(11) Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments, other than debt, approximates fair value at JuneSeptember 30, 2015 and December 31, 2014 because of the short maturity of those instruments. It was not practicable to estimate the fair value of the Company’s debt with its primary lender, its notes payable and its convertible debentures because these debts are in default causing no basis for estimating value by reference to quoted market prices or current rates offered to the Company for debt of the same remaining maturities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Preliminary Note
The Company’s most valuable remaining asset is a parcel of 366 acres located in Hernando County, Florida. As of JuneSeptember 30, 2015, the Company also owned 6 single family lots, located in Citrus County, Florida. In addition, the Company owns some minor parcels of real estate in Charlotte County, and Citrus County, Florida, which totals approximately 60 acres, but these have limited value because of associated developmental constraints such as wetlands, easements, and/or other obstacles to development and sale.
The 366 acre parcel in Hernando County is difficult to value because of uncertainty related to the proposed extension of the Suncoast Parkway, which terminates on the south side of Route 98 opposite this property. The State of Florida has indicated that it has made preliminary plans to proceed with the northward continuation of the Suncoast Parkway. The Florida Department of Transportation – Florida’s Turnpike Enterprise Website for the Suncoast Parkway, Project 2, has been updated with proposed schedules and right-of-way maps with an indication that the anticipated timeframe for the completion of the right-of-way acquisitions for this project is December, 2016. Until and unless the uncertainty regarding the future expansion of the Suncoast Parkway and the related prospect of an eminent domain taking of a significant portion of the parcel is resolved, planning with respect to this property is difficult.
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 has applied $89,000 of the $184,000 debenture reserve fund that the Trustee had maintained with respect to such debentures toward debenture administration fees charged by the Trustee, and the remaining balance of such reserve fund in the amount of $95,000 has beenwas designated by the Trustee for final distribution to holders of such debentures.
Such 6.5 % subordinated convertible debentures with an aggregate face amount of $80,000 and $507,000 have been surrendered by their respective debenture holders during the first sixnine months of 2015 and during the twelve month period of 2014, respectively. Funds utilized from the debenture reserve account were $7,000 and $47,000 during the first sixnine months of 2015 and during the twelve month period of 2014, respectively, in payment of a final distribution to such debenture holders. Accordingly, the Company has recognized $73,000 and $460,000 in forgiveness of debt during the first sixnine months of 2015 and during the twelve month period of 2014, respectively. In addition, accrued interest in the amounts of $136,000 and $853,000 on such debentures that have been surrendered was recorded as forgiveness of interest expense during the first sixnine months of 2015 and during the twelve month period of 2014, respectively. As of JuneSeptember 30, 2015 the remaining outstanding principal balance on such 6.5% subordinated convertible debentures totals $447,000 plus accrued and unpaid interest of $773,000.$780,000. 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.
PGI INCORPORATED AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations
Revenues for the three months ended JuneSeptember 30, 2015 decreased by $1,000 to $2,000 from $3,000 for the comparable 2014 period as a result of decreased interest income due to a lower balance on the short-term note receivable balance with Love Investment Company (“LIC”), an affiliate of L-PGI, the Company’s primary preferred stock shareholder. Expenses for the three months ended JuneSeptember 30, 2015 increased by $203,000$1,361,000 when compared to the same period in 2014, primarily resulting fromdue to no forgiveness of debt and interest in the respective 2015 period as compared to $1,217,000 of forgiveness of debt and interest in the three months ended September 30, 2014. The forgiveness of debt and interest for the three months ended September 30, 2014 is attributed to the 6.5% subordinated convertible debentures which matured in June, 1991, in the face amount of $470,000 that have been surrendered in exchange for a final distribution of $92 per $1,000 in face value of such debentures. Accrued interest in the amount of $790,000 on such surrendered debentures was recorded as forgiveness of interest expense during the three months ended September 30, 2014, and the principal amount of debt in the amount of $427,000 in connection with such debentures was recorded as forgiveness of debt during such period. In addition, there was an increase in interest expense of $224,000$232,000 due to interest accruing on past due balances under the various credit agreements, notes payable and debentures (other than with respect to the 6.5% subordinated convertible debentures) which increased over the same period in 2014 for accrued but unpaid interest. This