings of $431,000 by CII
from a bank with proceeds used to purchase an office building in Coconut Grove,
Florida in August of 1997, and additional borrowings by CII from TGIF Texas of
approximately $665,000. These borrowings were partially offset by repayments of
debt of approximately $1.3 million.
Other liabilities decreased from approximately $1.3 million to approximately
$391,000, a decrease of approximately $893,000 (or 67%). This was primarily as
the result of the disbursement by GIA of the $1 million restricted cash payment
received in 1996 from the new tenant at Grove Isle. Reference is made to Item 1.
Business for further information regarding this disbursement). The decrease in
other liabilities was partially offset by an increase in other liabilities of
The Grove Towne Center, Ltd. as a result of deposits held on pending sales of
real estate of $250,000.
(13)
<PAGE>
Results of Operations:
For the year ended December 31, 1997, the Company reported net income of
approximately $548,000 compared with a net loss of approximately $2.1 million
for the year ended December 31, 1996. Changes in specific revenues and expenses
are discussed below.
Revenues:
1997 versus 1996:
Total revenues for the year ended December 31, 1997 as compared with that of
1996 decreased by approximately $4 million (or 51%). This decrease was primarily
due to decreased operating revenues from the Grove Isle hotel, club and marina
of approximately $5.6 million (or 91%) as the result of the lease of the Grove
Isle property in November 1996 (Reference is made to the above sections of Item
1. Business). This decrease in revenues was partially offset by increased rental
and related revenues of approximately $370,000 (or 28%), increased gains from
unconsolidated entities of approximately $889,000 (consisting primarily of CII's
gain from TGIF Texas and from other investments), and increased interest income
from invested cash, dividends and other of approximately $520,000 (primarily
consisting of a approximately $202,000 gain from the forfeiture of a
non-refundable deposit and approximately $107,000 gain from the sale of a yacht
slip).
Expenses:
1997 versus 1996:
Total expenses for the year ended December 31, 1997 as compared to that of 1996
decreased by approximately $6.3 million (or 55%). The primary factor
contributing to this decrease was the termination of operations of the Grove
Isle Club in November 1996.
Total operating expenses of the Grove Isle hotel, club and marina decreased
approximately $6.3 million (or 90%) in fiscal 1997 versus 1996. The only
remaining costs included in this category pertain to the operations of the Grove
Isle Marina which remained consistent with that of last year (approximately
$504,000). The related revenues from the marina operations which are included in
other income were approximately $476,000 for 1997 and approximately $484,000 for
1996.
Operating expenses of rental properties and other decreased by approximately
$222,000 or (21%) for the year ended December 31, 1997 as compared to 1996. This
decrease was due to lower operating expenses of Grove Isle Associates and
HMG-Fieber.
General and administrative expenses increased by approximately $418,000 or (77%)
for the year ended December 31, 1997 as compared to 1996. This increase was
primarily due to increased legal fees relating to on-going litigation.
Minority partner's interest in operating losses of consolidated entities
decreased by approximately $103,000 (or 56%) primarily due to decreased losses
from Courtland Investments, Inc. and subsidiaries, primarily Grove Isle Club,
Inc.
Net gain on sale of real estate for the year ended December 31, 1997 consisted
of the following:
Net gain after incentive
Property Sold fee and minority interest
HMG-Fieber retail stores in various states $ 664,000
Undeveloped land in Texas 1,190,000
Land in Florida shopping center 174,000
----------
$2,028,000
==========
(14)
<PAGE>
Projected Operating Results:
The Company discontinued operating the Grove Isle property in November 1996. As
a result of this the Company no longer generates hotel and club revenues, nor
does it incur the related expenses. The Company's rental and related revenues in
1998 are expected to remain consistent with those of 1997.
Effect of Inflation:
Inflation affects the costs of operating and maintaining the Company's
investments and the availability and terms of financing. 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 and Capital Resources:
The Company's material commitments primarily consist of maturities of debt
obligations of approximately $4.4 million in 1998. The funds necessary to meet
these obligations are expected from the proceeds of sales of properties,
refinancing, distributions from investments and available cash. Included in the
maturing debt obligations is a note payable by CII to TGIF of approximately $3.1
million due on demand. CII intends to repay this obligation, when due, with
funds available from distributions from investments. In addition, the Company
intends to continue to seek opportunities for investment in income producing
properties.
The Company used cash from operating activities of approximately $2.2 million
for the year ended December 31, 1997 versus approximately $3.3 million in 1996.
The Company's cash flow from operating activities in 1998 is expected to remain
consistent with that of 1997.
Capital Expenditure Requirements:
The Company does not presently anticipate any significant capital expenditures,
other than in the ordinary course of business.
The Company is not presently in the process of evaluating the conversion of its
computer systems to "Year 2000" compliant software. However, the Company does
not expect the cost of such conversion to be material to its financial condition
or results of operations, nor does it anticipate any material disruption in its
operations with respect thereto.
Material Changes in Operating, Investing and Financing Cash Flows:
Discussion of 1997 Changes.
For the year ended December 31, 1997, net cash provided by investing activities
was approximately $3.5 million. This consisted primarily of net proceeds from
disposals of properties of approximately $4.7 million, less increased mortgage
loans, notes and other receivables (net of decreases) of approximately $450,000,
less acquisitions and improvements of properties of approximately $670,000
(primarily relating to the acquisition of an office building in Coconut Grove,
Florida and less additional investments (net of distributions) of approximately
$161,000 made by CII in limited partnerships whose primary purpose is to invest
in growth- oriented companies.
For the year ended December 31, 1997, net cash used in financing activities was
approximately $170,000. This consisted of repayment of mortgages and notes
payable of $1.3 million and distributions to minority partners of approximately
$302,000, partially offset by additional borrowings of $1.4 million (primarily
from CII's 49%-owned affiliate).
Future Accounting Pronouncements. SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive
income, its components and accumulated balances.
(15)
<PAGE>
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate the resources and in assessing performance.
Both SFAS No. 130 and 131, issued in June 1997, are effective for financial
statements for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
Forward Looking Statements Except for historical information contained herein,
the matters discussed in this Item 6, in particular, statements that use the
words "believes", "intends", "anticipates" or "expects" are intended to identify
forward looking statements that are subject to risks and uncertainties
including, but not limited to, increased competition, governmental action, legal
actions, and other unforeseen factors. The results of financial operations
reported herein are not necessarily an indication of future prospects of the
Company. Future results may differ materially.
(16)
<PAGE>
Item 7. Consolidated Financial Statements
Report of Independent Certified Public Accountants..................18.
Consolidated balance sheets December 31, 1997 and 1996..............19.
Consolidated statements of operations for the
years ended December 31, 1997 and 1996...........................20.
Consolidated statements of stockholders' equity for
the years ended December 31, 1997 and 1996.......................21.
Consolidated statements of cash flows for the
years ended December 31, 1997, and 1996..........................22.
Notes to consolidated financial statements..........................23.
(17)
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of HMG/Courtland Properties, Inc.:
We have audited the accompanying consolidated balance sheets of HMG/Courtland
Properties, Inc. and its subsidiaries (the "Company") as of December 31, 1997,
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1997, and 1996 and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Miami, Florida
April 7, 1998
(18)
<PAGE>
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
ASSETS NOTES
<S> <C> <C> <C>
Investment Properties, net of accumulated depreciation: 2
Commercial and Industrial $3,046,597 $3,044,789
Hotel and Club Facility 7,254,692 8,086,619
Yacht Slips 1,557,675 1,708,307
Land Held for Development 5,073,976 6,712,173
---------------- ----------------
Total investment properties, net 16,932,940 19,551,888
Investments In and Receivables From Unconsolidated Entities 3 4,138,935 3,068,925
Notes and Advances Due From Related Parties 4 655,912 841,798
Loans, Notes and Other Receivables 894,935 444,892
Cash and Cash Equivalents 2,492,059 1,389,546
Cash Restricted 8 1,000,000
Other Assets 894,842 618,396
---------------- ----------------
TOTAL ASSETS $26,009,623 $26,915,445
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts Payable and Accrued Expenses 888,346 1,621,924
Mortgages and Notes payable 5 10,216,407 10,084,395
Other Liabilities 390,864 1,283,809
---------------- ----------------
TOTAL LIABILITIES 11,495,617 12,990,128
Minority interests 396,694 356,018
---------------- ----------------
STOCKHOLDERS' EQUITY 7
Preferred Stock, no par value; 2,000,000 shares
authorized; none issued
Common Stock, $1 par value; 1,500,000 shares authorized;
1,245,635 shares issued and outstanding 1,245,635 1,245,635
Additional Paid-in Capital 26,283,222 26,283,222
Undistributed Gains From Sales of Real Estate, net of losses 35,151,554 33,123,339
Undistributed Losses From Operations (47,566,637) (46,086,435)
---------------- ----------------
15,113,774 14,565,761
Less: Treasury Stock, at cost (78,800 shares) (996,462) (996,462)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 14,117,312 13,569,299
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,009,623 $26,915,445
================ ================
</TABLE>
See notes to consolidated financial statements
(19)
<PAGE>
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
For the year ended
December 31,
Notes 1997 1996
REVENUES
<S> <C> <C> <C>
Rentals and related revenue $1,707,430 $1,337,527
Hotel, club and marina revenues 537,226 6,154,686
Gain from sales of marketable securities 71,894 252,908
Gain from unconsolidated entities 909,450 20,856
Interest from invested cash and other 648,978 129,147
-------------------------------------
Total revenues 3,874,978 7,895,124
-------------------------------------
EXPENSES
Operating expenses:
Rental Properties and other 822,980 1,044,816
Hotel, club and marina expenses:
Payroll and related expenses 221,284 2,784,706
Cost of food and beverage 1,170,471
Administrative and general expenses 473,433 3,083,577
Advisor's fee 4 875,000 875,000
General and administrative 962,488 544,124
Directors' fees and expenses 63,227 69,248
Depreciation and amortization 2 1,080,347 1,152,085
-------------------------------------
Total operating expenses 4,498,759 10,724,027
Interest expense 936,027 958,944
Minority partners' interests in operating
losses of consolidated entities (79,606) (182,876)
-------------------------------------
Total expenses 5,355,180 11,500,095
-------------------------------------
Loss before sales of real estate (1,480,202) (3,604,971)
Gain on sales of real estate, net 2,028,215 1,486,162
-------------------------------------
Net Income (loss) $548,013 ($2,118,809)
=====================================
Net Income (loss) Per Common Share, Basic and Diluted
(Based on 1,166,835 weighted average shares outstanding) $0.47 ($1.82)
