Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Preliminary Note
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, Inc. (“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 approximates 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.
On June
17, 2016 two contracts were executed for the sale of two
undeveloped parcels of real property consisting of 369 acres
located in Hernando County, Florida (the “Property”)
between Sugarmill Woods and the State of Florida Department of
Transportation (the “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 desired to
acquire the Property in connection with the northward extension of
the Suncoast Parkway as part of the Suncoast Parkway, Project
2.
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 obligation
totaling $500,000 in outstanding principal, and all accrued
interest payable 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 outstanding 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. 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 2,260,760
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.
The
Trustee of the 6.5% subordinated debentures, which matured in June,
1991, with an original face amount of $1,034,000, provided notice
of final distribution to 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
June 30, 2017 and December 31, 2016, respectively, which is
available for final distribution to holders of such debentures who
surrender their respective debenture certificates.
During
the six month period ended June 30, 2017 and the year ended
December 31, 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.
As of
June 30, 2017 and December 31, 2016 the remaining outstanding
principal balance on such 6.5% subordinated convertible debentures
that have not been surrendered by the respective holders equals
$447,000 plus accrued and unpaid interest of $831,000 and $817,000,
respectively. 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
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
As of
June 30, 2017, the Company remained in default under its
subordinated convertible debentures and notes payable, as well as
the accrued interest with respect to its collateralized convertible
debentures.
Results of Operations
Revenues for the
three months ended June 30, 2017 decreased by $9,000,000 to $1,000
from $9,001,000 for the comparable 2016 period primarily as a
result of the sale by Sugarmill Woods of the Property to the
Florida DOT on June 21, 2016 for $9 million. Interest income for
the three month periods ended June 30, 2017 and 2016 represents
interest earned on the Company’s short-term note receivable
balance with LIC, the Company’s primary preferred
shareholder.
Expenses for the
three months ended June 30, 2017 decreased by $2,597,000 when
compared to the same period in 2016. The cost of real estate sales
and expenses of sale for the three month period ended June 30, 2017
decreased by $745,000 compared to the three month period ended June
30, 2016, solely as a result of costs and expenses incurred in
connection with the Property sale on June 21, 2016. There was no
such expense for the comparable period in 2017. Interest expense
for the three month period ended June 30, 2017 decreased by
$1,850,000 compared to the same period in 2016. There was no
interest expense-related party during the three month period ended
June 30, 2017 compared to interest expense-related party of
$1,859,000 during the same period in 2016. Proceeds from the
Property sale were used by the Company on June 23, 2016 to repay
the entire outstanding principal of the primary lender debt of
$500,000, which was held by PGIP, and the entire outstanding
principal of the collateralized convertible debenture of
$1,500,000, which was held by LIC and Love-1989. With the full
repayment of such principal, no additional interest expense was
accrued with respect to such debentures subsequent to June 23,
2016. Interest expense relating to the Company’s current
outstanding debt, held by non-related parties, increased by $9,000
during the three month period ended June 30, 2017 compared to the
same period in 2016, primarily as a result of (i) interest accruing
on past due balances which increase at various intervals throughout
the year for accrued but unpaid interest, and (ii) an increase in
interest rates in 2017.
Taxes
and assessments expense decreased by $1,000 during the three months
ended June 30, 2017 when compared to the same period in 2016 as a
result of lower real estate tax expense due to the sale of Property
sold to the Florida DOT on June 21, 2016. Legal and professional
expenses decreased by $2,000 during the three months ended June 30,
2017 when compared to the same period in 2016 due to additional
legal expenses incurred in 2016 in connection with the filing of
the Company’s periodic reports during the three months ended
June 30, 2016. General and administrative expenses during the three
month period ended June 30, 2017 increased by $1,000 when compared
to the same period in 2016 primarily as a result of increased audit
and tax service fees during the three month period ended June 30,
2017. As a result, a net loss of $373,000 was incurred for the
three months ended June 30, 2017 compared to net income of
$6,030,000 realized for the three months ended June 30, 2016. After
deducting preferred dividends, totaling $160,000 for the three
month periods ended June 30, 2017 and 2016, with respect to the
Class A Preferred Stock, a net income (loss) per share of $(.10)
and $1.10 was incurred for the three month periods ended June 30,
2017 and 2016, respectively. The total cumulative preferred
dividends in arrears with respect to the Class A Preferred Stock
through June 30, 2017 is $14,195,000.
