Blueprint
 
 

FORM 10- Q
 U.S SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
(Mark One)
 ☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934   
 
For the quarterly period ended September 30, 2016
 
☐    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 
 
PGI INCORPORATED
(Exact name of registrant as specified in its charter)
 
 FLORIDA
 
 59-0867335
 (State or other jurisdiction of incorporation)
 
 (I.R.S. Employer Identification No.)
 
212 SOUTH CENTRAL, SUITE 304, ST. LOUIS, MISSOURI 63105
(Address of principal executive offices)
 
(314) 512-8650
(Registrant’s telephone number, including area code)
 
 N/A       
(Former Name, Former Address and Former Fiscal year, if changed since last report)
 
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 (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☐    Accelerated filer ☐    Non-accelerated filer ☐    Smaller reporting company ☑
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☑
 
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of November 9, 2016, there were 5,317,758 shares of the registrant’s common stock, $.10 par value per share, outstanding.
 
 

 
 
 
PGI INCORPORATED AND SUBSIDIARIES
 
Form 10 – Q
For the Quarter Ended September 30, 2016
 
Table of Contents
 
 
 
 
 
 
 
 
Form 10 - Q
 
 
 
     Page No.
 
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
Financial Statements
 
 3
 

 
 
 
Condensed Consolidated Statements of Financial Position September 30, 2016 (Unaudited) and December 31, 2015
 
3
 

 
 
 
Condensed Consolidated Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2016 and 2015
 
4
 

 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2016 and 2015
 
5
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
6
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
13
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
21
 
 
 
 
Item 4.
Controls and Procedures
 
 21
 
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
22
 
 
 
 
Item 1A.
Risk Factors
 
 22
 
 
 

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
22
 
 
 
 
Item 3.
Defaults Upon Senior Securities
 
22
 
 
 
 
Item 4.
Mine Safety Disclosures
 
22
 
 
 
 
Item 5.
Other Information
 
22
 
 
 
 
Item 6.
Exhibits
 
22
 
 
 
 
SIGNATURE  
 
23
 
 
 
 
EXHIBIT INDEX  
 
24
 
 
2
 
 
PART I  FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
PGI INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in thousands, except share and per share data)
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
(Unaudited)
 
 
 
 
ASSETS    
 
 
 
 
 
 
  Cash  
 $1,030 
 $1 
  Restricted cash  
  - 
  5 
  Receivables-related party  
  - 
  178 
  Land inventories  
  14 
  639 
  Other assets  
  43 
  44 
 
 $1,087 
 $867 
LIABILITIES    
    
    
  Accounts payable and accrued expenses  
 $199 
 $202 
  Accrued real estate taxes  
  4 
  8 
  Accrued interest:  
    
    
    Primary lender-related party
  - 
  450 
    Subordinated convertible debentures payable
  23,425 
  22,484 
    Convertible debentures payable-related party
  52,915 
  54,558 
    Notes payable
  3,130 
  3,081 
  Credit agreements:  
    
    
    Primary lender-related party
  - 
  500 
    Notes payable
  1,198 
  1,198 
    Subordinated convertible debentures payable
  8,472 
  8,472 
    Convertible debentures payable-related party
  - 
  1,500 
 
  89,343 
  92,453 
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 plus unpaid cumulative dividends of $13,715)
  2,000 
  2,000 
  Common stock, par value $.10 per share;  
    
    
    authorized 25,000,000 shares; 5,317,758 shares issued and outstanding
  532 
  532 
  Paid-in capital  
  13,498 
  13,498 
  Accumulated deficit  
  (104,286)
  (107,616)
 
  (88,256)
  (91,586)
 
 $1,087 
 $867 
 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
 
3
 
 
Part I  Financial Information (Continued)
 
PGI INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
REVENUES    
 
 
 
 
 
 
 
 
 
 
 
 
  Real estate sales  
 $- 
 $- 
 $9,000 
 $- 
  Interest income  
  1 
  - 
  1 
  - 
  Interest income-related party  
  - 
  2 
  2 
  7 
 
  1 
  2 
  9,003 
  7 
COSTS, EXPENSES AND OTHER    
    
    
    