=====================================
</TABLE>
See notes to consolidated financial statements
(20)
<PAGE>
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
Undistributed
Additional Gains from Sales Undistributed Total
Common Stock Paid-In of Real Estate, Losses from Treasury Stock Stockholders'
Shares Amount Capital Net of Losses Operations Shares Cost Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 1,245,635 $1,245,635 $26,283,222 $31,637,177 ($42,481,464) 78,800 ($996,462) $15,688,108
Net Income (Loss) 1,486,162 (3,604,971) (2,118,809)
------------------------------------------------------------------------------------------------
Balance as of December 31, 1996 1,245,635 1,245,635 26,283,222 33,123,339 (46,086,435) 78,800 (996,462) 13,569,299
Net Income (Loss) 2,028,215 (1,480,202) 548,013
-----------------------------------------------------------------------------------------------
===============================================================================================
Balance as of December 31, 1997 1,245,635 $1,245,635 $26,283,222 $35,151,554 ($47,566,637) 78,800 ($996,462) $14,117,312
===============================================================================================
</TABLE>
See notes to consolidated financial statements
(21)
<PAGE>
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 548,013 ($2,118,809)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,080,347 1,152,085
Gain from unconsolidated entities (909,450) (20,856)
Gain on sales of real estate, net (2,028,215) (1,486,162)
Gain from sales of marketable securities, net (71,894) (252,908)
Minority partners' interest in operating losses (79,606) (182,876)
Changes in assets and liabilities:
(Increase) decrease in other assets (276,591) 860,362
Decrease (increase) in due from affiliates 185,886 (227,280)
Decrease in accounts payable and accrued expenses (733,580) (632,100)
Decrease in other liabilities 107,055 (348,812)
----------- -----------
Total adjustments (2,726,048) (1,138,547)
----------- -----------
Net cash used in operating activities (2,178,035) (3,257,356)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Aquisitions and improvements of properties (669,806) (516,009)
Net proceeds from disposals of properties 4,714,429 4,264,004
Increase in mortgage loans, notes and other loans receivable (1,419,622) (25,670)
Decrease in mortgage loans, notes and other loans receivable 969,579 311,385
Net contributions to unconsolidated entities (160,560) (629,059)
Net proceeds from sales and redemptions of securities 89,599 344,424
Increase in investments in securities (73,344) (91,995)
----------- -----------
Net cash provided by investing activities 3,450,275 3,657,080
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgages and notes payables (1,313,931) (1,073,498)
Additions to mortgages and notes payables 1,445,943 2,252,727
Net distributions to minority partners (301,739) (1,284,406)
----------- -----------
Net cash used in financing activities (169,727) (105,177)
----------- -----------
Net increase in cash and cash equivalents 1,102,513 294,547
Cash and cash equivalents at beginning of the period 1,389,546 1,094,999
----------- -----------
Cash and cash equivalents at end of the period $ 2,492,059 $ 1,389,546
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 936,000 $ 959,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
The Company leased its Grove Isle Facility in November 1996 and received an
initial payment (as defined) of $1,000,000. The use of these funds was
restricted per agreement and accordingly this amount was recorded as restricted
cash and included in other liabilities for the year ended December 31, 1996. As
of December 31, 1997 all restricted funds have been disbursed as required by
agreement and no restricted funds remain.
</TABLE>
See notes to consolidated financial statements
(22)
<PAGE>
HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The 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. Investments
in which the Company does not have a majority voting or financial controlling
interest are accounted for under the equity method of accounting , even though
the Company may have a majority interest in profits and losses. All material
transactions with consolidated and unconsolidated entities have been eliminated
in consolidation or as required under the equity method.
The Company's consolidated subsidiaries are described below:
Courtland Investments, Inc. ("CII"). A 95% owned corporation which owns 100% of
Grove Isle Club, Inc. (through its wholly-owned subsidiary), 15% general
partnership interests in Grove Isle Associates, Ltd., and a 100% interest in
Grove Isle Yacht Club Associates. These entities are described below.
CII's other assets primarily consist of investments recorded under the equity
method of accounting (See Note 3).
Grove Isle Associates, Ltd. ("GIA"). This limited partnership owns a 50 room,
hotel and private club facility located on approximately 7 acres of a private
island in Coconut Grove, Florida known as Grove Isle. (See Note 8).
Grove Isle Club, Inc. ("GICI"). This corporation was the former operator of the
hotel and club of GIA. GICI's present revenues consists solely of the amounts
received from GIA in consideration for the relinquishment of its lease of the
Grove Isle property (See Note 8).
Grove Isle Yacht Club Associates ("GIYCA"). This partnership was the original
developer of the 85 boat slips located at Grove Isle of which 41 remain unsold.
GIYCA and its wholly-owned subsidiary operate all aspects of the Grove Isle
marina.
The Grove Towne Center - Texas, Ltd. A 65% owned limited partnership having a
wholly-owned subsidiary of the Company as its sole general partner. This
partnership was formed in 1994 with its principal asset being a 41 acre site
located in suburban Houston, Texas, held for investment and development. During
the year ended December 31, 1997 this partnership sold approximately 4.5 acres
of its property and in January 1998, the partnership sold another 13.5 acres.
South Bayshore Associates. A 75% owned venture of which the major asset is a
receivable from the Company's venture partner.
HMG - Fieber Associates. A 65% owned venture of which the major assets are
commercial properties located in the northeastern United States. (See Note 4).
260 River Corp. A 100% subsidiary of the company which owns a 65% interest in
one property located in Montpelier, Vermont. This property was transferred at
book value from HMG-Fieber effective January 1, 1997.
(23)
<PAGE>
HMG Sugargrove, Inc. A wholly-owned Texas corporation of which the major asset
is an 8 acre parcel of land in Houston, Texas, held for development. During 1997
this subsidiary recognized a net gain of approximately $202,000 from the
forfeiture of a non-refundable deposit relating to the sale of the 8 acres which
did not close.
HMG Fashion Square, Inc. A wholly-owned Florida corporation of which the major
asset is a 90% partnership interest in Fashion Square Partnership which owns a
shopping center on an approximate 10 acre site in Jacksonville, Florida. As of
December 31, 1997, this shopping center has three tenants each operating
restaurants. During 1997, this partnership sold an out parcel for approximately
$400,000 and recognized a net gain to the Company of approximately $175,000. The
remaining portion of the center is anticipated to be leased or developed.
Unconsolidated entities are discussed in Note 3.
The following table summarizes the Company's portfolio of real estate
investments as of December 31, 1997:
Percent of
Geographic Distribution Investments (1)
Florida 65%
Texas 30%
Northeastern United States (2) 5%
------
100%
======
Type of Property (3)
Undeveloped land 30%
Hotel and club facility 43%
Individual retail stores 4%
Yacht slips 9%
Restaurants and other 14%
-----
100%
======
-----------------
(1) For each category, the aggregate of cost less accumulated
depreciation divided by the aggregate of such investments in all
real estate owned directly by the Company or by joint ventures in
which the Company has a majority interest. The Company's minority
interests in joint ventures are not included in the above.
(2) New York, Massachusetts, Maine and Vermont.
(3) Based on predominant present or intended use.
Preparation of Financial Statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes. The Company qualifies as a real estate investment trust and
distributes its taxable operating income to stockholders in conformity with
requirements of the Internal Revenue Code. In
(24)
<PAGE>
addition, net operating losses can be carried forward to reduce future taxable
income but cannot be carried back. The Company intends to distribute any of its
future taxable operating income and is not taxed on the amounts distributed.
Distributed capital gains on sales of real estate are not subject to taxes;
however, undistributed capital gains are taxed as capital gains. State income
taxes are not significant.
Any benefit from or provisions for income taxes relates solely to taxable losses
or income of CII which is not consolidated with the Company for income tax
purposes and accordingly files a separate tax return. Refer to Note 6 for
further disclosure on income taxes.
Depreciation and Amortization. Depreciation of properties held for investment is
computed using the straight-line method over the estimated useful lives of the
properties, which range up to 39.5 years. Deferred mortgage and leasing costs
are amortized over the shorter of the respective term of the related
indebtedness or life of the asset. Depreciation expense for the years ended
December 31, 1997, and 1996 was approximately $1 million and $1.1 million,
respectively. Amortization expense for the years ended December 31, 1997 and
1996 was approximately $58,000 and $53,000, respectively.
Fair Value of Financial Instruments. The carrying value of financial instruments
including investments in and receivables from unconsolidated entities, notes and
advances due from related parties, accounts payable and accrued expenses and
mortgages and notes payable approximate their fair values at December 31 1997.
Investment Properties. The Company reviews the carrying values of its investment
properties for possible impairment whenever events or changes in circumstances
indicate that the true carrying amount of the asset may not be recoverable. Any
long-lived assets held for sale are reported at the lower of their carrying
amounts or fair values less cost to sell.
Earnings (Loss) Per Common Share. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share", which simplifies the
standards for computing earnings per share ("EPS") previously found in APR No.
15, "Earnings Per Share". It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the diluted EPS computation. The Company adopted SFAS No. 128 in
1997 and its implementation did not have a material effect on the financial
statements. EPS has been restated for all prior periods presented.
Net income (loss) per common share (basic and diluted) is based on the net
income (loss) divided by the weighted average number of common shares
outstanding during each year. Common shares outstanding includes issued shares
less shares held in treasury.
The Company's potential issuable shares of common stock pursuant to outstanding
stock purchase options are excluded from the Company's diluted computation as
their effect would be antidilutive to the Company's net income (loss).
Gain on Sales of Real Estate. Gain on sales of real estate has been reduced,
where applicable, by minority partners' interest in the gain of $422,000 and
$975,000 and advisor's incentive fees of $225,000 and $165,000 for the years
ended December 31, 1997 and 1996, respectively.
Cash and Cash Equivalents. For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments with a maturity of
three months or less to be cash and cash equivalent.
(25)
<PAGE>
Restricted Cash. Restricted cash as of December 31, 1996 consisted of the $1
million "initial payment" received by GIA, in connection with the lease of the
Grove Isle Facility (see Note 8). The use of these funds was restricted in
accordance with the Master Agreement between GIA and its tenant Westgroup. GIA
fulfilled its obligation in accordance with the Master Agreement and disbursed
the restricted funds to Westgroup for capital improvements and to cover any
operating shortfalls, as defined. No restricted funds remain as of December 31,
1997.
