-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N0aUsAbqxnu08LSN00+ykI1m8k9lKyF2dpsZQmrJ8/XieoCGEntJaLT/mH1lRbtv lMh5liH0MHpuMVHAedRQCA== 0001068800-99-000156.txt : 19990416 0001068800-99-000156.hdr.sgml : 19990416 ACCESSION NUMBER: 0001068800-99-000156 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PGI INC CENTRAL INDEX KEY: 0000081157 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 590867335 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-06471 FILM NUMBER: 99594496 BUSINESS ADDRESS: STREET 1: 212 SOUTH CENTRAL STREET 2: SUITE 100 CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3145128650 MAIL ADDRESS: STREET 1: 212 SOUTH CENTRAL STREET 2: SUITE 100 CITY: ST LOUIS STATE: MO ZIP: 63105 FORMER COMPANY: FORMER CONFORMED NAME: PUNTA GORDA ISLES INC DATE OF NAME CHANGE: 19900403 10KSB40 1 PGI INCORPORATED FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------------------------------- ( ) TRANSITION REPORT PURSUANT TO 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 (IRS Employer Ident. No.) incorporation or organization) 212 S. Central, Suite 100; St. Louis, Missouri 63105 - ----------------------------------------------------------------------- (Address of principal offices) (Zip Code) Registrant's Telephone Number, including area code: (314) 512-8650 -------------------- Securities registered pursuant to Section 12 (b) of the Act: Name of each Exchange Title of Each Class on which Registered - ------------------------------- -------------------------------- None None None None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, Par Value $.10 per share 6% Convertible Subordinated Debentures due 1992 Indicate by check mark 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. X Yes No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any adjustments to this Form 10-KSB. (x) The aggregate market value of voting stock held by non-affiliates of the registrant can not be determined. See page 7 of Form 10-KSB. Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of March 25, 1999. Common Stock $.10 par value, 5,317,758 shares outstanding. The Index to Exhibits is located on pages 44 to 48 of this report. PGI INCORPORATED AND SUBSIDIARIES FORM 10 - KSB - 1998 Contents and Cross Reference Index
Part Item Form 10-KSB No. No. Description Page No. - --- --- ----------- -------- I 1 Business General 3 Recent Developments 3 - 6 2 Properties 7 3 Legal Proceedings 7 4 Submission of matters to a Vote of Security Holders 7 II 5 Market for Registrant's Common Equity and Related Stockholder Matters 7 6 Management's Discussion and Analysis or Plan of Operation 8 - 14 7 Report of Independent Certified Public Accountants 15 Financial Statements and Supplementary Data 16 - 34 8 Disagreements on Accounting and Financial Disclosure 34 III 9 Directors and Executive Officers of The Registrant 35 10 Executive Compensation 35 - 36 11 Security Ownership of Certain Beneficial Owners and Management 36 12 Certain Relationships and Related Transactions 37 - 40 IV 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K 41 Signatures 43 Exhibit Index 44 - 48
PART I ------ Item 1. Business - ------ -------- GENERAL As used in this Annual Report on Form 10-KSB, the "Company" refers, unless the context otherwise requires, to PGI Incorporated and its subsidiaries. The Company's executive offices are at 212 S. Central, Suite 100, St. Louis, Missouri, 63105, and its telephone number is (314) 512-8650. The Company was founded in 1958 to engage in the business of building and selling homes, developing and selling homesites and selling undeveloped or partially developed tracts of land. Substantially all of the real estate available for sale by the Company is situated within Sugarmill Woods in west central Florida. In 1994 the Company's homesite sales effort came to a close with an exchange of most of the remaining developed homesites inventory in exchange for a reduction of debt with its primary lender. During the fiscal year ended December 31, 1996, the Company's business focus and emphasis changed substantially as it concentrated its sales and marketing efforts almost exclusively on the disposition in bulk of its undeveloped, platted, residential real estate. This change was prompted by its continuing financial difficulties due to the principal and interest owed on its debt and management's conclusion that a bulk sale was the best way to reduce the Company's debt service obligations. The sale of this undeveloped land occurred on May 13, 1998. Its remaining inventory now consists of undeveloped commercial property. The Company intends to make a decision as to whether it will pursue the development and sale of the commercial property in accordance with its traditional core business plans or whether it will attempt to sell such property in bulk. That decision will depend, in part, on