    
 
    
    
    
    
  Cost of real estate sales and expenses of sale  
  - 
  - 
  745 
  - 
  Interest  
  332 
  324 
  990 
  967 
 
    
    
    
    
  Forgiveness of debt and interest  
  - 
  - 
  - 
  (209)
  Interest-related party  
  - 
  1,842 
  3,832 
  5,342 
  Taxes and assessments  
  1 
  2 
  5 
  7 
 
    
    
    
    
  Consulting and accounting - related party  
  10 
  9 
  28 
  28 
  Legal and professional  
  4 
  2 
  15 
  8 
  General and administrative  
  18 
  18 
  58 
  59 
 
  365 
  2,197 
  5,673 
  6,202 
NET INCOME (LOSS)    
 $(364)
 $(2,195)
 $3,330 
 $(6,195)
 
    
    
    
    
NET INCOME (LOSS) PER SHARE(*)    
    
    
    
    
AVAILABLE TO COMMON    
    
    
    
    
STOCKHOLDERS-BASIC    
 $(0.10)
 $(0.44)
 $0.54 
 $(1.26)
 
    
    
    
    
NET INCOME (LOSS) PER SHARE(*)    
    
    
    
    
AVAILABLE TO COMMON    
    
    
    
    
STOCKHOLDERS-DILUTED    
 $(0.10)
 $(0.44)
 $0.38 
 $(1.26)
 
 *Considers the effect of cumulative preferred dividends in arrears for the three and nine months ended September 30, 2016 and 2015.
 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
 
 
4
 
 
Part I  Financial Information (Continued)
 
PGI INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities  
 $2,846 
 $(130)
Cash Flows from investing activities:  
    
    
  Payments received on notes receivable-related party
  178 
  130 
  Release of restricted cash
  5 
  - 
  Net cash provided by investing activities
  183 
  130 
 
    
    
Cash Flows from financing activities:  
    
    
  Principal payments on debt-related party
  (2,000)
  - 
  Net cash used in financing activities
  (2,000)
  - 
 
    
    
Net change in cash  
  1,029 
  - 
 
    
    
Cash at beginning of period  
  1 
  1 
 
    
    
Cash at end of period  
 $1,030 
 $1 
 
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
 
 
5
 
 
PGI INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
(1) Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements of PGI Incorporated (“PGI”) and its subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10 - Q and therefore do not include all disclosures necessary for fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. 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, 2015.
 
Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2015 filed with the Securities and Exchange Commission.
 
The condensed consolidated balance sheet of the Company as of December 31, 2015 has been derived from the audited consolidated balance sheet as of that date.
 
Sugarmill Woods, Inc. (“Sugarmill Woods”), a wholly-owned subsidiary of PGI, entered into two contracts with the State of Florida Department of Transportation (the “Florida DOT”) for the sale of Sugarmill Woods’ principal real property asset consisting of approximately 369 acres located in Hernando County, Florida (the “Property”) for $9 million. The signatures from the Florida DOT required to make the two contracts effective were obtained on June 17, 2016, and the sale was closed on June 21, 2016.
 
The proceeds from the sale of the Property of $9 million were received on June 23, 2016 and payment of the primary debt obligation, including all accrued interest payable to related party totaling $970,000, 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 convertible debentures payable to related parties totaling $1,500,000 was paid and a portion of the related accrued interest totaling $5,455,000 was paid to the current holders of such debentures. Love Investment Company (“LIC”), an affiliate of Love-PGI Partners, L.P. (“L-PGI”), the Company’s primary preferred stock shareholder and Love-1989 Florida Partners (“Love-1989”), also an affiliate of L-PGI, held the convertible debentures.
 
The Company remains in default under the indentures governing its unsecured subordinated debentures. (See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 7, 8, and 9 to the Company's consolidated financial statements for the year ended December 31, 2015, as contained in the Company's Annual Report on Form 10 - K).
 
All adjustments (consisting of only normal recurring accruals) necessary for fair presentation of financial position, results of operations and cash flows have been made. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of operations to be expected for the fiscal year ending December 31, 2016 or any other interim period.
 
