Notes
to Consolidated Financial Statements
1.
Nature of Business and Going Concern
PGI
Incorporated and Subsidiaries (the Company), a Florida corporation,
was founded in 1958, and up until the mid 1990’s was in
business of building and selling homes, developing and selling home
sites and selling undeveloped or partially developed tracts of
land. Over approximately the last 25 years, the Company’s
business focus and emphasis changed substantially as it has
concentrated its sales and marketing efforts almost exclusively on
the disposition of its remaining real estate.
The
Company has a significant accumulated deficit and is in default of
certain sinking fund and interest payments on its convertible
subordinated debentures (Note 8).
The
Company’s major efforts and activities have been, and
continue to be, to sell assets of the Company to repay its
indebtedness and to pay the ordinary on-going costs of operation of
the Company. The potential values of the land parcels held for sale
has been difficult to assess. With the 2016 sale of 369 acres to
the Florida DOT for $9,000,000, the remaining land inventory are
difficult to sell and difficult to value. While the Company will
seek to realize full market value for each remaining asset, the
amounts realized may be at substantial variance from its present
financial statement carrying value. Certain of these assets may be
of so little value and marketability that the Company may elect not
to pay the real estate taxes on selected parcels, which may
eventually result in a defacto liquidation of such property by
subjecting such property to a tax sale.
In
management’s judgment, with the 2016 land parcel sale, the
remaining assets will be insufficient to satisfy much, if any, of
the outstanding indebtedness and there will be no recoveries by the
shareholders. Consequently, there is substantial doubt about the
Company’s ability to continue as a going concern within one
year after the date that the financial statements are issued. The
asset carrying values shown in the financial statements, are judged
to be reasonable estimates of the value, when viewed in the context
of the entirety of the financial statements.
2.
Significant Accounting Policies:
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after eliminating all
significant inter-company transactions.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
2.
Significant Accounting Policies (continued):
Accounting Estimates
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.
Revenue and Profit Recognition
In May
2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts
with Customers (Topic 606)” which requires entities to
recognize revenue when control of the promised goods or services is
transferred to customers at an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or servies. We anticipate adopting this
standard using the modified retrospective approach. The adoption of
ASU 2014-09 will not have a material impact on the Company’s
consolidated financial statements.
Acreage
Sales
of undeveloped and developed acreage tracts are recognized, net of
any deferred revenue and valuation discount.
Land Inventory
Land
inventory is stated at cost.
3.
Real Estate Sales and Interest Income:
Real
estate sales and cost of real estate sales consisted
of:
|
2017
|
|
|
|
Real
estate sales
|
$
-
|
$
9,005
|
Cost
of real estate sales
|
-
|
747
|
Gross
profit margin
|
$
-
|
$
8,258
|
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
3.
Real Estate Sales and Interest Income
(continued):
During
the year ended December 31, 2016, the Company sold approximately
369 acres located in Hernando County, Florida (“the
Property”) for $9,000,000 to the State of Florida Department
of Transportation (“Florida DOT”) and sold a small
parcel of land to the South Oak Village Association in Citrus
County, Florida. There were no real estate sales in
2017.
Interest income
totaled $15,000 for the year ended December 31, 2017 compared to
interest income of $4,000 for the year ended December 31, 2016.
Related party interest income increased by $11,000 during the year
ended December 31, 2017 to $13,000 from $2,000 for the comparable
period in 2016. The related party interest income for the year
ended December 31, 2017 is a result of the Company’s
investment in a $560,000 short term note with LIC, which investment
was made during the year ended December 31, 2017 with an original
maturity of December 31, 2017, which was extended one year. The
Company received payment of the outstanding note receivable from
LIC in March, 2018. The Company received payment of the previous
note receivable from LIC on June 23, 2016. Interest income of
$2,000, represents interest earned on the Company’s money
market account during the years ended December 31, 2017 and
2016.
Land
inventory consisted of:
|
2017
|
|
|
|
Fully
improved land
|
14
|
14
|
|
$
14
|
$
14
|
Other
assets consisted of:
|
2017
|
|
|
|
Deposit
with Trustee of 6.5%
|
|
|
debentures
|
$
41
|
$
41
|
Deferred
charges
|
1
|
1
|
|
$
42
|
$
42
|
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
6.