whether the Company believes it can generate more revenue by developing and selling individual commercial properties or by selling in bulk. As of January 1, 1999 the Company employed a total of 2 persons of which one is on a part-time basis. RECENT DEVELOPMENTS On January 31, 1997, Sugarmill Woods, Inc. ("Sugarmill Woods"), a Florida corporation and a wholly-owned subsidiary of the Company, and Love-PGI Partners, L.P. ("L-PGI") (collectively as "Seller"), entered into an Option Agreement For Sale and -3- Purchase ("Sale Agreement") with the Nature Conservancy, Inc., an unrelated nonprofit District of Columbia corporation ("Purchaser"), for the sale and purchase of approximately 5,240 acres of certain undeveloped real estate located in Citrus County and Hernando County, Florida ("Property"). Approximately 4,890 acres of the Property was owned by the Company, and 350 acres was owned by L-PGI. Shareholder approval of the sale of the property was obtained at the Annual Meeting of the Company on December 22, 1997. On May 13, 1998, the bulk acreage sale was consummated. The Property was sold to the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida (the "Purchaser"), for $14,759,335 (the "Total Purchase Price"). The amount received by Sugarmill Woods for the PGI Property was $13,446,835 before closing adjustments (the "PGI Purchase Price"). L-PGI, which holds 1,875,000 (93.7%) of the Company's outstanding Class A Cumulative Preferred Stock constituting 56.5% of the Company's outstanding voting capital stock, received the remaining $1,312,500 for its portion of the land sold. The Total Purchase Price was based on two appraisals and was the result of intense and prolonged negotiations. The Company is confident that its wholly-owned subsidiary received the highest price for the PGI Property that the Purchaser was willing to pay. There is no material relationship among the Company, Sugarmill Woods or any of the affiliates and the Purchaser or the Conservancy, although certain affiliates of the Company and Sugarmill Woods may be deemed to have benefited from the sale of the Property to the Purchaser as described below. PGIP, LLC (PGIP) was formed by Andrew S. Love, Jr. and Laurence A. Schiffer, the Company's only directors and executive officers, to purchase from the mortgage holder the unpaid principal and interest on the Company's primary lender indebtedness, and accept assignment of the first mortgage and credit agreements related thereto as security for repayment. The largest investor in PGIP is Love Savings Holding Company ("LSHC") which holds an approximate 75% interest in, and is a manager of PGIP. Messrs. Love and Schiffer own approximately 52% of all the issued and outstanding voting stock of LSHC and serve as the directors and officers of LSHC. Messrs. Love and Schiffer and LSHC are the managers of PGIP. The holders of the remaining limited liability company interests do not have any affiliation with PGI, LSHC, L-PGI or Love-1989 Florida Partners, L.P. -4- The disposition of the cash from the sale, which also includes the payments to PGIP, is set forth below:
Description Amount ----------- ------ Gross Sale Proceeds of 5,240 Acres $ 14,759,335 Amount Allocable to L-PGI's 350 Acres (1,312,500) ------------ Gross Proceeds from sale of PGI Property 13,446,835 Expenses of Sale (435,876) Real Estate Tax Escrow (557,069) Accrued Tax Adjustment for 1998 (72,345) Legal Fees Relating to Property Sold (229,139) First Mortgage Principal ($7,529,756 6,529,756 Less: $1,000,000 remaining) First Mortgage Interest 3,832,437 --------- Payoff of First Mortgage and accrued interest to PGIP (10,362,193) Escrow Agreement with PGIP (1,000,000) Judgment (110,108) ------------ Funds to Sugarmill Woods, Inc. $ 680,105 ============
The use of proceeds as set forth above resulted in a payment of first mortgage principal and interest to PGIP of $10,362,193. After payment of its debts and liabilities, PGIP made cash distributions to its members in accordance with its Operating Agreement. LSHC, which holds approximately 75% of the PGIP limited liability company interests, received approximately $2,505,097 in excess of its investment in PGIP. Because Messrs. Love and Schiffer, the Company's only directors and executive officers, together own 52% of LSHC, they could be deemed to have "profited" by an aggregate of approximately $1,302,650. The amount of profit to LSHC and Messrs. Love and Schiffer is based on the use of proceeds set forth above. It could increase upon payment of the remaining $1 million mortgage amount and interest and by an additional amount up to ten percent of PGIP's profit over a specified minimum rate of return based upon the incentive arrangements that PGIP has with its members. A portion of the PGI Property sold by the Company to the Purchaser was also encumbered by a second mortgage in