 
6
 
 
PGI INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
 
 (2) Per Share Data
 
Basic per share amounts are computed by dividing net income (loss), after deducting current period dividends on the Company's preferred stock, by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding for the three and nine months ended September 30, 2016 and 2015 was 5,317,758.
 
Diluted per share amounts are computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding, after adjusting for the estimated effect of the assumed conversion of all cumulative convertible preferred stock and outstanding convertible debentures, if dilutive, into shares of common stock. For the three months ended September 30, 2016 and the three and nine months ended September 30, 2015, the assumed conversion of all outstanding convertible preferred stock and collateralized convertible debentures would have been anti-dilutive.
 
The following is a summary of the calculations used in computing basic and diluted income (loss) per share for the three and nine months ended September 30, 2016 and 2015.
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
 
 
($ in thousands, except share and per share data)
 
Net income (loss)
 $(364)
 $(2,195)
 $3,330 
 $(6,195)
 
    
    
    
    
Preferred dividends
  (160)
  (160)
  (480)
  (480)
 
    
    
    
    
Income (Loss) Available to
 $(524)
 $(2,355)
 $2,850 
 $(6,675)
Common shareholders
    
    
    
    
 
    
    
    
    
Weighted Average Number
    
    
    
    
Of Common Shares
    
    
    
    
Outstanding (Basic)
  5,317,758 
  5,317,758 
  5,317,758 
  5,317,758 
 
    
    
    
    
Weighted Average Number
    
    
    
    
Of Common Shares
    
    
    
    
Outstanding (Diluted)
 5,317,758
 5,317,758
  10,095,525 
 5,317,758
 
    
    
    
    
Basic Income (Loss)
    
    
    
    
Per Share
 $(0.10)
 $(0.44)
 $0.54 
 $(1.26)
 
    
    
    
    
Diluted Income (Loss)
    
    
    
    
Per Share
 $(0.10)
 $(0.44)
 $0.38 
 $(1.26)
 
 
 
7
 
PGI INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
 
(3) Statement of Cash Flows
 
The Financial Accounting Standards Board Accounting Standards Codification Topic No. 230, “Statement of Cash Flows”, requires a statement of cash flows as part of a full set of financial statements. For quarterly reporting purposes, the Company has elected to condense the reporting of its net cash flows. Related party interest paid during the nine months ended September 30, 2016 was $5,925,000. There were no payments of interest during the three months ended September 30, 2016 and the nine months ended September 30, 2015.
 
 (4) Restricted Cash
 
Restricted cash of $5,000, previously held by PGIP, the primary lender, as collateral for the Company’s debt obligation to PGIP, was released on June 28, 2016 following the sale of the undeveloped land in Hernando County and respective payment of the primary lender debt obligation on June 23, 2016.
 
(5)
Receivables
 
Net receivables consisted of:
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
Notes receivable - related party
 $- 
 $178 
 
(6)
Land Inventory
 
Land inventory consisted of:
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
Unimproved land
 $- 
 $625 
Fully improved land
  14 
  14 
 
 $14 
 $639 
 
 
 
8
 
PGI INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
 
(7)
Other Assets
 
Other assets consisted of: 
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
Deposit with Trustee of 6-1/2% debentures
 $41 
 $41 
Prepaid expenses
  - 
  2 
Other
  2 
  1 
 
 $43 
 $44 
 
(8)
Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consisted of:
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
Accounts payable
 $8 
 $7 
Accrued audit & professional
  34 
  40 
Accrued consulting fees-related party
  1 
  1 
Environmental remediation obligations
  21 
  25 
Accrued debenture fees
  134 
  128 
Accrued miscellaneous
  1 
  1 
 
 $199 
 $202 
 
    
    
Accrued real estate taxes consisted of:
    
    
Current real estate taxes
 $4 
 $8 
 
 
9
 
PGI INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
 
(9)
Primary Lender Credit Agreements, Notes Payable, Subordinated and Convertible Debentures Payable
 
Credit agreements with the Company’s primary lender and notes payable consisted of the following:
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
    Credit agreements - first mortgage-related party bearing interest at prime plus 5%; due June 1, 1997
 $- 
 $500 
 
