PGI INC - Annual Report: 2017 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – K

(Mark One)

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

 

For the fiscal year ended December 31, 2017                                                               

 

☐           TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________ to _____________________

 

Commission File Number

1-6471

FLORIDA	59-0867335
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

 

(314) 512-8650

(Issuer's telephone number)

 

Securities registered pursuant to section 12(b) of the Act:                                                                                     

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.10 per share

6% Convertible Subordinated Debentures due 1992

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K  ☒

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017 cannot be determined. See Item 5 of Form 10-K.

 

The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

 

As of March 23, 2018, 5,317,758 shares of Common Stock, par value $.10 per share, were outstanding.

 

PGI INCORPORATED AND SUBSIDIARIES

FORM 10 – K - 2017

Contents and Cross Reference Index

 

Part		Item				Form 10-K
No.		No.		Description		Page No.
I		1		Business		3
		1A		Risk Factors		4
		1B		Unresolved Staff Comments		4
		2		Properties		4
		3		Legal Proceedings		4
		4		Mine Safety Disclosures		4
II		5		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		5
		6		Selected Financial Data		5
		7		Management’s Discussion and Analysis of Financial Condition and Results of Operations.		6
		7A		Quantitative and Qualitative Disclosures About Market Risks		13
		8		Financial Statements and Supplementary Data		14
		9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		33
		9A		Controls and Procedures		33
		9B		Other Information		34
III		10		Directors, Executive Officers and Corporate Governance		35
		11		Executive Compensation		36
		12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		36
		13		Certain Relationships and Related Transactions, and Director Independence		37
		14		Principal Accountant Fees and Services		41
IV		15		Exhibits and Financial Statement Schedules		42
		16		Form 10-K Summary		44
Signatures						45

 

 

PART I

 

 

As used in this Annual Report on Form 10-K, the “Company” refers, unless the context otherwise requires, to PGI Incorporated and its subsidiaries. The Company’s executive offices are at 212 S. Central, St. Louis, Missouri, 63105, and its telephone number is (314) 512-8650.

 

The Company, a Florida corporation, was founded in 1958, and up until the mid 1990’s was in the 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. This change was prompted by its continuing financial difficulties due to the principal and interest owed on its debt.

 

During the fiscal year ended December 31, 2016, Sugarmill Woods, Inc. (“Sugarmill Woods”), a wholly-owned subsidiary of the Company, sold its largest parcel of real estate, approximately 369 acres located in Hernando County, Florida (“the Property”), to the State of Florida Department of Transportation (“Florida DOT”). The Property was encumbered by secured creditor claims, and the sale of the Property closed on June 21, 2016 for $9,000,000. The Florida DOT acquired the Property in connection with the northward extension of the Suncoast Parkway as part of the Suncoast Parkway, Project 2. On November 29, 2016 Sugarmill Woods sold a small parcel of land in Citrus County, Florida for a nominal amount.

 

The Company’s remaining land inventory consists of 6 single family lots, an approximate 7 acre parcel and some other minor parcels of real estate consisting of easements in Citrus County, Florida, which are owned through its wholly-owned subsidiary, Sugarmill Woods. In addition, Punta Gorda Isles Sales, Inc. (“PGIS”), a wholly-owned subsidiary of the Company, owns 12 parcels of real estate in Charlotte County, Florida, which total approximately 60 acres, but these parcels have limited value because of associated developmental constraints such as wetlands, easements, and/or other obstacles to development and sale.

 

The proceeds from the sale of the Property of $9,000,000 were received on June 23, 2016 and payment of the primary lender debt totaling $500,000, in principal, and all accrued interest related to such debt totaling $470,000, was made to PGIP LLC (“PGIP”), the holder of the first mortgage note and an affiliate of the Company. 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 holders of such debentures. Love Investment Company (“LIC”), and Love-1989 Florida Partners, LP (“Love-1989”), each affiliates of Love-PGI Partners, L.P. (“L-PGI), held such collateralized convertible debentures. Prior to December 31, 2016, L-PGI was the Company’s primary preferred stock shareholder. 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 or indirectly, by Andrew S. Love and Laurence A. Schiffer, which are the directors and executive officers of the Company.

 

 

 

As of December 31, 2017, the Company had no employees, and all services provided to the Company are through contract services.