Accounts Payable and Accrued
Expenses:
Accounts payable
and accrued expenses consisted of:
|
|
|
|
|
Accounts
payable
|
$
15
|
$
26
|
Accrued
audit/tax expense
|
47
|
46
|
Accrued
consulting fees-related party
|
1
|
1
|
Environmental
remediation
|
|
|
obligations
|
-
|
19
|
Accrued
debenture fees
|
145
|
137
|
Accrued
miscellaneous
|
1
|
1
|
|
$
209
|
$
230
|
Accrued Real Estate Taxes:
Accrued
real estate taxes consisted of:
|
|
|
|
|
Current
accrued real estate taxes
|
$
4
|
$
4
|
Notes
payable consisted of the following:
|
|
|
|
|
Notes
Payable-
|
|
|
At
prime plus 2%, due October 1, 1984
|
$
176
|
$
176
|
At
prime plus 2%, due October 1, 1987
|
1,000
|
1,000
|
Non-interest
bearing, due August 1, 1993
|
22
|
22
|
|
$
1,198
|
$
1,198
|
The
prime rate at December 31, 2017 and 2016, was 4.5% and 3.75%,
respectively.
During
the year ended December 31, 2016, the Company paid the primary
lender debt of $500,000 and all accrued interest totaling $470,000
to PGIP, the holder of the first mortgage note and an affiliate of
the Company upon receipt of the proceeds of the sale of the
Property on June 23, 2016.
The
overall weighted-average interest rate for the Company’s
credit agreements with its notes and mortgages was approximately
6.0% and 5.9
%
at December 31,
2017 and 2016, respectively.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
7.
Notes Payable
(continued):
Accrued
interest on notes payable was $3,218,000 and $3,146,000 at December
31, 2017 and 2016, respectively.
All of
the outstanding notes payable including accrued interest are past
due.
8.
Subordinated Convertible Debentures
Payable:
Subordinated
debentures payable consisted of:
|
|
|
|
|
6.5%,
due June, 1991
|
$
447
|
$
447
|
6%,
due May, 1992
|
8,025
|
8,025
|
|
$
8,472
|
$
8,472
|
The
Trustee of the 6.5% subordinated convertible debentures, which
matured in June 1991, with an original face amount of $1,034,000,
provided notice of a final distribution to holders of such
debentures on September 2, 2014. In connection with such final
distribution, the Trustee has maintained a debenture reserve fund
with a balance of $41,000 as of December 31, 2017 and 2016,
available for distribution to holders of such debentures who
surrender their respective debenture certificates.
During
the year ended December 31, 2017 and 2016, there were no 6.5%
subordinated convertible debentures that were surrendered by their
respective debenture holders and no funds were utilized from the
debenture reserve account.
The
6.5% Subordinated convertible debenture balances are as
follows:
|
|
|
|
|
Original
face value
|
$
1,034
|
$
1,034
|
Outstanding
debenture principal balance
|
447
|
447
|
Accrued
and unpaid interest balance
|
846
|
817
|
Debenture
reserve account balance
|
41
|
41
|
If and when such
remaining debentures are surrendered to the Trustee, the applicable
portion of such principal and accrued interest will be recorded as
debt and interest forgiveness. As the Company has consistently
stated in prior filings, the Company believes that any potential
claims by the respective debenture holders on such 6.5%
subordinated convertible debentures would be barred under the
applicable statutes of limitations.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
8.
Subordinated Convertible Debentures Payable
(continued):
Since
issuance, $650,000 and $152,000 of the 6.5% and 6% debentures,
respectively, have been converted into common stock. This
conversion feature is no longer in effect.
The
Company is in default of certain sinking fund and interest payments
on both subordinated convertible debentures totaling $8,472,000 in
principal plus accrued and unpaid interest of $25,032,000 and
$23,743,000 as of December 31, 2017 and 2016,
respectively.
The
debentures are not collateralized and are not subordinate to each
other, but are subordinate to senior indebtedness ($1,198,000 at
December 31, 2017 and 2016). Payment of dividends on the
Company’s common stock is restricted under the terms of the
two indentures pursuant to which the outstanding debentures are
issued.
In
order to maximize the amounts realized for the debt holders, the
Company has been and intends to continue to seek buyers for the
remaining landholdings.
No
assurances are offered regarding the timing of or the values to be
realized from future land sales.