Reclassifications. Certain amounts in prior year's consolidated financial
statements have been reclassified to conform to the current year's presentation.
Minority Interest. Minority interest represents the minority partners'
proportionate share of the equity of the Company's majority owned subsidiaries.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Minority interest balance at beginning of year $ 356,000 $ 848,000
Minority partners' interest in operating losses of consolidated
subsidiaries (80,000) (183,000)
Minority partners' interest in net gain on sales of real estate of
consolidated subsidiaries 422,000 975,000
Distributions to minority partners, net of contributions and
note receivable from minority partner (314,000) (1,297,000)
Other 13,000 13,000
----------- -----------
Minority interest balance at end of year $ 397,000 $ 356,000
=========== ===========
</TABLE>
Long-Lived Assets. The Company adopted the provision of FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," in 1996. The adoption of FASB No. 121 did not have a material
effect on the carrying value of the Company's long-lived assets.
Stock-Based Compensation. In October 1995, FASB issued SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 establishes a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company did not adopt the fair value based method for employee
options but instead will disclose the proforma effects of the calculation
required by the statement.
Revenue Recognition. The Company is the lessor of various real estate. All of
the lease agreements are classified as operating leases and accordingly all
rental revenue is recognized as earned based upon total fixed cash flow over the
initial term of the lease, using the straight line method. Percentage rents are
based upon tenant sales levels for a specified period. Reimbursed expenses for
real estate taxes, common area maintenance, utilities and insurance are
recognized in the period in which the expenses are incurred, based upon the
provisions of the tenant's lease.
Future Accounting Pronouncements. SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of
(26)
<PAGE>
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate the resources and in assessing performance.
Both SFAS No. 130 and 131, issued in June 1997, are effective for financial
statements for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
(27)
<PAGE>
2. INVESTMENT PROPERTIES
The components of the Company's properties and the related accumulated
depreciation information follows:
<TABLE>
<CAPTION>
December 31, 1997
Accumulated
Cost Depreciation Net
<S> <C> <C> <C>
Commercial and Industrial Properties
Land $ 1,444,890 $ 1,444,890
Buildings and improvements 2,930,635 $ 1,328,928 1,601,707
----------- ----------- -----------
4,375,525 1,328,928 3,046,597
----------- ----------- -----------
Hotel and Club Facility
Land 1,338,518 1,338,518
Hotel/ club facility and improvements 6,910,614 1,583,641 5,326,973
Furniture, fixtures & equipment 2,231,630 1,642,429 589,201
----------- ----------- -----------
10,480,762 3,226,070 7,254,692
----------- ----------- -----------
Yacht Slips 1,557,675 1,557,675
----------- ----------- -----------
Land Held for Development 5,073,976 5,073,976
----------- ----------- -----------
Total $21,487,938 $ 4,554,998 $16,932,940
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Accumulated
Cost Depreciation Net
<S> <C> <C> <C>
Commercial and Industrial Properties
Land $ 1,365,282 $ 1,365,282
Buildings and improvements 3,309,092 $ 1,629,585 1,679,507
----------- ----------- -----------
4,674,374 1,629,585 3,044,789
----------- ----------- -----------
Hotel and Club Facility
Land 1,338,518 1,338,518
Hotel/ club facility and improvements 6,890,309 1,147,028 5,743,281
Furniture, fixtures & equipment 2,196,131 1,191,311 1,004,820
----------- ----------- -----------
10,424,958 2,338,339 8,086,619
----------- ----------- -----------
Yacht Slips 1,708,307 1,708,307
----------- ----------- -----------
Land Held for Development 6,712,173 6,712,173
----------- ----------- -----------
Total $23,519,812 $ 3,967,924 $19,551,888
=========== =========== ===========
</TABLE>
(28)
<PAGE>
3. INVESTMENTS IN AND RECEIVABLES FROM UNCONSOLIDATED ENTITIES
As of December 31, 1997 the Company's investments in and receivables from
unconsolidated entities primarily consisted of CII's 49% equity interest in
T.G.I.F. Texas, Inc. (T.G.I.F.) and CII's other investments. CII owns 49% of the
outstanding common stock of T.G.I.F., a publicly-held Texas corporation engaged
in the business of owing net leased properties in Texas and Louisiana, which is
accounted for under the equity method. During 1997, T.G.I.F. sold its four
locations in Texas for $4 million. This sale was in conjunction with a 1987
settlement agreement between T.G.I.F. and its former franchisor T.G.I. Fridays,
Inc. CII recognized a gain of approximately $510,000 from T.G.I.F. primarily as
a result of this sale. T.G.I.F. continues to own one property located in Baton
Rouge, Louisiana which is leased to a restaurant operator. Also, see Note 5 for
notes payable to TGIF.
CII's other investments primarily consist of investments in four partnerships
whose purpose is to make equity investments primarily in growth oriented
enterprises. CII's ownership interest in each of these partnerships is less than
3% of the total partnership ownership . The carrying values of all investments
in and receivables from unconsolidated entities are carried at the lower of cost
or market.
Carrying Values as of December 31,
Description 1997 1996
T.G.I.F. Texas, Inc. $2,264,931 $1,669,180
Various Others 1,874,004 1,399,745
---------- ----------
$4,138,935 $3,068,925
========== ==========
4. NOTES AND ADVANCES DUE FROM, TRANSACTIONS WITH RELATED PARTIES AND
LITIGATION
The Company has an agreement (the "Agreement") with Courtland Group, Inc. (the
"Advisor") for its services as investment advisor and administrator of the
Company's affairs. All officers of the Company who are officers of the Advisor
are compensated solely by the Advisor for their services. The Agreement is
renewable annually upon the approval of a majority of the directors of the
Company who are not affiliated with the Advisor and a majority of the Company's
shareholders. The contract may be terminated at any time on 120 days written
notice by the Advisor or upon 60 days written notice by a majority of the
unaffiliated directors of the Company or the holders of a majority of the
Company's outstanding shares.
The Agreement was terminated effective January 1, 1998. On April 4, 1997, the
Board of Directors approved a new advisory agreement between the Company and HMG
Advisory Corp. effective for a term commencing January 1, 1998 through December
31, 1998. This new advisory agreement was approved by a majority of the
shareholders of the Company at the 1997 Annual Meeting of Shareholders on June
27, 1997. The new advisory agreement is substantially the same as the current
advisory agreement but with a 25% reduction in the regular compensation paid to
the new advisor.
HMG Advisory Corp. is majority owned by Mr. Wiener with the remaining shares
owned by certain officers. The officers and directors of HMG Advisory Corp. are
as follows: Maurice Wiener, Chairman of the Board and Chief Executive Officer;
Lawrence I. Rothstein, President, Treasurer, Secretary and
(29)
<PAGE>
Director; Carlos Camarotti, Vice President - Finance and Assistant Secretary;
and Bernard Lerner, Vice President.
Under the Agreement, as amended at the Company's 1992 Annual Meeting of
Shareholders, the Advisor is entitled to receive a monthly fee of $72,917. The
Advisor is entitled to a monthly fee of 20% of the amount of any unrefunded
commitment fees received by the Company with respect to mortgage loans and other
commitments which the Company was not required to fund and which expired within
the next preceding calendar month. The Advisor is also entitled to an annual
incentive compensation equal to the sum of 10% of net realized capital gains and
extraordinary items of income for that year and 10% of the amount, if any, by
which net profits of the Company for such fiscal year exceeded 8% per annum of
the Average Net Worth of the Company, as defined.
During 1997 and 1996, $1,260,000 and $1,067,000, respectively, was earned by the
Advisor as advisory fees of which approximately $385,000 and $192,000,
respectively, were for incentive compensation. The Advisor also received
management fees from certain affiliates of the Company in the amount of
approximately $30,000 in 1997 and 1996.
At December 31, 1997 and 1996, the Company had amounts due from the Advisor of
$205,000 and $417,000, respectively. These amounts bear interest at prime plus
1% and are due on demand.
The Company, via its 75% owned joint venture (SBA), has a note receivable from
Transco of $300,000 plus accrued interest of $150,000 and $125,000 as of
December 1997 and 1996, respectively. This note bears interest at the prime rate
and is due on demand.
Mr. Wiener, Chairman of the Company, is an 18% shareholder and an officer and
director of T.G.I.F. Texas, Inc., a 49% owned affiliate of CII (See Note 3). As
of December 31, 1997, T.G.I.F. has amounts due from Mr. Wiener in the amount of
approximately $170,000. These amounts are due on demand and bear interest at the
prime rate. Furthermore, the Advisor receives a management fee of $18,000 per
year from T.G.I.F. In December 1996, T.G.I.F. purchased 10,000 shares of the
Company's stock at $5 per share, the market value at the time. CII has amounts
due to T.G.I.F. of approximates $3.1 million and $2.5 million as of December 31,
1997 and 1996, respectively. These amounts bear interest at the prime rate and
principal and interest are due on demand.
In October 1996, it was brought to the Company's attention that Mr. Lee Gray
(then President, Treasurer and Director of the Company, "Gray") failed to
disclose his interest, through a partnership of his and his sister's, in a 35%
joint venture partner in HMG-Fieber Associates. Additionally, another director
(Mr. Norman Fieber, "Fieber"), who had an interest in the joint venture partner,
failed to disclose Gray's and Gray's sister's interest in such partnership. In
November 1996, the Company appointed a Special Committee of the Board to review
Gray's and Fieber's failure to disclose the interests in the joint venture
partner. During the course of the inquiry it was discovered that Gray also
failed to disclose his and his sister's interest in the Company's 66 2/3% joint
venture partner in another joint venture which operated through 1992. Based on
the report of the Special Committee in March 1997, the Board concluded that Gray
and Fieber breached their fiduciary duties to the Company by failing to disclose
Gray's and Gray's sister's interest in the joint ventures. The Board removed
Gray as President and Treasurer of the Company. Both Gray and Fieber refused to
resign as directors of the Company. Mr. Gray and Mr. Fieber were not re-elected
as directors at the 1997 Annual Meeting of Shareholders. The Company is
currently a party, as both plaintiff and defendant, to litigation in three
jurisdictions, as follows:
(30)
<PAGE>
HMG Courtland Properties, Inc. v. Lee Gray et al.