 

 

Not Applicable

 

 

Not Applicable

 

 

The Company’s remaining land inventory consists of 6 single family lots, an approximate 7 acre parcel and some other minor parcels of real estate consisting of easements in Citrus County, Florida, which are owned through its wholly-owned subsidiary, Sugarmill Woods. In addition, PGIS, a wholly-owned subsidiary of the Company, owns 12 parcels of real estate in Charlotte County, Florida, which total approximately 60 acres, but these parcels have limited value because of associated developmental constraints such as wetlands, easements, and/or other obstacles to development and sale. The Company continues its efforts to dispose of all of its real estate.

 

The Company believes the properties are adequately covered by insurance.

 

 

The Company, to its knowledge, currently is not a party in any legal proceedings.

 

 

Not Applicable

 

 

PART II

 

 

There is no public trading market for the Company’s common equity securities. There have been no reported transactions in the Company’s common stock, par value $.10 (the “Common Stock”), since January 29, 1991, with the exception of the odd lot tender offer by PGIP, an affiliate of the Company, in 2003 which was described previously in the Company’s annual report on Form 10-KSB for the fiscal year ended December 31, 2004 and the 2,260,706 shares of Common Stock assigned by L-PGI to LIC effective December 31, 2016 as described under Item 1.

 

The following over-the-counter market quotations, obtained from www.otcmarkets.com, reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:

 

Quarter End Date		Price		Volume
9/30/17		$.000005		1,985
3/31/17		$.000008		1,245
12/31/16		$.000001		67,980
9/30/16		$.0001		123
6/30/16		$.0001(high)		1,000
6/30/16		$.000001(low)		1,500

 

No dividends have ever been paid on the Common Stock, and payment of dividends on the Common Stock is restricted under the terms of the two indentures (one of which matured on June 1, 1991 and the other on May1, 1992) pursuant to which the Company’s outstanding subordinated convertible debentures were issued and by the terms of the Company’s preferred stock. As of December 31, 2017, to the Company’s knowledge, there were 552 holders of record of the Company’s Common Stock and 418 debenture holders.

 

 

Not Applicable

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 The liabilities of the Company exceed the reported value of its assets. Management’s 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. With the June 2016 sale of 369 acres to the Florida DOT for $9,000,000, and the sale of the small land parcel in Citrus County, Florida in November 2016, the aggregate remaining land inventory is less than 70 acres, consisting of multiple parcels located in two Florida counties. These parcels have limited value because of associated development constraints such as wetlands, easements and other obstacles to development and sale. At December 31, 2017 the carrying value of the land inventory was $14,000. The Company is seeking to realize full market value for such land. However, certain land parcels 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 June 2016 land parcel sale, the remaining assets will be insufficient to satisfy much, if any, of the outstanding indebtedness of the Company. Consequently, there is substantial doubt about the Company’s ability to continue as a “going concern,” as that term is used for generally accepted accounting purposes. 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.

 

The proceeds of the June 2016 property sale were utilized to repay the entire principal of the first mortgage note and related interest accrued thereto, and with respect to the collateralized convertible debentures, to repay the entire principal and a portion of the accrued interest related thereto as follows:

 

	June 23, 2016	June 23, 2016	Remaining
	Principal	Interest	Accrued
	Payment	Payment	Interest
	($ in thousands)
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

 

In addition to the convertible subordinated debentures noted above, the Company’s financial statement indebtedness includes the: (i) 6.5% subordinated convertible debentures, which matured in June, 1991, with a remaining face amount of $1,034,000 and (ii) its 6.0% subordinated convertible debentures which matured in May, 1992, with a remaining face amount of $8,025,000.

 

 

 

With respect to the 6.5% subordinated convertible debentures, the Trustee provided notice of final distribution to the holders of such debentures on September 2, 2014. In connection with such final distribution, the Trustee maintained a debenture reserve fund with a balance of $41,000 as of December 31, 2017 and 2016, respectively, which is available for final distribution to remaining 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:

 

	December 31, 2017	December 31, 2016
	($ in thousands)
Original face value	$1,034	$1,034
Outstanding debenture principal balance	447	447
Face value of debentures surrendered	-	-
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 similarly 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.