increase for the three months ended June 30, 2015 isThese increases are offset by forgiveness of debt and accrued interesta decrease in the aggregate amount of $24,000 which is attributed to the 6.5% subordinated convertible debentures which matured in June, 1991, in the face amount of $9,000 that have been surrendered in exchange for a final distribution of $92 per $1,000 in face value of such debentures. Accrued interest in the amount of $16,000 on such surrendered debentures has been recorded as forgiveness of interest expense during the three months ended June 30, 2015, and the principal amount of debt in the amount of $8,000 in connection with such debentures has been recorded as forgiveness of debt during such period. There was no forgiveness of debt or accrued interest with respect to such debentures during the first three months of 2014. Generalgeneral and administrative expenses for the three months ended JuneSeptember 30, 2015 increased by approximately $3,000of $88,000 when compared to the same period in 2014 primarily due to expenses inan assessment of $89,000 for debenture administrative fees charged to the amountCompany from the funds on deposit with the Trustee of $2,000 incurred on a parcel of property located in Citrus County requiring landscaping and fence improvements.the 6.5% subordinated debentures during the nine months ended September 30, 2014. As a result, a net loss of $2,113,000$2,195,000 was incurred for the three months ended JuneSeptember 30, 2015 compared to a net loss of $1,909,000$833,000 for the comparable period in 2014. After consideration of cumulative preferred dividends in arrears, totaling $160,000 for each three month period ended JuneSeptember 30, 2015 and 2014, with respect to the Class A Preferred Stock, a net loss per share of $(0.43)$(0.44) and $(0.39)$(0.19) was incurred for the three month periods ended JuneSeptember 30, 2015 and JuneSeptember 30, 2014, respectively. The total cumulative preferred dividends in arrears with respect to the Class A Preferred Stock through JuneSeptember 30, 2015 is $12,915,000.$13,075,000.
Revenues for the sixnine months ended JuneSeptember 30, 2015 decreased by $2,000$3,000 to $5,000$7,000 from $7,000$10,000 for the comparable 2014 period as a result of decreased interest income due to a lower balance on the short-term note receivable balance with Love Investment Company (“LIC”), an affiliate of L-PGI, the Company’s primary preferred stock shareholder.LIC. Expenses for the sixnine months ended JuneSeptember 30, 2015 increased by $235,000$1,596,000 when compared to the same period in 2014, primarily resulting from a decrease of $1,008,000 in forgiveness of debt and interest during the nine months ended September 30, 2015 when compared to the same period in 2014. Forgiveness of debt and interest was $209,000 for the nine months ended September 30, 2015 and $1,217,000 for the nine months ended September 30, 2014. In addition, there was an increase in interest expense of $441,000$673,000 due to interest accruing on past due balances under the various credit agreements, notes payable and debentures (other than with respect to the 6.5% subordinated convertible debentures) which increased over the same period in 2014 for accrued but unpaid interest. This increase for the six months ended June 30, 2015 is offset by forgiveness of debt and accrued interest in the aggregate amount of $209,000 which is attributed to the 6.5% subordinated convertible debentures which matured in June, 1991, in the face amount of $80,000 that have been 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 has been recorded as forgiveness of interest expense during the six months ended June 30, 2015, and the principal amount of debt in the amount of $73,000 in connection with such debentures has been recorded as forgiveness of debt during such period. There was no forgiveness of debt or accrued interest with respect to such debentures during the first six months of 2014.
PGI INCORPORATED AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Taxes and assessments for the six months ended June 30, 2015 increased by approximately $1,000 when compared to the same period in 2014 due to increasing real estate tax assessments.
General and administrative expenses for the sixnine months ended JuneSeptember 30, 2015 increaseddecreased by approximately $3,000$85,000 when compared to the same period in 2014 primarily due to an assessment of $89,000 for debenture administrative fees charged to the Company from the funds on deposit with the Trustee of the 6.5% subordinated debentures during the nine months ended September 30, 2014. In addition, there were expenses incurred in 2015 in the amount of $2,000 for a parcel of property located in Citrus County requiring landscaping and fence improvements. As a result, a net loss of $4,000,000$6,195,000 was incurred for the sixnine months ended JuneSeptember 30, 2015 compared to a net loss of $3,763,000$4,596,000 for the comparable period in 2014. After consideration of cumulative preferred dividends in arrears, totaling $320,000$480,000 for each sixnine month period ended JuneSeptember 30, 2015 and 2014, with respect to the Class A Preferred Stock, a net loss per share of $(0.81)$(1.26) and $(0.77)$(0.95) was incurred for the sixnine month periods ended JuneSeptember 30, 2015 and JuneSeptember 30, 2014, respectively.