On July 2, 1997, the Company filed suit in the Court of Chancery of the State of
Delaware in and for New Castle County against Lee Gray (individually and as a
partner in Martine Avenue Associates), Norman A. Fieber (individually and as a
partner in NAF Associates), Betsy Gray Saffell (Lee Gray's sister) (individually
and as a partner in Martine Avenue Associates), Martine Avenue Associates, (a
New York general partnership in which Mr. Gray and Mrs. Saffell are the general
partners) ("Martine"), NAF Associates (a Connecticut general partnership in
which Mr. Fieber and Martine are general partners, and the Company's joint
venture partner in HMG-Fieber Associates ("NAF"), and The Jim Fieber Trust ( a
trust for beneficiaries including Mr. Fieber and Martine, and the Company's
joint venture partner in HMG-Fieber Wallingford Associates, which has James A
Fieber, son of Norman A. Fieber, as trustee) (the "Trust").
The Company's lawsuit is based on the facts underlying the Board of Directors'
conclusion , based upon the report of the Special Committee following the
Inquiry and in consultation with counsel, that Mr. Gray breached his fiduciary
duties to the Company and CGI by failing to disclose his and his sister's
interest in the Joint Ventures, and that Mr. Fieber breached his fiduciary duty
to the Company and assisted Mr. Gray by failing to disclose Mr. Gray's and
Gray's sister's interest in the Joint Ventures. The Company's suit makes the
following claims: (I) breach of fiduciary duty against Mr. Gray; (ii) breach of
fiduciary duty against Mr. Fieber; (iii) aiding and abetting against Mr. Fieber,
Mrs. Saffell, Martine, NAF and the Trust; (iv) usurpation of a corporate
opportunity against all defendants; (v) common law fraud against Messrs. Gray
and Fieber; and (vi) conspiracy against all defendants. Relief being sought by
the Company includes: (I) damages; (ii) imposition of constructive trust for the
benefit of the Company over, and an accounting of, the defendants' interests in
the Joint Ventures; (iii) a recision of the transactions which created the Joint
Ventures; and (iv) a disgorgement of all interests and profits derived by all
the defendants from the Joint Ventures. The lawsuit is currently in the early
stages of discovery. The Company believes strongly that its claims are
meritorious and intends to vigorously pursue all legal remedies against all
defendants.
Lee Gray v. HMG/Courtland Properties, Inc et al.
On May 22, 1997, Lee Gray, a former director and officer and a shareholder of
the Company and a former officer and director and a shareholder of CGI, which
currently serves as the Company's advisor pursuant to an advisory agreement
which expires December 31, 1997, filed suit in the Circuit Court of the 11th
Judicial Circuit in and for Dade County, Florida against the following
defendants: (I) the Company; (ii) all of the directors and certain of the
officers of the Company and of CGI; (iii) CGI; and (iv) HMG Advisory Corp., a
Delaware corporation that will serve as the Company's advisor commencing January
1, 1998 pursuant to the advisory agreement approved by the shareholders at the
Company's Annual Meeting held on June 27, 1997.
In his lawsuit, Mr. Gray, individually and derivatively as a shareholder of CGI,
alleges, among other things, that his removal as an officer of the Company, his
failure to be nominated for reelection as Director of the Company, his
subsequent removal as an officer and director of CGI and the Board of Directors'
decision not to renew the Company's former advisory agreement with CGI, were the
product of a conspiracy involving certain officers and Directors of the Company
and of CGI who wanted to force Mr. Gray out of the Company and CGI, and to
terminate the Company's advisory agreement with CGI, for their own financial
gain. Mr. Gray has also alleged that he was libeled in the discussion of the
Inquiry and the results thereof in certain documents, including documents filed
with the Securities and Exchange Commission. Mr. Gray is seeking money damages
in excess of $15,000, punitive damages, and temporary and permanent injunctive
relief on the following grounds: (I) breach of fiduciary duty against the
directors and certain of the officers of the Company; (ii) libel against the
Company and the directors and certain of the officers of the Company; (iii)
breach of fiduciary duty against the officers and
(31)
<PAGE>
directors of CGI; and (iv) tortious interference with an advantageous business
relationship against defendants HMG Advisory Corp. and the officers and
directors of CGI.
On July 10, 1997, the Company filed a motion to dismiss the portion of the
lawsuit directed against it and its directors. The motion to dismiss was granted
November 18, 1997. On December 1, 1997, Mr. Gray filed an amended complaint that
seeks to reinstate the libel claim against the Company. The Company has moved to
dismiss the amended complaint. The motion is currently subjudice. The Company
and its officers and directors believe strongly that they have meritorious
defenses to, and intend to vigorously defend against, the claims made by Mr.
Gray.
CGI also filed a motion to dismiss the tortious interference claims described in
(iv) above which was granted. HMGA filed a motion to dismiss which was granted.
HMGA is no longer a defendant.
Norman A. Fieber v. HMG/Courtland Properties, Inc. et al.
On July 8, 1997, Norman A. Fieber, NAF Associates and James A. Fieber, Trustee
(collectively, the "Fieber Plaintiffs") filed a separate lawsuit against the
Company in the Superior Court of the State of Connecticut, Fairfield/Bridgeport
Judicial District. In their lawsuit, the Fieber Plaintiffs are seeking a
declaratory judgement absolving them of any liability to the Company on
essentially all of the issues and claims being considered in the Company's
lawsuit in Delaware discussed above.
On August 27, 1997, the Company moved to dismiss, or in the alternative, stay
this action on the grounds that the declaratory judgement action was
inappropriate given the pendency of the Company's prior pending lawsuit in
Delaware. This motion is currently subjudice. The Company intends to vigorously
oppose the Fieber Plaintiffs' declaratory judgment action.
(32)
<PAGE>
5. NOTES, MORTGAGES AND OTHER PAYABLES
<TABLE>
<CAPTION>
December 31,
1997 1996
Collateralized by Investment Properties (Note 2)
<S> <C> <C>
Land Held for Development:
Mortgage loan payable, interest at 9% payable quarterly
with quarterly principal payments of $12,776. Principal
and accrued interest were paid off in January 1998 $ 867,524 $1,088,955
Mortgage loan payable, interest at 1% over prime (9.50%
at December 31, 1997) payable monthly. Principal due at
maturity in June 2000 768,000 890,000
Mortgage loan payable, interest at prime plus 1.75%
(10.25% at December 31, 1997) payable monthly with all
principal due September 1998 221,340 431,104
Mortgage loan payable, interest fixed at 9.75% payable
quarterly with principal payments of $15,867 due each
February 1st and a balloon payment due February 2000 149,167 165,033
Note Payable to bank, interest at the prime rate plus 1%
(9.25% at December 31, 1996). Balance of outstanding
principal and accrued interest matured and was paid in
January 1997 -- 350,000
Joint Venture owning retail centers:
Mortgage loan payable requiring monthly payments of
principal and interest of $2,895 at 10% interest rate
Note matured in 1984 (1) 33,095 62,852
Partnerships owning hotel and club facility and yacht slips:
Mortgage loan payable with interest at prime plus 2%
(10.5% at December 31, 1997). Payments of interest only
through June 1995, thereafter, 20 year amortization of
principal with all outstanding principal due September
2000 3,972,055 4,322,601
---------- ----------
Balance brought forward: $6,011,181 $7,310,545
---------- ----------
</TABLE>
(33)
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Balance brought forward: $6,011,181 $7,310,545
Limited partnership owning ground lease:
Mortgage loan payable interest fixed at 9.75% payable
monthly with principal due at maturity in November 1999 650,000 300,000
Note payable to individual with interest rate fixed at
8%. Payment of principal and interest quarterly, with
maturity in May 1998 6,426 18,538
Office building:
Mortgage loan payable, interest at prime plus 3/4% (9.25%
at December 31, 1997) for the first five years, then
fixed at the then prime rate plus 3/4%. Payment of
principal and interest monthly with maturity in August 2007 428,045 --
Other:
Note payable to affiliate (TGIF), interest at prime (8.5%
at December 31, 1997) payable annually in January
Principal outstanding due on demand 3,120,755 2,455,312
----------- -----------
$10,216,407 $10,084,395
----------- -----------
<FN>
(1) The Company has continued to make principal and interest payments on this
mortgage. No request for full payment has been made by the lender.
</FN>
</TABLE>
A summary of scheduled principal repayments or reductions for all types of notes
and mortgages payable is as follows:
Year ending December 31, Amount
1998 $4,357,807
1999 763,867
2000 4,697,488
2001 16,000
2002 20,000
2003 and thereafter 361,245
-----------
Total $10,216,407
===========
The 1998 principal repayments are expected to be satisfied with proceeds from
sales of real estate, distributions from investments, available cash or such
debt may be refinanced.
(34)
<PAGE>
6. INCOME TAXES
The Company's income tax benefit or provision is solely attributable to CII
which files a separate tax return. Deferred tax assets and liabilities reflect
the impact of temporary differences between amounts of assets and liabilities
for financial reporting purposes and the bases of such assets and liabilities as
measured by income tax law. A valuation allowance is recognized to reduce
deferred tax assets to the amounts more likely than not to be realized. As of
December 31, 1997 and 1996, the components of the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
Deferred tax Deferred tax
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Net operating loss carryforward $1,911,000 $3,104,000
Excess of book basis of 49%-owned
corporation over tax basis 334,000 142,000
Other 447,000 22,000 196,000 55,000
Valuation allowance (2,002,000) (3,103,000)
--------------- -------------- -------------- --------------
Totals $356,000 $356,000 $197,000 $197,000
=============== ============== ============== ==============
</TABLE>
The change in the valuation allowance between December 31, 1997 and 1996 was a
decrease of $1,101,000.
There is no provision or benefit necessary for income taxes for the years ended
December 31, 1997 and 1996.
7. STOCK-BASED COMPENSATION
At December 31, 1997, the Company has a fixed stock option plan which is
described below. The Company applies APB Opinion 25, Accounting for Stock Issued
to Employees, and related Interpretations in accounting for the plan. Under APB
Opinion 25, if the exercise price of the Company's employee stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation is recognized.
In July 1991, the shareholders approved the 1990 Stock Option Plan (which
expires in 2001) for the issuance of options to the officers and directors of
the Company. Under the 1990 Plan, options were authorized to be granted to
purchase 120,000 common shares at no less than 100% of the fair market value at
the date of grant. Options may be exercised at any time within ten years from
the date of grant and are not transferable. Options expire upon termination of
employment, except to a limited extent in the event of retirement, disability or
death of the optionee.