 

The cumulative amount due for the 6.5% and 6% subordinated convertible debentures as of December 31, 2017 is as follows:

	December 31, 2017
	Principal	Unpaid
	Amount Due	Interest
	($ in thousands)
6.5% Subordinated debentures due June 1, 1991	$447	$846
6% Subordinated debentures due May 1, 1992	8,025	24,186
	$8,472	$25,032

 

 

 

Both issues of subordinated convertible debentures have been in payment default for over twenty-five years. It is unclear whether any action on behalf of the bondholders is presently likely, given the negative net worth of the Company and continuing passage of time. Further, the Company believes that if claims were to be asserted at least a portion of such claims (especially those with respect to the 6.5% subordinated convertible debentures which matured on June 1, 1991) are barred under the applicable statutes of limitations.

 

If such claims are barred, the Company will likely recognize income in like amount for income tax purposes, without the receipt of any cash. Management estimates that the potential income tax liability may be largely averted by the insolvency exception of the tax laws and the utilization of the Company’s tax loss carryforwards, which as of December 31, 2017 totaled approximately $67,793,000.

 

Even if claims by the subordinated convertible debenture holders are barred in full and there is no cash tax consequence to the Company as a result of the utilization of the tax loss carry forwards, the Company would nonetheless have a substantial Stockholders’ Deficiency. As of December 31, 2017, the Stockholders’ Deficiency of the Company was $90,260,000.

 

RESULTS OF OPERATIONS

Revenues

 

Revenues for the year ended December 31, 2017 decreased by $8,994,000 to $15,000 compared to revenues of $9,009,000 for the year ended December 31, 2016, primarily as a result of the sale, by Sugarmill Woods, of the Property to the Florida DOT on June 21, 2016 for $9,000,000, and the sale of a small parcel of land on November 29, 2016 for $5,000. There were no sales of real estate 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. The Company received payment of the outstanding note receivable from LIC on March 6, 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.

 

 

 

Costs and Expenses

 

Costs and expenses for the year ended December 31, 2017 decreased by $4,593,000 when compared to the same period in 2016 as follows:

 

			Increase
	2017	2016	(Decrease)
		($ in thousands)
COSTS, EXPENSES AND OTHER
Cost of real estate sales	$-	$747	$(747)
Interest expense	1,360	1,324	36
Interest expense -related party	-	3,832	(3,832)
Taxes and assessments	5	6	(1)
Consulting and accounting-
related party	37	38	(1)
Legal and professional	27	83	(56)
General and administrative	95	87	8
	$1,524	$6,117	$(4,593)

 

The cost of real estate sales for the year ended December 31, 2017 decreased by $747,000 compared to the year ended December 31, 2016, solely as a result of costs and expenses incurred in connection with the sales of real estate on June 21, 2016 and November 29, 2016. There was no such expense for the comparable period in 2017 because there were no sales of real estate during such period.

 

Interest expense relating to the Company’s current outstanding debt held by non-related parties, increased by $36,000 during the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily as a result of interest accruing on past due balances which increased at various intervals throughout the year for accrued but unpaid interest.

 

Interest expense-related party decreased by $3,832,000 during the year ended December 31, 2017, compared to December 31, 2016. Proceeds from the June 2016 Property sale was used by the Company to repay the outstanding principal of the primary lender debt of the $500,000 first mortgage note, which was held by PGIP, and the $1,500,000 collateralized convertible debenture principal, which was held by LIC and Love-1989. With the repayment of such principal, no additional interest expense was accrued with respect to such collateralized debt subsequent to June 23, 2016.

 

 

 

Taxes and assessments decreased by $1,000 in 2017 when compared to the same period in 2016 as a result of lower real estate tax expense due primarily to the sale of the Property sold to the Florida DOT on June 21, 2016.

 

Consulting and accounting expense was $37,000 and $38,000 for the years ended December 31, 2017 and 2016, respectively. A quarterly consulting fee is paid to Love Real Estate Company (“LREC”), an affiliate of LIC, of one-tenth of one percent of the carrying value of the Company’s assets. In addition, accounting service fees of $33,600 were paid to LREC in 2017 and 2016.

 

Legal and professional expenses decreased by $56,000 during the year ended December 31, 2017 when compared to the same period in 2016. Additional legal expenses were incurred in 2016 in connection with the evaluation of the Company’s business alternatives. Other professional expenses of $18,000 were incurred during the year ended December 31, 2017 relating to environmental remediation services incurred for a parcel in Citrus County, Florida.