On May 1, 2013 the Company executed a cell tower lease on a parcel of property located in Citrus County, Florida. Effective October 26, 2015 the lessee provided notice of termination of the lease agreement which was in a due diligence period.
As of JuneSeptember 30, 2015, the Company remained in default of its primary lender indebtedness of $500,000 with PGIP, LLC (“PGIP”), an entity related to L-PGI, as well as under its subordinated and convertible debentures and notes payable. PGIP holds restricted funds of the Company pursuant to an escrow agreement whereby funds may be disbursed (i) as requested by the Company and agreed to by PGIP, (ii) as deemed necessary and appropriate by PGIP, to protect PGIP's interest in the Retained Acreage (as hereinafter defined), including PGIP's right to receive principal and interest under the note agreement securing the remaining indebtedness, or (iii) to PGIP to pay any other obligations owed to PGIP by the Company. The restricted escrow funds held by PGIP were $5,000 at JuneSeptember 30, 2015 and December 31, 2014. The Company did not utilize any of the restricted escrow funds during the sixnine months ended JuneSeptember 30, 2015 or 2014.
The primary parcel of real estate owned by the Company, totaling 366 acres and located in Hernando County, Florida, remains subject to the primary lender indebtedness.
Cash Flow Analysis
During the sixnine month period ended JuneSeptember 30, 2015, the Company’s net cash used in operating activities was $77,000$130,000 compared to $70,000$92,000 for the comparable period in 2014. Net cash provided from investing activities during the sixnine months ended JuneSeptember 30, 2015 and 2014 consisted of $77,000$130,000 and $70,000,$92,000, respectively, in note receivable proceeds received from LIC. The Company receives proceeds from its notes receivable from LIC as needed to fund its operating activities.
PGI INCORPORATED AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Analysis of Financial Condition
Total assets decreased by $86,000$137,000 at JuneSeptember 30, 2015 compared to total assets at December 31, 2014, reflecting the following changes:
| | June 30, | | | December 31, | | | Increase | |
| | 2015 | | | 2014 | | | (Decrease) | |
| | | | | ($ in thousands) | | | | |
Cash | | $ | 1 | | | $ | 1 | | | $ | - | |
Restricted cash | | | 5 | | | | 5 | | | | - | |
Receivables-related party | | | 255 | | | | 332 | | | | (77 | ) |
Land and improvement inventories | | | 639 | | | | 639 | | | | - | |
Other assets | | | 42 | | | | 51 | | | | (9 | ) |
| | $ | 942 | | | $ | 1,028 | | | $ | (86 | ) |
| | September 30, | | | December 31, | | | Increase | |
| | 2015 | | | 2014 | | | (Decrease) | |
| | | | | ($ in thousands) | | | | |
Cash | | $ | 1 | | | $ | 1 | | | $ | - | |
Restricted cash | | | 5 | | | | 5 | | | | - | |
Receivables-related party | | | 202 | | | | 332 | | | | (130 | ) |
Land and improvement inventories | | | 639 | | | | 639 | | | | - | |
Other assets | | | 44 | | | | 51 | | | | (7 | ) |
| | $ | 891 | | | $ | 1,028 | | | $ | (137 | ) |
During the sixnine month period ended JuneSeptember 30, 2015, the amount of receivables-related party decreased by $77,000$130,000 due to the Company’s receipt of principal and accrued interest payments from LIC, a related party, under the note receivable from LIC.
During the sixnine month period ended JuneSeptember 30, 2015, the amount of other assets decreased by $9,000,$7,000, primarily as a result of the decrease in the debenture reserve fund maintained by the Trustee of the 6.5% subordinated convertible debentures by $7,000 during this period. The Trustee of these debentures utilized $7,000 of the debenture reserve fund maintained by the Trustee with respect to such debentures for a final distribution to the holders of such debentures that surrendered their debenture certificates during the first sixnine months of 2015. During this period, such debentures with a face amount of $80,000 have been surrendered by their respective debenture holders.