FASB Statement 123, Accounting for Stock-Based Compensation, requires the
Company to provide proforma information regarding net income and net income per
share as if compensation cost for the
(35)
<PAGE>
Company's stock option plan had been determined in accordance with the fair
value based method prescribed in FASB Statement 123. There were no options
granted during the years ended December 31, 1997 and 1996, and therefore, under
the accounting provisions of FASB Statement 123, the Company's proforma net
income (loss) and net income (loss) per share would not differ.
A summary of the status of the Company's fixed stock option plan as of December
31, 1997 and 1996, and changes during the years ending on those dates are
presented below:
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 105,000 $5.20 105,000 $5.20
Granted -- -- -- --
Exercised -- -- -- --
Forfeited 30,000 $5.41 -- --
- ---------------------------------------------------------------------------------------------------------
Outstanding at end of year 75,000 $5.12 105,000 $5.20
- ---------------------------------------------------------------------------------------------------------
Options exercisable at year-end 75,000 $5.12 105,000 $5.20
Weighted average fair value of -- -- -- --
options granted during the year
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of outstanding at Contractual Average Exercisable at Average
Exercise Prices 12/31/97 Life Exercise Price 12/31/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$3.75 - $5.50 75,000 3.9 $5.12 75,000 $5.12
</TABLE>
8. LEASE OF GROVE ISLE FACILITY
In November 1996, GIA terminated its lease with GICI and entered into a
long-term lease with an unrelated tenant, Westgroup Grove Isle Associates, Ltd.
("Westgroup"). GIA and GICI also entered into a Master Agreement with Westgroup
whereby among other things Westgroup assumed the operations of the Grove Isle
hotel and club.
(36)
<PAGE>
The leased premises include all real property and all furniture, furnishings,
fixtures, appliances and other equipment used in connection with the operation
of the Grove Isle hotel, resort and membership club. The initial term of the
lease is ten years and calls for annual net base rent of $880,000 plus real
estate taxes and property insurance, payable in monthly installments. The lease
also called for an "initial payment" (as defined and as previously reported) of
$1,000,000. The "initial payment" of $1,000,000 was paid by Westgroup to GIA on
November 19, 1996 and the use of these funds was restricted in accordance with
the Master Agreement between GIA and Westgroup. GIA was obligated to provide to
Westgroup, upon receipt of required documentation, funds from the "initial
payment" for capital improvements made to the Grove Isle property and operating
shortfalls, as defined. As of November 1997, all restricted funds had been
disbursed in accordance with the Master Agreement, and no restricted funds
remain. In addition to the "initial payment" and base net rent, Westgroup shall
also pay GIA participation rent consisting of a portion of Westgroup's operating
surplus, as defined in the lease agreement. Participation rent is due at end of
each lease year. No participation rent was due in 1997. Furthermore, also as
previously reported, in consideration for GICI relinquishment of its rights in
and to the original lease with GIA, GIA agreed to pay to GICI the sum of
$200,000 for each year that the Westgroup lease is in good standing and has also
assigned to GICI the aforementioned participation rent due from Westgroup. In
November 1997, GIA paid GICI $200,000 as per agreement. This amount is
eliminated in consolidation.
During 1997 and in conjunction with the aforementioned agreements, GIA advanced
$500,000 to the principal owner of the tenant of the Grove Isle property. GIA
received a promissory note bearing interest at 8% per annum with interest
payments due quarterly beginning on July 1, 1997 and all principal due at
maturity in 2006. All interest payments due have been received.
(37)
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. There has not been any disagreement with the Company's
accountants withing the 24 months prior to the date of the most recent financial
statements concerning any matter of accounting principles or practice or
financial statement disclosure.
(38)
<PAGE>
Part III.
Item 9. Directors. Executive Officers and Control Persons.
Listed below is certain information relating to the executive officers and
directors of the Company:
<TABLE>
<CAPTION>
Principal Occupation and Employment other than With
the Company During the Past Five
Name and Office Age Years - Other Directorships
<S> <C> <C>
Maurice Wiener; Chairman of 56 Chairman of the Board and Chief Executive Officer of the
the Board of Directors, Advisor; Executive Trustee, Transco; Director, TGIF Texas,
President and Chief Executive Inc.; Trustee, Heitman Real Estate Fund; Chairman of the
Officer Board and Chief Executive Officer of Courtland Group, Inc.
Lawrence I. Rothstein; 45 Director, President and Secretary of the Advisor ; Trustee and
Director, Senior Vice President, Vice President of Transco; Director, President and Secretary
Treasurer and Secretary of Courtland Group, Inc. (1)
Carlos Camarotti; Vice 37 Vice President - Finance and Assistant Secretary of the
President-Finance and Advisor; Vice President - Finance and Assistant Secretary
Assistant Secretary of Courtland Group, Inc.
Bernard Lerner; Vice President 55 Vice President of the Advisor; Vice President of Courtland
Group, Inc.
Walter Arader; Director 78 President, Arader, Herzig and Associates Inc. (financial
management consultants); Director, Pep Boys-Manny, Moe &
Jack; Director, Unitel Video; Former Secretary of Commerce,
Commonwealth of Pennsylvania.
Harvey Comita; Director 68 President and Director of Pan-Optics, Inc. (1971-1991);
Director of Mediq, Incorporated (1981-1991); Trustee of
Transco Realty Trust.
John B. Bailey; Director 71 Real Estate Consultant; Retired CEO, Landauer Associates,
Inc. (Real Estate Consultants) (1977-1988).
<FN>
- --------------------
(1) As of April 3, 1998, Mr. Rothstein was appointed to service as a
Director of the Company.
</FN>
</TABLE>
(39)
<PAGE>
Except as previously discussed, all executive officers of the Company were
elected to their present positions to serve until their successors are elected
and qualified at the 1997 annual organizational meeting of directors immediately
following the annual meeting of shareholders. All directors of the Company were
elected to serve until the next annual meeting of shareholders and until the
election and qualification of their successors.
Item 10. Executive Compensation.
Executive officers received no cash compensation from the Company in their
capacity as executive officers. Reference is made to Item 1. Business and Item
6. Management's Discussion and Analysis or Plan of Operation for information
concerning fees paid to the Advisor.
Compensation of Directors. Each Director receives an annual fee of $5,000, plus
expenses and $500 per each Board of Directors meeting attended.
Stock Options. In July 1991, the shareholders approved the 1990 Stock Option
Plan (the "Plan"). The Plan, which is non-qualified and expires in 2001, is
intended to provide incentives to the directors and employees (the "employees")
of the Company as well as to enable the Company to obtain and retain the
services of such employees. The Plan is administered by a Stock Option Committee
(the "Committee") appointed by the Board of Directors. The Committee selects
those key officers and employees of the Company to whom options for shares of
common stock of the Company shall be granted. The Committee determines the
purchase price of shares deliverable upon exercise of an option; such price may
not, however, be less than 100% of the fair market value of a share on the date
the option is granted. Payment of the purchase price may be made in cash,
Company stock, or by delivery of a promissory note, except that the par value of
the stock must be paid in cash or Company stock. Shares purchased by delivery of
a note must be pledged to the Company. Shares subject to an option may be
purchased by the optionee within ten years from the date of the grant of the
option. However, options automatically terminate if the optionee's employment
with the Company terminates other than by reason of death, disability or
retirement. Further, if, within one year following exercise of any option, an
optionee terminates his employment other than by reason of death, disability or
retirement, the shares acquired upon exercise of such option must be sold to the
Company at a price equal to the lesser of the purchase price of the shares or
their fair market value.
As of December 31, 1997, 75,000 options have been granted, of which none have
been exercised, and 15,000 options are reserved for issuance under the Plan, of
which none have been granted.
(40)
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Set forth below is certain information concerning common stock ownership by
directors, directors and officers as a group, and holders of more than 5% of the
outstanding common stock.
<TABLE>
<CAPTION>
Shares Held as of April 7, 1998
Additional Shares in
Shares Owned by Which the named Person
Named Persons & Has, or Participates in,
Members of His the Voting or Total Shares &
Name Family(1) Investment Power(2) Percent of Class
<S> <C> <C> <C> <C>
Maurice Wiener 35,100 (4) 541,830 (3) 576,930 46%
Lawrence Rothstein 25,000 (4) 541,830 (3) 566,830 46%
Walter G. Arader 12,800 (4) 0 12,800 1%
John B. Bailey 7,100 (4) 0 7,100 *
Harvey Comita 5,000 (4) 477,300 (6) 482,300 39% *
All 7 Directors and 95,000 (4) 541,830 (3) 636,830 51%
Officers as a Group
Transco Realty Trust 477,300 (5) 0 477,300 38%
2701 S. Bayshore Drive
Coconut Grove, FL 33133
Barry S. Halperin 133,500 0 133,500 11%
441 South Federal Highway
Deerfield Beach, FL 33441
<FN>
* Less than 1 %
-----------------------
(1) Unless otherwise indicated, beneficial ownership is based on sole voting
and investment power.
(2) Shares listed in this column represent shares held by entities with which
directors or officers are associated. Directors, officers and members of
their families have no ownership interest in these shares.
(3) This number includes the number of shares held by Transco Realty Trust
(477,300 shares), Courtland Group, Inc. (54,530 shares) and T.G.I.F. Texas,
Inc. (10,000 shares). Of those shares owned by Transco Realty Trust, 24,350
shares have been pledged to a brokerage firm pursuant to a margin
agreement. Several of the directors of the Company are directors, trustees,
officers or shareholders of certain of those firms.
(4) This number includes options granted under the 1990 Stock Option Plan, none
of which have been exercised. These options have been granted to Mr.
Wiener, 30,000; Mr. Rothstein ,15,000; 5,000 each to Mr. Arader, Mr.
Bailey, and Mr. Comita; and a total of 10,000 to two officers who are not
directors. Reference is made to Item 10. Executive Compensation for further
information about the 1990 Stock Option Plan.
(5) Mr. Wiener holds approximately 25% of the stock of Transco and may
therefore be deemed to be the beneficial owner of the shares of the Company
held by Transco.
(6) This number represents the number of shares held by Transco Realty Trust,
of which Mr. Comita is a Trustee.