PGI
INCORPORATED AND SUBSIDIARIES
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Revenues for the
six month period ended June 30, 2017 decreased by $9,000,000 to
$2,000 from $9,002,000 for the comparable 2016 period primarily as
a result of the sale by Sugarmill Woods in 2016 of the Property to
the Florida DOT for $9 million. Related party interest income
decreased by $1,000 during the six months ended June 30, 2017 to
$1,000 from $2,000 for the comparable period in 2016. The related
party interest income for the six month period ended June 30, 2017
is a result of the Company’s investment in a $500,000 short
term note with LIC, which investment was made during the three
month period ended June 30, 2017. The Company received payment of
the previous note receivable from LIC on June 23, 2016. Interest
income on the Company’s money market account increased by
$1,000 during the six months ended June 30, 2017. There was no
money market account interest income during the six months ended
June 30, 2016.
Expenses for the
six months ended June 30, 2017 decreased by $4,541,000 when
compared to the same period in 2016. The cost of real estate sales
and expenses of sale for the six month period ended June 30, 2017
decreased by $745,000 compared to the six month period ended June
30, 2016, solely as a result of costs and expenses incurred in
connection with the Property sale on June 21, 2016. There was no
such expense for the comparable period in 2017. Interest expense
for the six month period ended June 30, 2017 decreased by
$3,815,000 compared to the same period in 2016. There was no
interest expense-related party during the six month period ended
June 30, 2017 compared to interest expense-related party of
$3,832,000 during the same period in 2016. Proceeds from the
Property sale were used by the Company on June 23, 2016 to repay
the entire outstanding principal of the primary lender debt of
$500,000, which was held by PGIP, and the entire outstanding
principal of the collateralized convertible debenture of
$1,500,000, which was held by LIC and Love-1989. With the full
repayment of such principal, no additional interest expense was
accrued with respect to such debentures subsequent to June 23,
2016. Interest expense relating to the Company’s current
outstanding debt, held by non-related parties, increased by $17,000
during the six month period ended June 30, 2017 compared to the
same period in 2016, primarily as a result of (i) interest accruing
on past due balances which increase at various intervals throughout
the year for accrued but unpaid interest, and (ii) an increase in
interest rates in 2017.
Taxes
and assessments expense decreased by $2,000 during the six month
period ended June 30, 2017 when compared to the same period in 2016
as a result of lower real estate tax expense during the six month
period ended June 30, 2017 due to the sale of Property sold to the
Florida DOT on June 21, 2016. Consulting and accounting-related
party expenses increased by $1,000 during the six month period
ended June 30, 2017 when compared to the same period in 2016. 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 which
increased effective June 21, 2016 with the sale of Property to the
Florida DOT, which resulted in the increase in such consulting and
accounting expenses during the six month period ended June 30,
2017.
Legal and
professional expenses during the six month period ended June 30,
2017 increased by approximately $14,000 when compared to the same
period in 2016, primarily as a result of expenses incurred on a
parcel in Citrus County requiring additional environmental
remediation during the six month period ended June 30, 2017.
General and administrative expenses during the six month period
ended June 30, 2017 increased by $6,000 when compared to the same
period in 2016 primarily as a result of increased audit and tax
service fees during the six month period ended June 30,
2017.
PGI
INCORPORATED AND SUBSIDIARIES
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The
Company paid a Federal income tax deposit of $75,000 on April 18,
2017 for the estimated 2016 Alternative Minimum Tax on the 2016
gain on sales of real estate. Estimated recoverable income taxes as
of June 30, 2017 is $18,000 and the Company recognized an income
tax expense of $57,000 during the six month period ended June 30,
2017. As a result, a net loss of $822,000 was incurred for the six
month period ended June 30, 2017 compared to net income of
$3,694,000 for the comparable period in 2016. After deducting
preferred dividends, totaling $320,000 for the six month periods
ended June 30, 2017 and 2016, with respect to the Class A Preferred
Stock, net income (loss) per share of $(.21) and $.63 was incurred
for the six month periods ended June 30, 2017 and 2016,
respectively.
Cash Flow Analysis
During
the six month period ended June 30, 2017, the Company’s net
cash used in operating activities was $213,000 compared to cash
provided by operating activities of $2,887,000 for the comparable
period in 2016, reflecting the net effect of the $9 million
received in the sale of Property to the Florida DOT and $5,925,000
of accrued interest paid on collateralized debt. Net cash used in
investing activities during the six months ended June 30, 2017,
consisted of a $500,000 short-term loan to LIC, the Company’s
primary preferred shareholder, bearing interest at 4.5% per annum
and to be repaid by December 31, 2017. During the six months ended
June 30, 2016, the Company received $178,000 in payment of the note
receivable principal from LIC and the restricted cash of $5,000
from PGIP, the first mortgage lender, which was released with the
sale of Property and satisfaction of the primary lender debt
obligation owed to PGIP. Net cash used in financing activities for
the six month period ended June 30, 2016 was for the repayment of
$2 million of related party primary lender debt and related party
collateralized convertible debentures.