    
    
      Notes payable - $1,176,000 bearing interest at prime plus 2%, the remainder non-interest bearing, all past due
  1,198 
  1,198 
 
  1,198 
  1,698 
Subordinated convertible debentures payable:  
    
    
At 6-1/2% interest; due June 1, 1991
  447 
  447 
At 6% interest; due May 1, 1992
  8,025 
  8,025 
 
  8,472 
  8,472 
Convertible debentures payable-related party:  
    
    
At 14% interest; due July 8, 1997, convertible into shares of common stock at $1.72 per share
  - 
  1,500 
 
 $9,670 
 $11,670 
 
The proceeds from the sale of the Property of $9 million were received on June 23, 2016 and payment of the primary debt obligation, including all accrued interest totaling $970,000, was made to 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 convertible debentures payable to related parties totaling $1,500,000 was paid and a portion of the related accrued interest was paid totaling $5,455,000 to the current holders of such debentures. LIC, an affiliate of L-PGI, the Company’s primary preferred stock shareholder and Love-1989, also an affiliate of L-PGI, held the collateralized convertible debentures.
 
The Trustee of the 6.5% unsecured subordinated convertible 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 distributions, the Trustee has maintained a debenture reserve fund with a balance of $41,000 as of September 30, 2016 and December 31, 2015, available for final distribution to holders of such debentures who surrender their respective debenture certificates.
 
 
10
 
PGI INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
 
During the nine month period ended September 30, 2016, there were no unsecured subordinated convertible debentures that were surrendered by their respective debenture holders and no funds were utilized from the debenture reserve account. During the year ended December 31, 2015, such unsecured subordinated convertible debentures with face amounts of $80,000 were surrendered by their respective debenture holders. Funds utilized from the debenture reserve account were $7,000 during the year ended December 31, 2015 in payment of a final distribution to such debenture holders. Accordingly, the Company recognized $73,000 in forgiveness of debt during the year ended December 31, 2015. In addition, accrued interest in the amount of $136,000 on such debentures that have been surrendered was recorded as forgiveness of interest expense during the year ended December 31, 2015.
 
As of September 30, 2016 and December 31, 2015 the outstanding principal balance on such 6.5% unsecured subordinated convertible debentures that were not surrendered by the respective holders equals $447,000 plus accrued and unpaid interest of $809,000 and $788,000, respectively. 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 accrued 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% unsecured subordinated convertible debentures would be barred under the applicable statutes of limitations.
 
 
(10)
Real Estate Sales
 
Real estate sales and cost of sales consisted of:
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate sales  
 $- 
 $- 
 $9,000 
 $- 
 
    
    
    
    
 
    
    
    
    
Cost of real estate sales including expenses of sale
 $- 
 $- 
 $(745)
 $- 
 
 
11
 
PGI INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
 
 (11) Income Taxes
 
At December 31, 2015, the Company had an operating loss carryforward of approximately $69,127,000 available to reduce future taxable income. These operating losses expire at various dates through 2035.
 
The following summarizes the temporary differences of the Company at September 30, 2016 and December 31, 2015 at the statutory rate:        
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
Deferred tax asset
 
 
 
 
 
 
Net operating loss carryforward
 $25,077 
 $26,342 
Alternative minimum tax credit carryforward
  67 
  - 
Adjustments to reduce land to net realizable value
  12 
  12 
Expenses capitalized under IRC 263(a)
  56 
  56 
Environmental liability
  9 
  9 
Valuation allowance
  (25,049)
  (26,247)
 
  172 
  172 
 
    
    
Deferred tax liability:
    
    
Basis difference of land and improvement inventories
  172 
  172 
Net deferred tax asset
 $- 
 $- 
 
(12) Fair Value of Financial Instruments
 
The carrying amount of the Company’s financial instruments, other than debt, approximates fair value at September 30, 2016 and December 31, 2015 because of the short maturity of those instruments. It was not practicable to estimate the fair value of the Company’s 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.
 