</FN>
</TABLE>
(41)
<PAGE>
Item 12. Certain Relationships and Related Transactions. The following
discussion describes the organizational structure of the Company's subsidiaries
and affiliates.
Transco Realty Trust ("Transco").
Transco is a publicly-held 41% shareholder of the Company.
Mr. Wiener is the executive trustee of Transco and holds approximately 25%
of Transco's stock.
Courtland Group, Inc. (the "Advisor").
Mr. Wiener is a director and officer of the Advisor, which owns 21% of
Transco's stock and owns approximately 4% of the Company's common stock.
Mr. Wiener is Chairman of the Board and a 40% shareholder of the Advisor.
HMG Advisory Corp. (HMGA)
Effective January 1, 1998, HMGA will become the new advisor for the
Company. HMGA is principally owned by Maurice Wiener, its Chairman and CEO.
Courtland Investments, Inc. ("CII").
The Company owns a 95% non-voting interest in CII. The other 5% (which
represents 100% of the voting stock) is owned by a wholly-owned subsidiary
of Transco.
CII and its wholly-owned subsidiary own 100% of Grove Isle Club, Inc.,
Grove Isle Yacht Club Associates and Grove Isle Marina, Inc. CII also owns
15% of Grove Isle Associates, Ltd., and the other 85% is owned by the
Company.
On May 31, 1997, CII sold a 45% partnership interest in GIA, Ltd. to the
Company for approximately $4.6 million. This transaction was between
consolidated subsidiaries and accordingly had no impact on the consolidated
financial statements of the Company.
HMG-Fieber Associates ("Fieber").
The Company also owns a 65% interest in Fieber and the other 35% is owned
by NAF Associates ("NAF"). The partners in NAF include the following
related parties: Norman A. Fieber, a former director of the Company
(33.62%), Norman A. Fieber's son, James A. Fieber, (1.08%), Norman A.
Fieber's brother, Stanley S. Fieber, M.D. (7.59%), and Martine Avenue
Associates (Martine), a New York general partnership in which Mr. Gray, a
former officer and director of the Company, and Mr. Gray's sister are the
partners (13.02%).
The following discussion describes all material transactions, receivables and
payables involving related parties. All of the transactions described below were
on terms as favorable to the Company as comparable transactions with
unaffiliated third parties.
(42)
<PAGE>
The Advisor.
The day-to-day operations of the Company are handled by the Advisor, as
described above under Item 1. Business "Advisory Agreement." Reference is
made to Item 1. Business and Item 6. Management's Discussion and Analysis
or Plan of Operation for further information about the remuneration of the
Advisor.
As of December 31, 1997 and 1996, the Advisor owed the Company $205,000 and
$417,000, respectively. Such sums bear interest at the prime rate plus 1%
and are due on demand.
Transco.
As of December 31, 1997, the Company has a note and accrued interest
receivable from Transco of $450,000 compared to $425,000 as of December 31,
1996. This note bears interest at the prime rate and is due on demand.(See
Item 1. Business- South Bayshore Associates).
CII - T.G.I.F. Texas, Inc.
CII owns approximately 49% of the outstanding shares of T.G.I.F. Texas,
Inc. ("T.G.I.F.") Mr. Wiener is a director and officer of T.G.I.F and owns,
directly and indirectly, approximately 18% of the outstanding shares of
T.G.I.F. Also, T.G.I.F. owns 10,000 shares of the Company at $5 per share
which was the market value at the time of purchase. The Advisor receives a
management fee of $18,000 per year from T.G.I.F.
As of December 31, 1997 and 1996, CII owed approximately of $3.1 million
and $2.5 million, respectively to T.G.I.F. All advances between CII and
T.G.I.F. are due on demand and bear interest at the prime rate plus 1%.
CII- Grove Isle.
In 1986, CII acquired from the Company the rights to develop the marina at
Grove Isle for a promissory note of $620,000 payable in 10 years at an
annual interest rate equal to the prime rate. The principal matures on
January 2, 2001. Interest payments are due each January 2. Because the
Company consolidates CII, the note payable and related interest income are
eliminated in consolidation.
HMG-Fieber Wallingford Associates.
In April of 1986, James A. Fieber, Trustee, acting for The Fieber Group
purchased from the Company a two-thirds interest in a store located in
Wallingford, Connecticut leased to Grossman's, Inc. for $233,000 based on
the appraised value of the store, less existing indebtedness. Subsequently,
on July 1, 1986, the Company purchased from Transco its 8 1/3% interest in
the Wallingford store and concurrently entered into an agreement with The
Fieber Group creating the joint venture titled HMG-Fieber Wallingford
Associates, owned two-thirds by James A. Fieber, Trustee, acting for The
Fieber Group, and one-third by the Company. Partners in The Fieber Group
included the following related parties: Norman A. Fieber, a former director
of the Company, James Fieber (Norman A. Fiebers' son) and Martine Avenue
Associates, a New York general partnership in which Mr. Gray, a former
officer and director of the Company, and Mr. Gray's sister are the
partners.
HMG-Fieber Associates ("Fieber").
On June 30, 1986, the Company purchased from Transco its 25% interest in
certain retail stores located in Connecticut, Maine, Massachusetts, New
Hampshire, New York, Pennsylvania, Rhode Island and Vermont and owned by
South Bayshore Associates, a joint venture owned 75% by the Company and 25%
by Transco. These stores were leased to Grossman's, Inc, a chain of home
improvement stores, under net leases, most of which provided for minimum
and percentage rent payments. The purchase price paid the Company was
$1,500,000 plus the assumption of liabilities of $660,355. Concurrently,
the Company sold to NAF a 35% interest in the Grossman's stores for a price
of approximately $2,100,000 plus the assumption of liabilities
(43)
<PAGE>
of $924,497, and entered into an agreement with NAF creating the joint
venture titled HMG-Fieber Associates. The purchase price of Transco's 25%
interest and of NAF's 35% interest were based on the appraised value of the
Grossman's stores, less existing indebtedness. NAF is a Connecticut general
partnership, the partners of which include the following related parties:
Norman A. Fieber, a former director of the Company (33.62%), James A.
Fieber, Norman A. Fieber's son (1.08%), Stanley S. Fieber, M.D., Norman A.
Fieber's brother (7.59%), and Martine Avenue Associates, a New York general
partnership in which Mr. Gray, a former officer and director the Company,
and Mr. Gray's sister are the partners (13.02%).
Inquiry Relating to HMG-Fieber Wallingford Associates and HMG-Fieber Associates.
On November 15, 1996, the Board of Directors appointed a Special Committee
of the Board to review Mr. Lee Gray's failure to disclose his and his
sister's interest, through Martine Avenue Associates ("Martine"), a
partnership of Mr. Gray and his sister, in NAF Associates ("NAF"), the
Company's 35% joint venture partner in HMG- Fieber Associates ("Fieber"),
as well as Mr. Norman A. Fieber's failure to disclose Mr. Gray's and Mr.
Gray's sister's interest in NAF. Mr. Gray's interest in NAF first came to
the attention of the Company in October of 1996. During the course of the
inquiry, it was discovered that Mr. Gray and his sister also had an
interest in The Fieber Group, the Company's 66 2/3% joint venture partner
in HMG-Fieber Wallingford Associates (Wallingford), which venture operated
from 1986 to 1992. James A. Fieber, Norman A. Fieber's son, and Stanley
Fieber, Norman A. Fieber's brother, were also partners in NAF.
As a result of the inquiry, it was determined that in 1986, Mr. Gray and
his sister, through Martine, acquired a 13.02% interest in NAF and a 20%
interest in The Fieber Group, but did not then or at any time since
disclose those interests to the Board of Directors of the Company. Norman
A. Fieber, a partner in both NAF and The Fieber Group, also failed to
disclose Mr. Gray's and Gray's sister's interests in NAF and The Fieber
Group.
A special meeting of the Board of Directors was held on March 21, 1997, at
which the Board considered the report of the Special Committee. Based on
the Special Committee's report and in consultation with counsel, the Board
concluded that Mr. Gray breached his fiduciary duty to the Company and to
the Advisor by failing to disclose his and his sister's interest in NAF and
Wallingford, and that Mr. Norman A. Fieber breached his fiduciary duty to
the Company and assisted Gray by failing to disclose Mr. Gray's and Gray's
sister's interest in NAF and Wallingford.
The Board requested the resignation of Mr. Gray as President, Treasurer,
Director and as a member of the Audit Committee; requested the resignation
of Mr. Norman A. Fieber as a Director and member of the Audit Committee;
and requested that the Board of Directors of the Advisor consider
requesting the resignation of Mr. Gray as President, Treasurer and Director
of the Advisor.
Lee Gray has been removed as President and Treasurer of the Company and as
a member of the Audit Committee and as President and a Director of the
Advisor. Mr. Gray refused to resign as a director of the Company. Norman A.
Fieber has been removed as a member of the Audit Committee of the Company
and refused to resign as a director of the Company. Mr. Gray and Mr. Norman
A. Fieber were not re-elected as directors of the Company at the 1997
Annual Meeting of Shareholders.
(44)
<PAGE>
Part IV.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)
1. Financial Statements - See Item 7.
Index to Consolidated Financial Statements and Supplemental Data.
All other schedules omitted because of the absence of the conditions under which
they are required or because all information required to be reported is included
in the consolidated financial statements or notes thereto.
2. Exhibits listed in the Index to Exhibits.
(b)
Reports on Form 8-K: None.
(45)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 14, 1998 By: /s/ Maurice Wiener
Maurice Wiener
Chairman of the Board & President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Maurice Wiener April 14, 1998
Maurice Wiener
Chairman of the Board & President
/s/ Lawrence I. Rothstein April 14, 1998
Lawrence I. Rothstein
Director, Senior Vice President, Treasurer & Secretary
/s/ Walter G. Arader April 14, 1998
Walter G. Arader, Director
/s/ John B. Bailey April 14, 1998
John B. Bailey, Director
/s/ Harvey Comita April 14, 1998
Harvey Comita, Director
/s/ Carlos Camarotti April 14, 1998
Carlos Camarotti
Vice President - Finance and Controller
(46)
<PAGE>
EXHIBIT INDEX
Description
<TABLE>
<CAPTION>
<S> <C>
(3) (a) Restated Certificate of Incorporation Incorporated by reference to Exhibit 3(a) to
the Company's 1987 Report on Form 10-
KSB (the "1987 Form 10-KSB").