Analysis of Financial Condition
Total
assets decreased by $194,000 at June 30, 2017 compared to total
assets at December 31, 2016, reflecting the following
changes:
|
|
|
|
|
|
|
|
|
($
in thousands)
|
Cash
|
$
245
|
$
958
|
$
(713
)
|
Receivables-related
party
|
500
|
-
|
500
|
Recoverable
income taxes
|
18
|
-
|
18
|
Land
and improvement inventories
|
14
|
14
|
-
|
Other
assets
|
43
|
42
|
1
|
|
$
820
|
$
1,014
|
$
(194
)
|
During
the six month period ended June 30, 2017, cash decreased by
$713,000 compared to December 31, 2016, primarily as a result of
the $500,000 short-term loan to LIC which bears interest of
4.5% per annum and matures on December 31, 2017, and funding of the
Company’s operating activities.
The
Company paid a Federal income tax deposit of $75,000 on April 18,
2017 for the estimated 2016 Alternative Minimum Tax on the 2016
gain on sales of real estate. Estimated recoverable income taxes as
of June 30, 2017 is $18,000 and estimated income tax expense of
$57,000 was recognized for the six months ended June 30,
2017.
PGI
INCORPORATED AND SUBSIDIARIES
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liabilities were
approximately $90,336,000 at June 30, 2017 compared to
approximately $89,708,000 at December 31, 2016, reflecting the
following changes which resulted in an increase of $628,000 of
liabilities:
|
|
|
|
|
|
|
|
|
($
in thousands)
|
Accounts
payable and accrued expenses
|
$
184
|
$
230
|
$
(46
)
|
Accrued
real estate taxes
|
2
|
4
|
(2
)
|
Accrued
interest
|
80,480
|
79,804
|
676
|
Credit
agreements:
|
|
|
-
|
Notes
payable
|
1,198
|
1,198
|
-
|
Subordinated
convertible
|
|
|
|
debentures payable
|
8,472
|
8,472
|
-
|
|
|
|
|
|
$
90,336
|
$
89,708
|
$
628
|
During
the six month period ended June 30, 2017, the amount of accounts
payable and accrued expenses decreased by $46,000 primarily as a
result of timing differences. Accrued real estate taxes decreased
by $2,000 during the six month period ended June 30, 2017 due to
the payment of previously accrued taxes. Accrued interest during
the six month period ended June 30, 2017 increased by $676,000 due
to the amount of interest expense for such period. During the six
month period ended June 30, 2017, the Company made no interest or
principal payments on its outstanding notes payable and
subordinated convertible debentures.
PGI
INCORPORATED AND SUBSIDIARIES
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
The
Company remains in default on the entire principal amount plus
interest (including certain sinking fund and interest payments with
respect to the subordinated convertible debentures) of its
subordinated convertible debentures and notes payable as well as
the remaining accrued interest owed with respect to the
collateralized convertible debentures.
The
principal and accrued interest amounts due as of June 30, 2017 are
as indicated in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible debentures:
|
|
|
At
6 1/2 %, due June 1, 1991
|
$
447
|
$
831
|
At
6%, due May 1, 1992
|
8,025
|
23,553
|
|
$
8,472
|
$
24,384
|
Collateralized
convertible debentures-related party:
|
|
|
At
14%, due July 8, 1997
|
$
-
|
$
52,915
|
|
|
|
Notes
payable:
|
|
|
At
prime plus 2%, all past due
|
$
1,176
|
$
3,181
|
Non-interest
bearing
|
22
|
-
|
|
$
1,198
|
$
3,181
|
The
Company does not have sufficient funds available (after payment of,
or the reserving for the payment of, anticipated future operating
expenses) to satisfy the principal or interest obligations on the
above debentures and notes payable or any arrearage in preferred
dividends.
The
Company remains totally dependent upon the sale of parcels of its
various remaining properties with respect to its ability to make
any future debt service payments.
The
Company’s independent registered public accounting firm
included an explanatory paragraph regarding the Company’s
ability to continue as a going concern in their opinion on the
Company’s consolidated financial statements for the year
ended December 31, 2016.
PGI
INCORPORATED AND SUBSIDIARIES
Forward Looking Statements
The
discussion set forth in this Item 2, as well as other portions of
this Form 10-Q, 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-Q. When used in this Form 10-Q, words
such as “anticipates,” “estimates,”
“believes,” “expects,” and similar
expressions are intended to identify forward-looking 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;
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.