 
12
 
PGI INCORPORATED AND SUBSIDIARIES
 
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 were received on June 23, 2016 and payment of the primary lender debt totaling $500,000 and all accrued interest 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 current holders of such debentures. Love Investment Company (“LIC”), an affiliate of Love-PGI Partners, L.P. (“L-PGI”), the Company’s primary preferred stock shareholder, and Love-1989 Florida Partners, LP (“Love-1989”), also an affiliate of L-PGI, held the collateralized convertible debentures.  
 
 
 
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 
 
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 September 30, 2016 and December 31, 2015, respectively, which is available for final distribution to holders of such debentures who surrender their respective debenture certificates.
 
 
13
 
PGI INCORPORATED AND SUBSIDIARIES
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
During the nine month period ended September 30, 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. During the year ended December 31, 2015 such subordinated convertible debentures with a face amount of $80,000 were surrendered by their respective debenture holders.
 
As of September 30, 2016 and December 31, 2015 the remaining outstanding principal balance on such 6.5% subordinated convertible debentures that were not surrendered by the respective holders equals $447,000 plus accrued and unpaid interest of $809,000 and $788,000, respectively. 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.
 
As of September 30, 2016, 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 September 30, 2016 decreased by $1,000 to $1,000 from $2,000 for the comparable 2015 period as a result of decreased interest income. Interest income for the three months ended September 30, 2016 represents interest earned on the Company’s money market account. Interest income for the three months ended September 30, 2015 represents related party interest on the short-term note receivable with LIC, an affiliate of L-PGI, the Company’s primary preferred stock shareholder. The Company received payment of the note receivable balance from LIC on June 23, 2016.
 
Expenses for the three months ended September 30, 2016 decreased by $1,832,000 when compared to the same period in 2015 primarily as a result of a decrease in interest expense during the three months ended September 30, 2016. Interest expense for the three month period ended September 30, 2016 decreased by $1,834,000 compared to the same period in 2015, primarily due to the repayment of the outstanding principal of the Company’s collateralized debt with a portion of the proceeds from the Property sale received on June 23, 2016, including the primary lender debt of $500,000 with PGIP, and the collateralized convertible debenture principal in the amount of $1,500,000 paid to LIC and Love-1989. As a result there was no interest expense during the three months ended September 30, 2016 with respect to such collateralized debt.
 
Taxes and assessments expense decreased by $1,000 during the three month period ended September 30, 2016 when compared to the same period in 2015 as a result of lower real estate tax expense due to the sale of Property sold to the Florida DOT on June 21, 2016. Consulting and accounting expenses increased by $1,000 during the three months ended September 30, 2016 when compared to the same period in 2015. A quarterly consulting fee is paid to Love Real Estate Company (“LREC”), an affiliate of L-PGI, 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.
 
 
14
 
PGI INCORPORATED AND SUBSIDIARIES
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Legal and professional expenses during the three months ended September 30, 2016 increased by approximately $2,000 when compared to the same period in 2015, primarily as a result of additional legal expenses incurred in connection with the filing of the Company’s periodic reports during the three month period ended September 30, 2016. As a result, a net loss of $364,000 was incurred for the three months ended September 30, 2016 compared to a net loss of $2,195,000 for the comparable period in 2015. After deducting preferred dividends, totaling $160,000 for each of the three months ended September 30, 2016 and 2015 , with respect to the Class A Preferred Stock, a net loss per share of $(.10) and $(.44) was incurred for the three month periods ended September 30, 2016 and 2015. The total cumulative preferred dividends in arrears with respect to the Class A Preferred Stock through September 30, 2016 is $13,715,000.
 
Revenues for the nine months ended September 30, 2016 increased by $8,996,000 to $9,003,000 from $7,000 for the comparable 2015 period 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. Interest income for the nine months ended September 30, 2016 in the amount of $1,000 represents interest earned on the Company’s money market account. Interest income from related party decreased by $5,000 in the first nine months of 2016 to $2,000 from $7,000 for the comparable period in 2015 due to receipt of the repayment of the short term note receivable balance from LIC, an affiliate of L-PGI, the Company’s primary preferred stock shareholder, on June 23, 2016 . Net income of $3,330,000 was realized for the first nine months of 2016, which includes a gain of $8,255,000 from the Property sale to the Florida DOT. This compared to a net loss of $6,195,000 for the first nine months of 2015. After deducting preferred dividends, totaling $480,000 for each of the nine months ended September 30, 2016 and 2015, net income (loss) per share of $.54 and $(1.26), respectively, were reported for the nine month periods ended September 30, 2016 and 2015.
 