(b) By-laws Incorporated by reference to Exhibit 6.1 to
the Registration Statement of Hospital
Mortgage Group, Inc. on Form S-14, No.
2-64, 789, filed July 2, 1979.
(10) (a) Agreement between NAF Associates and the Incorporated by reference to Exhibit 10(f)
Company, dated June 30, 1986. to the 1987 Form 10-K.
(b) 1990 Incentive Stock Option Plan of Incorporated by reference to Exhibit 10(j)
HMG/Courtland Properties, Inc. to the 1991 Form 10-KSB.
(c) Amended and Restated Advisory Agreement Incorporated by reference to Exhibit 10(k)
between the Company and Courtland Group, Inc. to the 1992 Form 10-KSB.
dated July 17, 1992, effective January 1, 1993.
(d) Amended and restated lease agreement between Incorporated by reference to Exhibit 10(d)
Grove Isle Associates, Ltd. and Westgroup Grove to the 1996 Form 10-KSB.
Isle Associates, Ltd. dated November 19, 1996.
(e) Master agreement between Grove Isle Associates, Incorporated by reference to Exhibit 10(e)
Ltd. Grove Isle Club. Inc., Grove Isle to the 1996 Form 10-KSB.
Investments, Inc. and Westgroup Grove Isle
Associates, Ltd. dated November 19, 1996.
(f) Agreement Re: Lease Termination between Grove Incorporated by reference to Exhibit 10(f)
Isle Associates, Ltd. And Grove Isle Club, Inc. to the 1996 Form 10-KSB.
dated November 19, 1996.
(g) Martine Avenue Associates Partnership Agreement Incorporated by reference to Exhibit 10(g)
dated May 24, 1968 and amendment dated to the 1996 Form 10-KSB.
January 29, 1987.
(h) Advisory Agreement between the Company and Filed herewith.
HMG Advisory Corp. effective January 1, 1998.
</TABLE>
(47)
<PAGE>
(22) Subsidiaries of the Company:
HMG-FIEBER ASSOCIATES, a Connecticut Joint Venture
SOUTH BAYSHORE ASSOCIATES, a Florida Joint Venture
HMG FASHION SQUARE, INC., a Florida Corporation
FASHION SQUARE PARTNERSHIP, a Florida Partnership
HMG SUGARGROVE, INC., a Texas Corporation
COURTLAND INVESTMENT, INC., a Delaware Corporation
GROVE ISLE INVESTMENTS, INC., a Florida Corporation
GROVE ISLE YACHT CLUB ASSOCIATES., a Florida Joint Venture
GROVE ISLE ASSOCIATES, LTD., a Florida Limited Partnership
GROVE ISLE CLUB, INC., a Florida Corporation
HMG HOUSTON GROVE, INC., a Texas Corporation
THE GROVE TOWNE CENTER-TEXAS, LTD. , a Texas Limited Partnership
260 RIVER CORP., a Vermont Corporation
FASHION SQUARE OWNER'S ASSOCIATION, a Florida Corporation
(48)
<PAGE>
Exhibit Index
Description Reference
Advisory Agreement between the Company Exhibit 10(h)
and HMG Advisory Corp. effective January 1, 1998.
(49)
Exhibit 10(h)
ADVISORY AGREEMENT
BETWEEN
HMG/COURTLAND PROPERTIES, INC.
AND
HMG ADVISORY CORP
This Advisory Agreement made as of June 27, 1997 and effective as of
January 1, 1998 between HMG/Courtland Properties, Inc., a Delaware corporation
(the "Company"), and HMG Advisory Corp., a Delaware corporation (the "Adviser");
WITNESSETH:
WHEREAS. the Company was initially established as a Massachusetts
business trust by a Declaration of Trust on October 29, 1971, as amended and
restated from time to time (the "Declaration of Trust"), and was converted into
a corporation on July 31, 1979;
WHEREAS, the Company has qualified as a real estate investment trust
as defined in the Internal Revenue Code of 1986, as the same may be amended or
modified from time to time (which, together with any regulations and rulings
issued from time to time thereunder is hereinafter called the "Code"), and
invests its funds in the investments permitted for a real estate investment
trust;
WHEREAS, the Board of Directors of the Company decided on April 4,
1997 that it was in the Company's best interests not to renew the Company's
advisory agreement with Courtland Group, Inc., which agreement expires by its
terms on December 31, 1997;
<PAGE>
WHEREAS, the Company desires to avail itself of the experience,
sources of information, advice and assistance of the Adviser and to have the
Adviser perform the duties and responsibilities hereinafter set forth, on behalf
of and subject to the supervision of the directors of the Company (the
"Directors"), as provided herein; and
WHEREAS, the Adviser is willing to render such services, subject to
the supervision of the Directors, on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound, the parties
hereto agree as follows:
1. DUTIES OF ADVISER. The Adviser shall consult with the Directors and
shall, at the request of the Directors or the officers of the Company, furnish
advice and recommendations with respect to all aspects of the business and
affairs of the Company. In general, the Adviser shall inform the Directors of
any factors which come to its attention which would influence the policies of
the Company. The Adviser in performing its duties under the Agreement shall at
all times be subject to the supervision of the Directors and will have only such
authority as the Company may delegate to it as its agent. Such duties to be
performed by the Adviser shall include: (a) counseling the Company and
presenting to it investments consistent with the objectives of the Company, (b)
performing such research and investigation as the Directors may request in
connection with the policy decisions as to the type and nature of investments to
be made by the Company; (c) evaluating the desirability of acquisition,
retention and disposition of specific Company assets; (d) conducting the
day-to-day investment operations of the Company;
2
<PAGE>
(e) conducting relations with mortgage loan brokers, originators and servicers,
and determining whether loans offered to the Company meet the requirements of
the Company; and (f) providing all of the executive and administrative
personnel, office space and services required in rendering such services to the
Company.
2. NO PARTNERSHIP OR JOINT VENTURE. The Company and the Adviser are
not, and shall not be deemed to be, partners or joint venturers with each other.
3. RECORDS. The Adviser shall keep proper books of account and records
relating to services performed hereunder which shall be accessible for
inspection by the Company at any time during ordinary business hours.
4. REIT QUALIFICATION. Anything else in this Agreement to the contrary
notwithstanding, the Adviser shall refrain from any action which, in its
reasonable judgement, or in the judgement of the Directors of which the Adviser
has written notice, would adversely affect the status of the Company as a real
estate investment trust as defined and limited in Sections 856, 857 and 858 of
the Code or which would violate any law, rule or regulation of any governmental
body or agency having jurisdiction over the Company or its securities.
5. BANK ACCOUNTS. The Adviser may establish one or more bank accounts
in its own name, and may deposit into and disburse from such accounts, any money
on behalf of the Company, under such terms and conditions as the Directors may
approve, provided that no funds in any such account shall be commingled with the
funds of the Adviser, and the
3
<PAGE>
Adviser shall from time to time render appropriate accounting of such deposits
and payments to the Directors and to the auditors of the Company
6. BOND. The Adviser shall maintain a fidelity bond with the
responsible surety company in such reasonable amount as may be required by the
Directors from time to time covering its officers, employees and agents handling
funds and records of the Company. Such bond shall inure to the benefit of the
Company in respect of losses of such property from acts of such persons through
theft, embezzlement, fraud, negligence, error or otherwise
7. INFORMATION FURNISHED ADVISER. The Directors shall keep the Adviser
informed in writing concerning the investment and financing policies of the
Company. The Directors shall notify the Adviser promptly in writing of their
intention to make any new investments or to dispose of any existing investments.
The Directors shall furnish the Adviser with a certified copy of all financial
statements, a signed copy of each report prepared by independent public
accountants, and such other information with regard to its affairs as the
Adviser may reasonably request.
8. DEFINITIONS As used herein, the following terms shall have the
meanings set forth below:
(a) "Affiliate" means as to any corporation, partnership or trust
any person who (a) holds beneficially, directly or indirectly one
percent (1%) or more of the outstanding capital stock, shares or
equity interest in such corporation, partnership or trust, (b) is an
officer, director, partner, or trustee of such corporation,
partnership or trust or of any person which controls, is controlled
by,
4
<PAGE>
or is under common control with, such corporation, partnership or
trust, or (c) controls, is controlled by, or is under common control
with, such corporation, partnership or trust.
(b) "Average Net Worth" is defined as the average of the amount
in the shareholders' equity accounts on the books of the Company, plus
the accumulated non-cash, reserves for depreciation, depletion and
amortization shown on the books of the Company, determined at the
close of the last day of each month for the computation period.
(c) "Fiscal Year" shall mean any period for which any income tax
return is submitted to the Internal Revenue Service and which is
treated by the Internal Revenue Service as a reporting period.
(d) "Net Profits" is defined as the gross earned income of the
Company (exclusive of gains and losses from the disposition of
assets), minus all expenses other than non-cash charges for
depreciation, depletion and amortization and the incentive
compensation payable to the Adviser, and minus, all amounts expended
for mortgage indebtedness, excluding extraordinary and balloon
payments.
Except as specifically otherwise provided herein, all calculations
made in accordance with this Section 8 shall be based on statements (which may
be unaudited, except as provided herein) prepared on an accrual basis consistent
with generally accepted accounting principles, regardless of whether the Company
may also prepare statements on a different basis.
5
<PAGE>
9. REGULAR COMPENSATION. For services rendered under this Agreement.
The Adviser shall receive as regular compensation (1) a monthly fee at a rate of
$55,000 (fifty-five thousand dollars) and (2) a monthly fee of 20% of the amount
of any unrefunded commitment fees received by the Company with respect to
mortgage loans and other commitments which the Company was not required to fund
and which expired within the next preceding calendar month.
10. INCENTIVE COMPENSATION. In order to reward further the Adviser for
performance hereunder, the Company shall also pay to the Adviser, on or before
the 15th day after the completion of the annual audit of the Company's financial
statements for each Fiscal Year, incentive compensation in an amount equal to
the sum of (a) 10% of the realized capital gains (net of accumulated net
realized capital losses) and extraordinary nonrecurring items of income of the
Company for such year, plus (b) 10% of the amount, if any, by which Net Profits
of the Company for such fiscal year exceeded 8% per annum of the Average Net
Worth of the Company during such year.