 

General and administrative expenses increased by $8,000 during the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to an increase in tax fees for the year ended December 31, 2017 of $11,000 compared to the year ended December 31, 2016. In addition, insurance expense decreased by $2,000 for the year ended December 31, 2017 due to the sale of the Property on June 23, 2016. There was also a decrease in general administrative expenses of $1,000 as a result of lower stock transfer agent fees relating to common stock for the year ended December 31, 2017 compared to 2016.

 

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.

 

 A net loss of $1,566,000 ($.41 per share loss) was incurred for the year ended December 31, 2017. This compared to net income of $2,892,000 ($.42 per share-basic) realized for the year ended December 31, 2016, which included a gain of $8,258,000 from sales of real estate during the year ended December 31, 2016. Included in the 2017 and 2016 income and loss per share computation is $640,000 ($.12 per share of Common Stock) of annual cumulative preferred stock dividends in arrears.

 

 

 

FINANCIAL CONDITION

 

Total assets decreased by $226,000 at December 31, 2017 compared to total assets at December 31, 2016 reflecting the following changes:

 

	2017	2016	Increase (Decrease)
	($ in thousands)
Cash	$159	$958	$(799)
Receivables-related party	573	-	573
Land inventory	14	14	-
Other assets	42	42	-
	$788	$1,014	$(226)

 

Net cash used in operating activities was $239,000 for the year ended December 31, 2017 compared to cash provided by operations of $2,774,000 for the year ended December 31, 2016. Net cash provided by or used in operations consists of cash received from operations less cash expended for operations.

 

Cash received from operations during the year ended December 31, 2017 was $2,000, which represents interest income earned on the Company’s money market account. Cash received from operations in the year ended December 31, 2016 was $9,009,000, which represented $9,005,000 received from real estate sales, $2,000 in interest income earned on the Company’s money market account and $2,000 in related party interest payments received from the Company’s note receivable with LIC.

 

Cash expended for operations during the year ended December 31, 2017 was $241,000, which represents a decrease of $5,994,000 compared to cash expended for operations of $6,235,000 in the year ended December 31, 2016. The decrease primarily is a result of payments of $5,925,000 for accrued related party interest paid on collateralized debt and payments of $122,000 for costs of real estate sales in the year ended December 31, 2016.

 

Related party receivables increased by $573,000 during the year ended December 31, 2017, due to two short-term notes receivable with LIC of $560,000 and accrued interest receivable of $13,000. The short-term loans to LIC bears interest at 4.5% per annum with an original maturity date of December 31, 2017; however, extended to December 31, 2018. The short-term notes receivable were subsequently paid in full during March, 2018. During the year ended December 31, 2016 investing activities provided $183,000 of cash, which primarily consisted of $178,000 of net principal repayments of the Company’s short-term note with LIC, in addition to restricted cash of $5,000 from PGIP, the first mortgage lender, which was released upon the sale of property and satisfaction of the primary lender debt obligation owed to PGIP.

 

 

 

Net cash used in financing activities during the year ended December 31, 2016 was $2,000,000 for principal repayments consisting of $500,000 in primary lender debt paid to PGIP and $1,500,000 in collateralized convertible debentures paid to LIC and Love-1989. There were no financing activities during the year ended December 31, 2017.

 

Related party receivables increased by $573,000 during the year ended December 31, 2017 due to the short-term note receivable with LIC of $560,000 and accrued interest receivable of $13,000. The short-term loan to LIC bears interest at 4.5% per annum. The Company received payment of the outstanding note receivable on March 6, 2018.

 

Liabilities were $91,048,000 at December 31, 2017 compared to $89,708,000 at December 31, 2016, reflecting the following changes:

 

			Increase
	2017	2016	(Decrease)
	($ in thousands)
Accounts payable and accrued expenses	$209	$230	$(21)
Accrued real estate taxes	4	4	-
Accrued interest	28,250	26,889	1,361
Accrued interest-related party	52,915	52,915	-
Notes payable	1,198	1,198	-
Convertible subordianted debentures payable	8,472	8,472	-
	$91,048	$89,708	$1,340

 

Accounts payable and accrued expenses decreased by $21,000 at December 31, 2017, compared to December 31, 2016, with decreases primarily representing current liabilities as of December 31, 2016 of $20,000 for legal services incurred in connection with the evaluation of the Company’s business focus alternatives, and a decrease in accrued expenses of $19,000 in environmental remediation expenses that were previously accrued by the Company. In addition, there were increases in accrued expenses of $11,000 in increased tax fees, and $8,000 for the accrual of the current year’s annual administration fees relating to the 6% subordinated convertible debentures.