PGI INCORPORATED AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liabilities were approximately $88.1$90.2 million at JuneSeptember 30, 2015 compared to approximately $84.2 million at December 31, 2014, reflecting the following changes:
| | June 30, | | | December 31, | | | Increase | |
| | 2015 | | | 2014 | | | (Decrease) | |
| | | | | ($ in thousands) | | | | |
Accounts payable and accrued expenses | | $ | 220 | | | $ | 229 | | | $ | (9 | ) |
Accrued real estate taxes | | | 4 | | | | 8 | | | | (4 | ) |
Accrued interest | | | 76,175 | | | | 72,168 | | | | 4,007 | |
Credit agreements: | | | | | | | | | | | - | |
Primary lender-related party | | | 500 | | | | 500 | | | | - | |
Notes payable | | | 1,198 | | | | 1,198 | | | | - | |
Subordinated convertible | | | | | | | | | | | | |
debentures payable | | | 8,472 | | | | 8,552 | | | | (80 | ) |
Convertible debentures payable- | | | | | | | | | | | | |
related party | | | 1,500 | | | | 1,500 | | | | - | |
| | | | | | | | | | | | |
| | $ | 88,069 | | | $ | 84,155 | | | $ | 3,914 | |
| | September 30, | | | December 31, | | | Increase | |
| | 2015 | | | 2014 | | | (Decrease) | |
| | | | | ($ in thousands) | | | | |
Accounts payable and accrued expenses | | $ | 197 | | | $ | 229 | | | $ | (32 | ) |
Accrued real estate taxes | | | 6 | | | | 8 | | | | (2 | ) |
Accrued interest | | | 78,340 | | | | 72,168 | | | | 6,172 | |
Credit agreements: | | | | | | | | | | | - | |
Primary lender-related party | | | 500 | | | | 500 | | | | - | |
Notes payable | | | 1,198 | | | | 1,198 | | | | - | |
Subordinated convertible | | | | | | | | | | | | |
debentures payable | | | 8,472 | | | | 8,552 | | | | (80 | ) |
Convertible debentures payable- | | | | | | | | | | | | |
related party | | | 1,500 | | | | 1,500 | | | | - | |
| | | | | | | | | | | | |
| | $ | 90,213 | | | $ | 84,155 | | | $ | 6,058 | |
During the sixnine month period ended JuneSeptember 30, 2015, the amount of accounts payable and accrued expenses decreased by $9,000$32,000 primarily as a result of timing differences with respectdue to the payment of certain accrued expenses.environmental remediation obligations in the amount of $34,000. Accrued real estate taxes decreased by $4,000$2,000 during the sixnine month period ended JuneSeptember 30, 2015 due to the payment of previously accrued real estate taxes. Accrued interest during the sixnine month period ended JuneSeptember 30, 2015 increased by $4,007,000$6,172,000 as a result of $4,143,000$6,309,000 of interest expense for such period which was offset by accrued interest in the amount of $136,000$137,000 on the 6.5% subordinated convertible debentures that have been surrendered, recorded as forgiveness of interest expense. During the sixnine month periods ended JuneSeptember 30, 2015 and JuneSeptember 30, 2014, the Company made no interest payments on its various credit agreements, notes payable and debentures.
The Trustee of the 6.5% subordinated convertible debentures, which matured in June, 1991, with an original face amount of $1,034,000, provided notice of a final distribution to holders of such debentures on September 2, 2014. During the threenine month and the six month periodsperiod ended JuneSeptember 30, 2015, 6.5% subordinated convertible debentures with a face amount of $9,000 and $80,000 respectively, have been surrendered to the Trustee by their respective debenture holders. There were no debentures surrendered in the three month period ended September 30, 2015.
The Company remains totally dependent upon the sale of parcels of its various properties to fund its operations and with respect to its ability to make any future debt service payments or any future preferred dividend payments. The Company also receives principal repayment and interest proceeds from its note receivable due from LIC, a related party, on an as needed basis to fund its operating activities.