11. COMPENSATION FOR ADDITIONAL SERVICES. If and to the extent that
the Company shall request the Adviser, or any of its directors, officers or
employees, to render services for the Company, other than those required to be
rendered by the Adviser under this Agreement, such additional services shall be
compensated separately on terms to be agreed upon between such party and the
Company from time to time, which terms shall be fair and reasonable and at least
as favorable to the Company as similar arrangements for comparable transactions
of which the Company is aware with organizations unaffiliated with the Adviser.
6
<PAGE>
The Adviser and its affiliates will not receive from the Company any
brokerage or similar fees for the placement of mortgages or other investments
with the Company. However, the Adviser and its Affiliates may receive normal
brokerage commissions from borrowers, buyers, sellers, lessees or other third
parties in connection with transactions involving the Company, provided that
such commissions are fully disclosed to all Directors prior to their approval of
the transaction and that such commissions (which to the extent paid by the
borrower, buyer, seller, lessee or other third party and retained by the Adviser
or its Affiliates may reduce the yield to the Company) are fair and reasonable
and in accord with the prevailing rates in the locality in which the transaction
is consummated for the type of transaction involved.
12. STATEMENTS. The Adviser shall furnish to the Company not later
than the tenth day of each calendar month a statement showing the computation of
any compensation payable to it during such month under Section 9 hereof. The
Adviser shall furnish to the Company not later than the 30th day following the
end of each Fiscal Year a statement showing the computation of the fees, if any,
payable in respect to such Fiscal Year under Sections 10 and 11 hereof. The
final settlement of compensation payable under Sections 10 and 11 hereof for
each Fiscal Year shall be subject to adjustments in accordance with, and upon
completion of, the annual audit of the Company's financial statements.
13. EXPENSES OF THE ADVISER. Without regard to the amount of
compensation received hereunder by the Adviser, the Adviser shall bear the
following expenses:
7
<PAGE>
(a) all salary and employment expenses of its own personnel and
of the officers and employees of the Company who are Affiliates of the
Adviser other than expenses relating to options to purchase shares of
the Company granted Affiliates of the Adviser who are also officers or
employees of the Company under a plan approved by the shareholders of
the Company;
(b) all of the administrative, rent and other offices expenses
(except those relating to a separate office, if any, maintained by the
Company) relating to its services as Adviser; and
(c) travel (to the extent not paid by any party other than the
Company or the Adviser) and advertising expenses incurred in seeking
investments for the Company.
14. EXPENSES OF THE COMPANY. Except as expressly otherwise provided in
this Agreement, the Company shall pay all its expenses not assumed by the
Adviser and, without limiting the generality of the foregoing, it is agreed that
the following expenses of the Company shall be paid by the Company:
(a) the cost of borrowed money;
(b) taxes on income, real property and all other taxes applicable
to the Company;
(c) legal, accounting, underwriting, brokerage, transfer agent's,
registrar's, indenture trustee's, listing, registration and other
fees, printing, engraving, and other expenses and taxes incurred in
connection with the issuance,
8
<PAGE>
distribution, transfer, registration and stock exchange listing of the
Company's securities;
(d) fees and expenses of advisers and independent contractors,
consultants, managers and other agents employed directly by the
Company;
(e) expenses connected with the acquisition, disposition or
ownership of mortgages or real property or other investment assets,
including, to the extent not paid by any party other than the Company
or the Adviser, but not limited to, costs of foreclosure, costs of
appraisal, legal fees and other expenses for professional services,
maintenance, repair and improvement of property; and brokerage and
sales commissions, and expenses of maintaining and managing real
property equity interests;
(f) the expenses of organizing or terminating the Company;
(g) all insurance costs (including the cost of Director's
liability insurance) incurred in connection with the protection of the
Company's property as required by the Directors;
(h) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by
the Directors to holders of securities of the Company including a
dividend reinvestment plan, if any;
(i) all expenses connected with communications to holders of
securities of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of securities,
including the cost of printing and
9
<PAGE>
mailing checks, certificates for securities and proxy solicitation
materials and reports to holders of the Company's securities;
(j) to the extent not paid by borrowers from the Company, the
expenses of administering, processing and servicing mortgage,
development, construction and other loans;
(k) the cost of any accounting, statistical, or bookkeeping
equipment necessary for the maintenance of the books and records of
the Company;
(1) general legal, accounting and auditing fees and expenses;
(m) salaries and other employment expenses of the personnel
employed or retained by the Company who are not Affiliates of the
Adviser, fees and expenses incurred by all Directors and officers in
attending Directors' meetings (including meetings of Board
committees); fees and travel and other expenses incurred by the
Directors, officers and employees of the Company who are not
Affiliates of the Adviser; and
(n) expenses relating to options to purchase shares of the
Company granted to officers and employees of the Company (including
Affiliates of the Adviser) under a plan approved by the Shareholders
of the Company
15. OTHER ACTIVITIES OF ADVISER. Nothing herein contained shall
prevent the Adviser from engaging in other business but the Adviser may not
(although its Affiliates may) otherwise engage in activities similar to those to
be performed by it for the Company, including the rendering of services and
advice to other persons and entities, the acting as a Director and the
management of other investments, (including the investments of the Adviser
10
<PAGE>
and its Affiliates). The Adviser shall counsel the Company regarding investments
and shall present to the Company a continuing flow of suitable investments which
are consistent with the objectives of the Company.
Directors,officers, employees and agents of the Adviser or of
Affiliates of the Adviser may serve as Directors, officers, employees or agents
of the Company. When executing documents or otherwise acting in such capacities
for the Company, such persons shall use their respective titles with the
Company.
16. TERM-TERMINATION OF AGREEMENT. This Agreement shall continue in
full force for a term expiring on December 31, 1998 and thereafter it may be
extended from year to year by the affirmative vote of a majority of the
Directors who are not Affiliates of the Adviser and the affirmative vote of a
majority of the shareholders of the Company present in person or by proxy at a
meeting called to renew this Agreement.
17. AMENDMENTS. This Agreement shall not be modified or terminated
except by an instrument in writing signed by both parties hereto, or their
respective, successors or assigns, or otherwise as provided herein.
18. ASSIGNMENT. This Agreement is not assignable without the consent
of the unaffiliated Directors of the Company and of the Adviser.
19. DEFAULT, BANKRUPTCY, ETC. At the option of the Directors, this
Agreement shall be terminated immediately upon written notice of termination
from the Directors to the Adviser if any of the following events shall occur:
11
<PAGE>
(a) If the Adviser shall violate any provision of this Agreement
and, after written notice of such violation, shall not cure such
default within 30 days;
(b) If the Adviser shall be adjudged bankrupt or insolvent by a
court of competent jurisdiction, or any order shall be made by a court
of competent jurisdiction for the appointment of a receiver,
liquidator or trustee of the Adviser or of all or substantially all of
its property by reason of the foregoing, or approving any petition
filed against the Adviser for its reorganization; or
(c) If the Adviser shall institute proceedings for voluntary
bankruptcy or shall file a petition seeking reorganization under the
Federal bankruptcy laws, or for relief under any law for the relief of
debtors, or shall consent to the appointment of a receiver of itself
or of all or substantially all its property, or shall make a general
assignment for the benefit of its creditors, or shall admit in writing
its inability to pay its debts generally, as they become due.
The Adviser agrees that if any of the events specified in subsections
(b) and (c) of this Section 19 shall occur, it will give written notice thereof
to the Directors within seven days after the occurrence of such event.
20. ACTION UPON TERMINATION. The Adviser shall not be entitled to
compensation after the date of termination of this Agreement for further
services hereunder but shall be paid all compensation accruing to the date of
termination. The Adviser shall forthwith upon such termination:
12
<PAGE>
(a) pay over to the Company all monies collected and held for the
account of the Company pursuant to this Agreement, after deducting any
accrued compensation and reimbursement for its expenses to which it is
then entitled,
(b) deliver to the Directors a full accounting, including a
statement showing all payments collected by it and a statement of all
monies held by it, covering the period following the date of the last
accounting furnished to the Directors, and
(c) deliver to the Directors all property and documents of the
Company then in the custody of the Adviser.
21. GOVERNING LAW. The provisions of this Agreement shall be construed
and interpreted in accordance with the laws of the State of Delaware as at the
time in effect.
22. MISCELLANEOUS. The Adviser assumes no responsibility under this
Agreement other than to render the services called for hereunder in good faith,
and shall not be responsible for any action of the Directors in following or
declining to follow any advice or recommendations of the Adviser. None of the
Adviser, its owners, directors, officers or employees shall be liable to the
Company, the Directors or the holders of securities of the Company except by
reason of acts constituting bad faith, willful misfeasance, gross negligence or
reckless disregard of their duties.
23. NOTICES. Any communications given hereunder shall be in writing
delivered at the following addresses of the parties hereto:
13
<PAGE>
The Directors and/or the Company:
2701 South Bayshore Drive
Coconut Grove, Florida 33133
The Adviser:
2701 South Bayshore Drive
Coconut Grove, Florida 33133
Either party may at any time give notice in, writing to the other
party of a change of its address for the purpose of this Section 23.
IN WITNESS WHEREOF, HMG/Courtland Properties, Inc., by an authorized
officer, and HMG Advisory Corp., by an authorized officer, in such case
thereunto duly authorized, have signed these presents on June 27, 1997,
effective as of January 1, 1998.
Attest: HMG/COURTLAND PROPERTIES, INC.
By /s/ Lawrence I. Rothstein By /s/ Maurice Wiener
Lawrence I. Rothstein Maurice Wiener
Secretary Chairman of the Board
of Directors
Attest: HMG ADVISORY CORP,
By /s/ Lawrence I. Rothstein By /s/ Maurice Wiener
Lawrence I. Rothstein Maurice Wiener
Secretary Chief Executive Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000311817
<NAME> HMG/COURTLAND PROPERTIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,492,059
<SECURITIES> 0
<RECEIVABLES> 1,550,847
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 21,487,938
<DEPRECIATION> 4,554,998
<TOTAL-ASSETS> 26,009,623
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 1,245,635
0
0
<OTHER-SE> 12,871,677
<TOTAL-LIABILITY-AND-EQUITY> 26,009,623
<SALES> 3,874,978
<TOTAL-REVENUES> 3,874,978
<CGS> 0
<TOTAL-COSTS> 4,498,759
<OTHER-EXPENSES> (79,606)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 936,027
<INCOME-PRETAX> 548,013
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 548,013
<EPS-PRIMARY> 0.47
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</TABLE>