 

Accrued interest increased by $1,361,000 at December 31, 2017 compared to December 31, 2016 reflecting changes in the following accrued interest categories:

 

			Increase
	2017	2016	(Decrease)
	($ in thousands)
Convertible subordinated debentures	$25,032	$23,743	$1,289
Other	3,218	3,146	72
	$28,250	$26,889	$1,361

 

 

 

There was an increase of $1,361,000 of accrued interest relating to the Company’s outstanding debt during the year ended December 31, 2017. The accrued interest relating to convertible subordinated debentures increased due to the additional accrual of interest on the nonpayment of previously accrued interest on the Company’s debentures (see Note 8 to the consolidated financial statements under Item 8). The notes payable and convertible subordinated debentures, including accrued interest, are past due.

 

The Company’s stockholders’ deficiency increased to $90,260,000 at December 31, 2017 from a $88,694,000 stockholders’ deficiency at December 31, 2016, reflecting the 2017 operating loss of $1,566,000.

 

Off-Balance Sheet Arrangements

 

The Company has no Off-Balance Sheet Arrangements.

 

Recent Accounting Standards

 

Accounting Standards Update (ASU) No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, is effective for interim and annual periods ending after December 15, 2016 and, accordingly, this is discussed in Footnote 2 to the financial statements.

 

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, is effective for interim and annual periods ending after December 15, 2017, and accordingly, this is discussed in Footnote 2 to the financial statements.

 

Forward Looking Statements

 

The discussion set forth in this Item 7, as well as other portions of this Form 10-K, may contain forward-looking statements. Such statements are based upon the information currently available to management of the Company and management’s perception thereof as of the date of the Form 10-K. When used in this Form 10-K, words such as “anticipates,” “estimates,” “believes,” “appears”, “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company’s operations could materially differ from those forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in the real estate market in Florida and the counties in which the Company owns any property; the overall national economy and financial markets; institution of legal action by the bondholders for collection of any amounts due under the subordinated convertible debentures (notwithstanding the Company’s belief that at least a portion of such actions might be barred under applicable statute of limitations); changes in management strategy; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time.

 

 

Not Applicable

 

 

 

Report of Independent Registered Public Accounting Firm

 

Audit Committee, Board of Directors

and Stockholders

PGI Incorporated

St. Louis, Missouri

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of financial position of PGI Incorporated and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ deficiency and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter – Going Concern

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has a significant accumulated deficit and is in default of certain sinking fund and interest payments on its convertible subordinated debentures.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in this regard to these matters are described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

 

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ BKD, LLP

 

We have served as the Company’s auditor since 2001.

 

St. Louis, Missouri

March 23, 2018

 

 

PGI INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31, 2017 and 2016

($ in thousands, except share data)

ASSETS				LIABILITIES
	2017	2016			2017	2016
Cash	$159	$958		Accounts payable and
				accrued expenses (Note 6)	$209	$230
Receivables-related party	573	-
(Note 14)				Accrued real estate taxes	4	4
Land Inventory (Note 4)	14	14		(Note 6)
				Accrued Interest:
Other assets (Note 5)	42	42		Subordinated convertible
				debentures (Note 8)	25,032	23,743
				Convertible debentures-
				related party (Note 9)	52,915	52,915
				Other (Note 7)	3,218	3,146
				Credit Agreements:
				Notes payable (Note 7)	1,198	1,198
				Subordinated convertible
				debentures payable (Note 8)	8,472	8,472
					91,048	89,708
				Commitments and
				Contingencies (Note 13)	-	-
			STOCKHOLDERS' DEFICIENCY
				Preferred stock, par value
				$1.00 per share; authorized
				5,000,000 shares; 2,000,000
				Class A cumulative
				convertible shares issued
				and outstanding; (liquidation
				preference of $8,000,000
				and cumulative dividends)
				(Note 11)	2,000	2,000
				Common stock, par value
				$.10 per share; authorized
				25,000,000 shares; 5,317,758
				shares issued and outstanding
				(Note 11)	532	532
				Paid-in capital	13,498	13,498
				Accumulated deficit	(106,290)	(104,724)
					(90,260)	(88,694)
	$788	$1,014			$788	$1,014

 

See accompanying notes to consolidated financial statements.