9
Convertible Debentures
Payable:
After
repayment of the first mortgage note (“the primary lender
debt”), proceeds received from the June 2016 Property sale to
Florida DOT were also utilized to repay the remaining principal of
the collateralized convertible debentures totaling $1,500,000 and a
portion of the accrued interest related to such debentures totaling
$5,455,000. The current holders of the collateralized convertible
debentures were LIC and Love-1989 Florida Partners, LP
(“Love-1989”), each affiliates of Love-PGI Partners,
L.P. (“L-PGI”).
The
June 23, 2016 payments of principal and interest and the remaining
accrued interest were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
agreements - first mortgage note
|
$
500
|
$
470
|
$
-
|
payable-related
party
|
|
|
|
|
|
|
|
Collateralized
convertible debentures
|
|
|
|
payable-related
party
|
1,500
|
5,455
|
52,915
|
|
$
2,000
|
$
5,925
|
$
52,915
|
Accrued
interest was $52,915,000 at December 31, 2017 and 2016,
respectively.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
9.
Convertible Debentures Payable (continued):
In May
2008, LIC purchased $703,000 in principal amount of the
Company’s convertible debentures from the previous debenture
holder. The balance of the outstanding convertible debentures in
the amount of $797,000, were held by Love-1989. The debentures held
by Love-1989 and LIC were secured by a second mortgage behind PGIP
on the 366 acres retained by the Company and a security interest
behind that held by PGIP in the restricted proceeds escrow. The
total debentures balance of $1,500,000 carried a maturity date of
July 8, 1997 and were in default as of December 31, 2015. Interest
on the debentures accrued at the rate of fourteen percent
compounded quarterly. The Company’s primary lender credit
agreements prohibit the payment of interest until such time as the
primary lender loans are repaid.
Reconciliation of
the statutory federal income tax rates, 34% for the years ended
December 31, 2017 and 2016, to the Company’s effective income
tax rates follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
tax (credit)
|
$
(513
)
|
-34.0
%
|
$
986
|
34.0
%
|
State
income taxes, net of
|
|
|
|
|
federal
tax benefits
|
(60
)
|
-4.0
%
|
116
|
4.0
%
|
Decrease
in land inventory basis
|
-
|
0.0
%
|
(160
)
|
-6.0
%
|
Decrease
in environmental
|
|
|
|
|
liability
|
7
|
0.0
%
|
2
|
0.0
%
|
Increase
(decrease) in valuation
|
|
|
|
|
allowance
|
623
|
41.0
%
|
(944
)
|
-32.0
%
|
|
$
57
|
3.0
%
|
$
-
|
-
|
The
Company recognized an income tax expense of $57,000 during the year
ended December 31, 2017 for the 2016 Alternative Minimum tax on the
2016 gain recognized on the sales of real
estate.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
10.
Income Taxes (continued):
At
December 31, 2017, the Company had an operating loss carryforward
of approximately $67,793,000 which will expire at various dates
through 2036.
|
|
|
|
|
Deferred
tax asset:
|
|
|
Net
operating loss carryover
|
$
16,948
|
$
25,240
|
Expenses
capitalized under IRC 263(a)
|
37
|
56
|
Environmental
liability
|
-
|
7
|
Tax
credits (AMT)
|
57
|
-
|
Valuation
allowance
|
(17,042
)
|
(25,303
)
|
|
|
|
Net
deferred tax asset
|
$
-
|
$
-
|
The
Company is no longer subject to U.S. federal or state income tax
examinations by tax authorities for years before 2014.
Effective December
31, 2016, L-PGI liquidated and assigned the 2,260,706 shares of
common stock of the Company and 1,875,000 shares of preferred stock
of the Company, that were held by L-PGI to LIC, in conjunction with
settling its remaining indebtedness. LICwas the general partner of
L-PGI and is owned, directly or indirectly, by Andrew S. Love and
Laurence A. Schiffer, which are the directors and executive
officers of the Company.
In
March 1987, the Company sold, in a private placement, 1,875,000
shares of its Class A cumulative convertible preferred stock to
L-PGI for a purchase price of $7,500,000 cash ($4.00 per share).
The Company also converted $500,000 of indebtedness owed to a
corporation owned by the Company’s former Chairman of the
Board of Directors and members of his family into 125,000 shares of
the cumulative convertible preferred stock.
