PGAI P G I Incorporated (CE)

Notes to Consolidated Financial Statements (Unaudited)

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 30 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 on its convertible subordinated debentures and notes payable (Notes 6 and 7).

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 administrative expenditures in keeping an inactive company in existence.  The aggregate remaining land inventory is less than 68 acres, consisting of multiple parcels located in Florida counties.  These parcels have limited value because of associated developmental constraints such as wetlands, easements and other obstacles to development and sale. The potential values of the land parcels held for sale have been difficult to assess as the remaining land inventory is 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 de facto liquidation of such property by subjecting such property to a tax sale.

In management’s judgment, the 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 (Unaudited) (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 Change in Accounting Principle

            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 services.  We adopted this standard using the modified retrospective approach.  The adoption of ASU 2014-09 did not have an 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.  

Cash

The Company’s cash accounts do not exceed federally insured limits.

3.Real Estate Sales and Other Income:

Revenues totaled $94,000 for the year ended December 31, 2021 compared to revenues of $2,000 for the year ended December 31, 2020.  

Real estate sales and cost of sales consisted of:

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

3. Real Estate Sales and Other Income (continued):

Other income totaled $4,000 for the year ended December 31, 2021 compared to $2,000 for the year ended December 31, 2020.  Other income in 2021 represents income from a settlement claim from when the Company was operating as a home builder.  Other income in 2020 represents recoveries of lot lien receivables which had been fully provided for cancellation.  

4. Land Inventory:

Land inventory consisted of:

5. Accounts Payable and Accrued Expenses:

Accounts payable and accrued expenses consisted of:

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

6. Notes Payable:

Notes payable consisted of the following:

The prime rate at December 31, 2021 and 2020, was 3.25%, respectively.

The overall weighted-average interest rate for the Company’s credit agreements with its notes and mortgages was approximately 5.15% and 5.44% at December 31, 2021 and 2020, respectively.

Accrued interest on notes payable consisted of the following:

All of the outstanding notes payable including accrued interest are past due.

7. Subordinated Convertible Debentures Payable:

Subordinated debentures payable consisted of:

Since issuance, $152,000 of the 6% debentures have been converted into common stock.  This conversion feature is no longer in effect.

The Company is in default on the 6% subordinated convertible debentures which totals $8,025,000 in principal plus accrued and unpaid interest of $29,512,000 and $28,137,000 as of December 31, 2021 and 2020, respectively.

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

7. Subordianted Convertible Debentures Payable (continued):

The debentures are not collateralized and are subordinate to senior indebtedness ($1,198,000 at December 31, 2021 and 2020).  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.

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.

8.Convertible Debentures Payable:

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.  In 2016 the 366 acres were sold and the primary lender obligation to PGIP was respectively paid, in addition to the convertible debentures principal of $1,500,000 and a portion of the accrued interest.  Interest on the debentures accrued at the rate of fourteen percent compounded quarterly until the principal was paid in 2016.

During the years ended December 31, 2021 and 2020 the Company paid $50,000 and $125,000, respectively of accrued interest for the related party collateralized convertible debentures.  

The remaining accrued interest is $52,740,000 and $52,790,000 as of December 31, 2021 and 2020.

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

9. Income Taxes:

            Reconciliation of the statutory federal income tax rates, 21% for the years ended December 31, 2021 and 2020, to the Company’s effective income tax rates follows:                        

At December 31, 2021, the Company had an operating loss carryforward of approximately $69,349,000, the majority of which will expire at various dates through 2040.

The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2018.  It is the Company’s policy to classify interest and penalties related to its tax positions in general and administrative expense in the consolidated statements of operations.

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

10. Capital Stock:

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.

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 $0.32 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, 2021 cumulative preferred dividends in arrears totaled $17,075,000 ($640,000 of which related to the year ended December 31, 2021).  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.

As of December 31, 2021 and 2020, 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, 2021 and 2020, the Company had reserved 3,756,000 common shares for the conversion of preferred stock.

11. Quarterly Results:

The Company sold four single family lots in Citrus County, Florida that provided sale proceeds of approximately $80,000 in the fourth quarter of 2021.

12. Commitments and Contingencies:

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business.  It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.           

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

13. Related Party Transactions:

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.  

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.  In 2016 the 366 acres were sold and the primary lender obligation to PGIP was respectively paid, in addition to the convertible debentures principal of $1,500,000 and a portion of the accrued interest.  Interest on the debentures accrued at the rate of fourteen percent compounded quarterly until the principal was paid in 2016. 

During the years ended December 31, 2021 and 2020 the Company paid $50,000 and $125,000, respectively, of accrued interest for the related party collateralized convertible debentures.  

The remaining accrued interest is $52,740,000 and $52,790,000 as of December 31, 2021 and 2020.

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 LIC, is paid a monthly fee for the following:

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

13. Related Party Transactions (continued):

In addition, the Company receives office space, telephone service and computer service from LREC. A fee of $2,000 per month was accrued in 2021 and $2,800 in 2020.  The Company made payments of $24,000 and $33,600 to LREC in 2021 and 2020, respectively, for service fees.  The decrease in services in 2021 is due to the Company not being reviewed by a PCAOB registered public accounting firm effective with the March 31, 2020 periodic filing with the SEC. There were no accrued accounting service fees as of December 31, 2021 and 2020.  

The Company has 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, 2021 and 2020, the carrying value of the Company’s assets was approximately $68,000 and $95,000 respectively.  Consulting fees were $300 and $1,000 in 2021 and 2020, respectively.  

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, 2021 and 2020 had an outstanding principal balance of $176,000 plus accrued interest of $496,000 and $486,000, totaling an outstanding balance of $672,000 and $663,000, respectively.  Interest accrued on this loan was $9,000 and $10,000 in 2021 and 2020, respectively.

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

14. 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 notes payable and its subordinated 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:

PGI INCORPORATED AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) (continued)

15. Loss Per Share:

The following is a summary of the calculations used in computing basic and diluted loss per share:

16. Subsequent Events:

Management has evaluated subsequent events from the balance sheet date through March 31, 2022 and has determined that no material subsequent events exist.