 

 

PGI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2017 and 2016
($ in thousands, except per share data)
	2017	2016
Revenues:
Real estate sales	$-	$9,005
Interest income	2	2
Interest income-related party	13	2
	15	9,009
Costs and expenses:
Cost of real estate sales	-	747
Interest	1,360	1,324
Interest-related party	-	3,832
Taxes and assessments	5	6
Consulting and accounting-related party	37	38
Legal and professional	27	83
General and administrative	95	87
	1,524	6,117
Net Income (Loss)
before income taxes	(1,509)	2,892
Income tax expense	(57)	-
Net Income (Loss)	$(1,566)	$2,892
Net Income (Loss) Per Share
Available to Common Stockholders
Basic (Note 16)	$(0.41)	$0.42
Net Income (Loss) Per Share
Available to Common Stockholders
Diluted (Note 16)	$(0.41)	$0.35
See accompanying notes to consolidated financial statements.

 

 

PGI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2017 and 2016
($ in thousands)
	2017	2016
Cash flows from operating activites:
Cash received from operations:
Real estate sales	$-	$9,005
Interest Income	2	2
Interest income-related party	-	2
	2	9,009
Cash expended for operations:
Cost of real estate sales	1	122
Interest-related party	-	5,925
Taxes and assessments	5	10
Consulting and accounting-related party	38	37
Legal and professional	66	74
General and administrative	74	67
Income tax	57	-
	241	6,235
Net cash flows provided by (used in)
operating activites	(239)	2,774
Cash flows from investing activities:
Net (advances) repayments of notes receivable
-related party	(560)	178
Release of restricted cash	-	5
Net cash flows provided by (used in)
investing activities	(560)	183
Cash flows from financing activities:
Principal payments on notes payable	-	(2,000)
Net cash flows used in financing activities	-	(2,000)
Net change in cash	(799)	957
Cash at beginning of year	958	1
Cash at end of year	$159	$958
See accompanying notes to consolidated financial statements.

 

 

PGI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31. 2017 and 2016
($ in thousands)
	2017	2016
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss)	$(1,566)	$2,892
Decrease (increase) in assets:
Land Inventory	-	625
Interest receivable-related party	(13)	-
Prepaid Expenses	-	2
Increase (decrease) in liabilities:
Accounts payable and accrued expenses	(21)	24
Accrued interest	1,361	1,324
Accrued interest-related party	-	(2,093)
Net cash flows provided by (used in)
operating activities	$(239)	$2,774
Supplemental Cash Flow:
Income taxes paid	$57	$-
See accompanying notes to consolidated financial statements.

 

 

PGI INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

Years ended December 31, 2017 and 2016

($ in thousands, except share data)

	Preferred Stock		Common Stock		Paid-in	Accumulated
	Shares	Par Value	Shares	Par Value	Capital	Deficit	Total
Balances at 1/1/16	2,000,000	$2,000	5,317,758	$532	$13,498	$(107,616)	$(91,586)
Net Income	-	-	-	-	-	2,892	2,892
Balances at 12/31/16	2,000,000	2,000	5,317,758	532	13,498	(104,724)	$(88,694)
Net Loss	-	-	-	-	-	(1,566)	(1,566)
Balances at 12/31/17	2,000,000	$2,000	5,317,758	$532	$13,498	$(106,290)	$(90,260)
See accompanying notes to consolidated financial statements.

 

 

 

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 

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.

 

 

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)

 

 

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.

 

 

Real estate sales and cost of real estate sales consisted of:

 

	2017	2016
	($ in thousands)
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)

 

 

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	2016
	($ in thousands)
Fully improved land	14	14
	$14	$14

 

 

Other assets consisted of:

 

	2017	2016
	($ in thousands)
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)

 

 

Accounts payable and accrued expenses consisted of:

 

	2017	2016
	($ in thousands)
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:

 

	2017	2016
	($ in thousands)
Current accrued real estate taxes	$4	$4

 

 

Notes payable consisted of the following:

 

	2017	2016
	($ in thousands)
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)

 

 

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.