The
holders of the preferred stock are entitled to one vote per share
and, except as provided by law, will vote as one class with the
holders of the common stock. Class A preferred stockholders are
also entitled to receive cumulative dividends at the annual rate of
$.32 per share, an effective yield of 8%. Dividends accrued for an
initial two year period and, at the expiration of this period,
preferred stockholders had the option of receiving accumulated
dividends, when and if declared by the Board of Directors, in cash
(unless prohibited by law or contract) or common stock. At December
31, 2017 cumulative preferred dividends in arrears totaled
$14,515,000 ($640,000 of which related to the year ended December
31, 2017). On May 15, 1997 preferred dividends accrued through
April 25, 1995 totaling $4,260,000 were paid in the form of
2,000,203 shares of common stock.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
11.
Capital Stock (continued):
As of
December 31, 2017 and 2016, the preferred stock is callable or
redeemable at the option of the Company at $4.00 per share plus
accrued and unpaid dividends. In addition, the preferred stock will
be entitled to preference of $4.00 per share plus accrued and
unpaid dividends in the event of liquidation of the
Company.
At
December 31, 2017 the Company had reserved 3,756,000 common shares
for the conversion of preferred stock.
There
were no significant transactions in the fourth quarter of
2017.
13.
Commitments and Contingencies:
The
Company is currently not a party in any legal
proceedings.
14.
Related Party Transactions:
The
entire outstanding principal of the primary lender debt of $500,000
and all accrued interest totaling $470,000 was paid to PGIP, the
holder of the first mortgage note and an affiliate of the Company
on June 23, 2016, upon receipt of proceeds from the June 2016
Property Sale to the Florida DOT. In addition, on June 23, 2016,
the remaining principal of the collateralized convertible
debentures totaling $1,500,000 and a portion of the accrued
interest related to such debentures totaling $5,455,000 was paid to
the current holders of such debentures. LIC and Love-1989, each
affiliates of L-PGI, held the collateralized convertible
debentures. With the principal repaid, there was no incremental
interest expense accrued with respect to such collateralized debt
subsequent to June 23, 2016.
The
June 23, 2016 payments of principal and interest and the remaining
accrued interest are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
agreements - first mortgage note
|
$
500
|
$
470
|
$
-
|
payable-related
party
|
|
|
|
|
|
|
|
Collateralized
convertible debentures
|
|
|
|
payable-related
party
|
1,500
|
5,455
|
52,915
|
|
$
2,000
|
$
5,925
|
$
52,915
|
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
14.
Related Party Transactions (continued):
Effective December
31, 2016, L-PGI liquidated and assigned the 2,260,706 shares of
common stock of the Company and 1,875,000 shares of preferred stock
of the Company, that were held by L-PGI to LIC, in conjunction with
settling its remaining indebtedness. LIC was the general partner of
L-PGI and is owned, directly and indirectly, by Andrew S. Love and
Laurence A. Schiffer, which are the directors and executive
officers of the Company.
The
Company received the balance of restricted cash of $5,000 from
PGIP, the first mortgage lender, which was released subsequent to
the sale of the Property and satisfaction of the primary lender
debt obligation owed to PGIP during the year ended December 31,
2016.
The
Company’s primary preferred shareholder is LIC which is
primarily owned and managed by Andrew S. Love and Laurence A.
Schiffer. Messrs. Love and Schiffer serve as the executive officers
and directors of the Company.
PGIP is
owned and managed by Hallmark Investment Corporation
(“HIC”). Messrs. Love and Schiffer are directors and
executive officers of HIC and own 90% of all the issued and
outstanding voting stock of HIC.
The
Company maintains its administration and accounting offices with
Love Real Estate Company (“LREC”). LREC, which is owned
by Mr. Love and Mr. Schiffer, is paid a monthly fee for the
following:
1.
Maintain books of
original entry;
2.
Prepare quarterly
and annual SEC filings;
3.
Coordinate the
annual audit;
4.
Assemble
information for tax filing, review reports as prepared by tax
accountants and file same;
5.
Track shareholder
records through transfer agent;
6.
Maintain policies
of insurance against property and liability exposure;
7.
Handle day-to-day
accounting requirements
In
addition, the Company receives office space, telephone service and
computer service from LREC. A fee of $2,800 per month was accrued
in 2017 and 2016. The Company made payments of $33,600 to LREC in
2017 and 2016 respectively for accounting service fees. There were
no accrued accounting service fees as of December 31, 2017 and
2016.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
14.