The proceeds from the sale of the Property were received from the Florida DOT on June 23, 2016 and payment of the first mortgage obligation was made to PGIP, an affiliate of the Company. In addition, on June 23, 2016, the collateralized convertible debentures principal was paid and a portion of the accrued interest was paid to the current holders of such debentures. LIC, an affiliate of L-PGI, the Company’s primary preferred stock shareholder, and Love-1989, also an affiliate of L-PGI, held the collateralized convertible debentures.
 
 
15
 
PGI INCORPORATED AND SUBSIDIARIES
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
The June 23, 2016 payments of principal and interest were as follows:
 
 
 
Principal
 
 
Interest
 
 
 
Payment
 
 
Payment
 
 
 
($ in thousands)
 
Primary lender-1st mortgage note
 $500 
 $470 
payable (PGIP-related party)
    
    
 
    
    
Collateralized convertible debentures
    
    
payable (LIC-related party)
  703 
  2,557 
 
    
    
Collateralized convertible debentures
    
    
payable (Love-1989-related party)
  797 
  2,898 
 
 $2,000 
 $5,925 
 
Real estate sales and cost of real estate sales for the nine months ended September 30, 2016 and September 30, 2015 were as follows:
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2016
 
 
2015
 
 
 
($ in thousands)
 
 
 
 
 
 
 
 
Real estate sales
 $9,000 
 $- 
 
    
    
Cost of real estate sales and
    
    
expenses of sale
 $(745)
 $- 
 
Real estate sales for the nine months ended September 30, 2016 increased by $9,000,000 compared to the nine months ended September 30, 2015 solely due to the sale of the Property by Sugarmill Woods to the Florida DOT on June 21, 2016. There were no sales of real estate for the comparable period in 2015.
 
 
16
 
PGI INCORPORATED AND SUBSIDIARIES
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Expenses for the nine months ended September 30, 2016 decreased by $529,000 when compared to the same period in 2015 as follows:
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
Increase
 
 
 
2016
 
 
2015
 
 
(Decrease)
 
 
 
 
 
 
($ in thousands)
 
 
 
 
COSTS, EXPENSES AND OTHER    
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 Cost of real estate sales and expenses of sale
 $745 
 $- 
 $745 
Interest
  990 
  967 
  23 

    
    
    
 Forgiveness of debt and interest
  - 
  (209)
  209 
Interest-related party
  3,832 
  5,342 
  (1,510)
Taxes and assessments
  5 
  7 
  (2)

    
    
    
 Consulting and accounting- related party
  28 
  28 
  - 
Legal and professional
  15 
  8 
  7 
General and administrative
  58 
  59 
  (1)
 
 $5,673 
 $6,202 
 $(529)
 
Cost of real estate sales and expenses of sale for the nine month period ended September 30, 2016 increased by $745,000 compared to the nine month period ended September 30, 2015 solely as a result of the costs and expenses incurred in connection with the Property sale. There was no such expense for the comparable period in 2015.
 
Interest expense for the first nine months of 2016 decreased by $1,487,000 compared to the same period in 2015. Interest expense relating to the Company’s current outstanding debt held by non-related parties increased by $23,000 during the nine months ended September 30, 2016 compared to the same period in 2015, primarily as a result of interest accruing on past due balances which increased at various intervals throughout the nine month period for accrued but unpaid interest. Interest expense-related party decreased by $1,510,000 during the nine months ended September 30, 2016 compared to the same period in 2015 primarily due to the repayment of the outstanding principal of the Company’s collateralized debt with a portion of the proceeds from the Property sale received on June 23, 2016, including the primary lender debt of $500,000 with PGIP and the collateralized convertible debenture principal in the amount of $1,500,000 paid to LIC and Love-1989.
 