Related Party Transactions (continued):
Effective March 25,
1987, the Company entered into a Management Consulting Agreement
with LREC. As a consultant to the Company and in addition to the
above services, LREC provides other services including, but not
limited to, strategic planning, marketing and financing as
requested by the Company. In consideration for these consulting
services, the Company pays LREC a quarterly consulting fee of
one-tenth of one percent of the carrying value of the
Company’s assets, plus reasonable out-of-pocket expenses. As
of December 31, 2017 and 2016, the carrying value of the
Company’s assets was approximately $788,000 and $1,014,000,
including $159,000 and $958,000 of cash, respectively. Consulting
fees were $4,000 in 2017 and 2016. As of both December 31, 2017 and
2016, a total of $1,000 of unpaid fees had accrued under this
agreement.
In 1985
a corporation owned by the former Chairman of the Board and his
family made an uncollateralized loan to the Company, which at
December 31, 2017 and 2016 had an outstanding principal balance of
$176,000 plus accrued interest of $452,000 and $441,000, totaling
an outstanding balance of $628,000 and $617,000, respectively.
Interest accrued on this loan was $11,000 and $10,000 in 2017 and
2016, respectively.
The
Company invested in a short-term note receivable of $560,000 with
LIC during 2017, bearing interest at 4.5% per annum with an
original maturity of December 31, 2017, which was extended one year
through December 31, 2018. The interest receivable on the related
party note receivable is $13,000 at December 31, 2017. The Company
received payment of the outstanding note receivable from LIC in
March, 2018.
The
Company received payments of $178,000 for an outstanding note
receivable balance from LIC during the year ended December 31,
2016. Interest income on this note receivable was $2,000 for the
year ended December 31, 2016.
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
15.
Fair Value of Financial Instruments:
The
following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is
practicable to estimate that value:
Cash:
The
carrying amount approximates fair value because of the short
maturity of those instruments.
Receivables:
The
carrying amount approximates fair value because of the short-term
maturity of those receivables.
Accounts
Payable:
The
carrying amount approximates fair value because of the short-term
maturity of those debts.
Debt:
It was
not practicable to estimate the fair value of the Company’s
debt with its primary lender, its notes payable and its convertible
debentures because these debts are in default causing no basis for
estimating value by reference to quoted market prices or current
rates offered to the Company for debt of the same remaining
maturities.
The
estimated fair values of the Company’s financial instruments
are as follows:
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
159
|
$
159
|
$
958
|
$
958
|
Receivables
|
573
|
573
|
-
|
-
|
Accounts
payable
|
15
|
15
|
26
|
26
|
Debt
|
9,670
|
-
|
9,670
|
-
|
PGI
INCORPORATED AND SUBSIDIARIES
Notes
to Consolidated Financial Statements (continued)
16.
Income (Loss) Per Share:
The
following is a summary of the calculations used in computing basic
and diluted income (loss) per share:
|
|
|
|
($ in
thousands, except share data)
|
Numerator:
|
|
|
BASIC
|
|
|
Net
Income (Loss)
|
$
(1,566
)
|
$
2,892
|
Preferred
Dividends
|
(640
)
|
(640
)
|
Income
(Loss) Available to Common Shareholders
|
$
(2,206
)
|
$
2,252
|
|
|
|
DILUTED
|
|
|
Income
(Loss) Available to Common Shareholders
|
$
(2,206
)
|
$
2,252
|
Dilutive
effect - Preferred Dividends
|
-
|
640
|
Dilutive
effect - Converible debenture interest
|
-
|
614
|
Adjusted
Income (Loss) Available to
|
|
|
Common
Shareholders
|
$
(2,206
)
|
$
3,506
|
|
|
|
Denominator:
|
|
|
BASIC
|
|
|
Weighted
average amount of shares outstanding
|
5,317,758
|
5,317,758
|
|
|
|
DILUTED
|
|
|
Weighted
average amount of shares outstanding
|
5,317,758
|
5,317,758
|
Dilutive
effect of assumed conversion of
|
|
|
Preferred
Stock
|
-
|
3,760,000
|
Dilutive
effect of assumed conversion of
|
|
|
Debentures
|
-
|
872,418
|
Dilutive
common shares
|
5,317,758
|
9,950,176
|
|
|
|
Income
(Loss) per share
|
|
|
Basic
|
$
(0.41
)
|
$
0.42
|
Diluted
|
$
(0.41
)
|
$
0.35
|