 
17
 
PGI INCORPORATED AND SUBSIDIARIES
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
There was no forgiveness of debt and interest in the nine months ended September 30, 2016 as compared to $209,000 for the same period in 2015. The forgiveness of debt and interest for the nine months ended September 30, 2015 is attributed to the 6.5% subordinated convertible debentures which matured in June, 1991, in the face amount of $80,000 that were surrendered in exchange for a final distribution of $92 per $1,000 in face value of such debentures. Accrued interest in the amount of $136,000 on such surrendered debentures was recorded as forgiveness of interest expense during the nine months ended September 30, 2015, and the remaining principal amount of such surrendered debentures in the amount of $73,000 was recorded as forgiveness of debt during such period.
 
Legal and professional expenses increased by $7,000 in the first nine months of 2016 compared to the same period in 2015 as a result of legal expenses incurred in connection with the filing of the Company’s periodic reports pursuant to the Securities Exchange Act of 1934, as amended, during the first nine months of 2016.
 
Cash Flow Analysis
 
Cash provided by operating activities for the nine months ended September 30, 2016 was $2,846,000, primarily reflecting the net effect of the $9,000,000 received in the sale of the Property to the Florida DOT and $5,925,000 of accrued interest paid on collateralized debt. This compared to cash used in operating activities of $130,000 for the comparable 2015 period. In addition, during the first nine months of 2016, the Company received $178,000 in payment of the note receivable principal from LIC, an affiliate of the Company and the restricted cash of $5,000 from PGIP, the first mortgage lender, which was released upon the sale of the Property and satisfaction of the primary lender debt obligation owed to PGIP. Net cash used in financing activities was for the principal repayment of $2,000,000 of primary lender debt to PGIP and collateralized convertible debentures to LIC and Love-1989.
 
Analysis of Financial Condition
 
Total assets increased by $220,000 at September 30, 2016 compared to total assets at December 31, 2015, reflecting the following changes:
 
 
 
September 30,
 
 
December 31,
 
 
Increase
 
 
 
2016
 
 
2015
 
 
(Decrease)
 
 
 
 
 
 
($ in thousands)
 
 
 
 
Cash
 $1,030 
 $1 
 $1,029 
Restricted cash
  - 
  5 
  (5)
Receivables-related party
  - 
  178 
  (178)
Land and improvement inventories
  14 
  639 
  (625)
Other assets
  43 
  44 
  (1)
 
 $1,087 
 $867 
 $220 
 
During the nine months ended September 30, 2016, cash increased by $1,029,000 compared to December 31, 2015, which is primarily attributed to the remaining proceeds of the Property sale to the Florida DOT in the second quarter of 2016. The Company anticipates that the cash will be utilized by the Company to fund its future operating activities.
 
 
18
 
PGI INCORPORATED AND SUBSIDIARIES
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Restricted cash decreased by $5,000 during the first nine months of 2016 with the release of restricted funds upon the sale of the Property and satisfaction of the primary lender debt obligation owed to PGIP.
 
Receivables-related party decreased by $178,000 during the first nine months of 2016 as the Company received payment of the outstanding note receivable balance from LIC, an affiliate of the Company.
 
Land and improvement inventories decreased by $625,000 during the first nine months of 2016 as a result of the sale of the Property, with the cost of the Property sold reflected in the cost of real estate sales for the nine months ended September 30, 2016.
 
Liabilities were approximately $89,343,000 at September 30, 2016 compared to approximately $92,453,000 at December 31, 2015, reflecting the following changes:
 
 
 
September 30,
 
 
December 31,
 
 
Increase
 
 
 
2016
 
 
2015
 
 
(Decrease)
 
 
 
 
 
 
($ in thousands)
 
 
 
 
Accounts payable and accrued expenses  
 $199 
 $202 
 $(3)
Accrued real estate taxes  
  4 
  8 
  (4)
Accrued interest  
  79,470 
  80,573 
  (1,103)
Credit agreements:  
    
    
  - 
Primary lender-related party
  - 
  500 
  (500)
Notes payable
  1,198 
  1,198 
  - 
Subordinated convertible debentures payable
  8,472 
  8,472 
  - 
Convertible debentures payable-related party
  - 
  1,500 
  (1,500)
 
 $89,343 
 $92,453 
 $(3,110)
 
During the nine month period ended September 30, 2016, the amount of accounts payable and accrued expenses decreased by $3,000 primarily as a result of timing differences. Accrued real estate taxes decreased by $4,000 during the nine month period ended September 30, 2016 due to the payment of previously accrued taxes. There was a net decrease of accrued interest in the amount of $1,103,000 during the nine month period ended September 30, 2016 with the aggregate payment of $5,925,000 in accrued interest to PGIP, as the holder of the Company’s first mortgage note, and the holders of the collateralized convertible debentures being offset by an increase of accrued interest in the amount of $4,822,000 of interest expense for such period. During the nine month period ended September 30, 2016, the entire outstanding principal of the primary lender debt in the amount of $500,000 was repaid to PGIP, and the entire outstanding principal of the convertible debentures in the aggregate amount of $1,500,000 was repaid to LIC and Love-1989.
 
 
19
 
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 September 30, 2016 are as indicated in the following table:
 
 
 
September 30, 2016
 
 
 
Principal
 
 
Accrued
 
 
 
Amount Due
 
 
Interest
 
 
 
($ in thousands)
 
 
 
 
 
 
 
 
Subordinated convertible debentures:
 
 
 
 
 
 
At 6 1/2 %, due June 1, 1991
 $447 
 $809 
At 6%, due May 1, 1992
  8,025 
  22,616 
 
 $8,472 
 $23,425 
Collateralized convertible debentures-related party:
    
    
At 14%, due July 8, 1997
 $- 
 $52,915 
 
    
    
Notes payable:
    
    
At prime plus 2%, all past due
 $1,176 
 $3,130 
Non-interest bearing
  22 
  - 
 
 $1,198 
 $3,130 
 
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, 2015.
 
 
20
 
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.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable.
 
Item 4. Controls and Procedures
 
The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures under the supervision and with the participation of its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on this evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016. There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
21
 
PGI INCORPORATED AND SUBSIDIARIES
 
 
PART II OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The Company, to its knowledge, currently is not a party to any material legal proceedings.
 
Item 1A. Risk Factors
 
Not applicable.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Not applicable.
 
Item 3. Defaults Upon Senior Securities
 
See discussion in Item 2 of Part I with respect to defaults under the Company's subordinated convertible debentures, collateralized convertible debentures and other indebtedness and with respect to cumulative preferred dividends in arrears, which discussions are incorporated herein by this reference.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
Not applicable.
 
Item 6. Exhibits
 
Reference is made to the Exhibit Index hereof for a list of exhibits filed or furnished under this Item.
 
 
22
 
 PGI INCORPORATED AND SUBSIDIARIES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
PGI INCORPORATED
 
 
(Registrant)
 
 
 
 
 
Date: November 9, 2016
By:  
/s/ Laurence A. Schiffer
 
 
 
Laurence A. Schiffer
 
 
 
President
 
 
 
(Duly Authorized Officer, Principal Executive Officer and Principal Financial Officer)
 
 
 
 
 
23
 
PGI INCORPORATED AND SUBSIDIARIES
 
EXHIBIT INDEX
 
2
Inapplicable.
 
 
3.(i)
Inapplicable.
 
 
3.(ii)
Inapplicable.
 
 
4
Inapplicable.
 
 
10
Inapplicable.
 
 
11
Statement re: Computation of Per Share Earnings (Set forth in Note 2 of the Notes to Condensed Consolidated Financial Statements (Unaudited) herein).
 
 
15
Inapplicable.
 
 
18
Inapplicable.
 
 
19
Inapplicable.
 
 
22
Inapplicable.
 
 
23
Inapplicable.
 
 
24
Inapplicable.
 
 
Principal Executive Officer certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
 
 
Principal Financial Officer certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
 
 
32.1
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350.
 
 
32.2
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350.
 
 
95
Inapplicable.
 
 
99
Inapplicable.
 
 
100
Inapplicable.
 
 
101
Instance Document, Schema Document, Calculation Linkbase Document, Labels Linkbase Document, Presentation Linkbase Document and Definition Linkbase Document.*
  
 
24