favor of Love-1989 Florida Partners, L.P., ("Love-1989"), securing the indebtedness owed to Love- 1989 represented by subordinated debentures issued by the Company (the "Debentures"). The general partner of Love-1989 is Love Investment Company, which is owned by Mr. Love, Love family members and trust, the Estate of Martha Love Symington and Mr. Schiffer. Messrs. Love and Schiffer, caused Love-1989 to release its second mortgage on the PGI Property and Messrs. Love and Schiffer, in their capacities as directors of the Company, caused the Company to grant to Love-1989 a substitute second mortgage on the Retained Acreage, behind the First Mortgage held by PGIP. -5- At closing, the Company and PGIP executed an escrow agreement (the "Escrow Agreement"). The Escrow Agreement provides that $1,000,000 of the PGI Purchase Price would not be used to repay the First Mortgage Indebtedness, so that $1,000,000 (the "Remaining Indebtedness") of the First Mortgage Indebtedness would remain in place. The $1,000,000 was placed in escrow with PGIP as the escrow agent. Pursuant to the Escrow Agreement, the escrowed funds are to be paid out (i) as requested by PGI and agreed to by PGIP, or (ii) as deemed necessary and appropriate by PGIP, in either case, to protect PGIP's interest in the Retained Acreage (as hereinafter defined), including PGIP's right to receive principal and interest under the First Mortgage securing the Remaining Indebtedness, or (iii) to PGIP to pay any other obligations owed to PGIP by the Company. The real estate owned by the Company which was not sold to the Purchaser (approximately 370 acres) (the "Retained Acreage") remains subject to the First Mortgage. Prospects for the Remaining Acreage The remaining acreage of the Company mainly consist of 370 acres located in Hernando County, Florida. The Company believes that the Retained Acreage may in the future prove to be of greater value than the property sold because the Retained Acreage's ratio of acreage to frontage on the proposed Suncoast Expressway is greater than the sold property's ratio and because of the proximity of the Retained Acreage to the proposed Suncoast Expressway and the planned interchange between the Suncoast Expressway and Highway 98. The Company acknowledges that completion of the highway improvements could reasonably be expected to increase materially the value of the Property. The Company fully recognizes, however, that completion of the Suncoast Expressway, if it ever occurs, is still more than five years away, and that any information or projections of enhanced values are purely speculative. Sale of Sugarmill Woods Sales, Inc. The stock of Sugarmill Woods Sales, Inc., a subsidiary of Sugarmill Woods, Inc. was sold September 15, 1998 to the president of Sugarmill Woods Sales, Inc. for a price of $25,000. Assets at the time of sale included the personal property, escrows and rental contracts of the entity. A promissory note for $24,000 was taken back by Sugarmill Woods, Inc. secured by a lien on the stock being purchased and evidenced by a security agreement. The company realized a gain of $18,000 on this transaction. Payoff of Debt Collateralized by Contracts Receivable On June 1, 1998 the Company paid $103,000 to Finova Capital Corporation in settlement of note obligations and accomplished the repurchase of contracts receivable on homesite sales, and release of $265,000 in restricted cash. The Company realized an extraordinary gain of $870,000 with this settlement. The Company is pursuing repossession of lots with delinquent status. -6- Item 2. Properties - ------- ---------- The Company's primary investments in properties relates to its Sugarmill Woods project. The Company generally has fee simple title to these properties, but substantially all of the Company's properties are encumbered by mortgages under either its primary lender agreement or other financing agreements (see Item 6 and Note 9 to the consolidated financial statements under Item 7). Item 3. Legal Proceedings - ------- ----------------- The Company is a party to a number of lawsuits incidental to the normal operation of its business. Based upon information presently available, the Company does not believe that the resolution of any of the suits individually, or collectively, will have a material adverse effect on its financial position (see Note 15 of Item 7). Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- A shareholders meeting was not held during the year 1998. PART II - ------- Item 5. Market for Registrant's Common Equity and Related - ------- ------------------------------------------------- Stockholder Matters ------------------- The Company's Common Stock was traded on the American Stock Exchange, Inc. ("AMEX") (trading symbol - - PGA) until January 4, 1991 at which time the Company consented to the removal of its Common Stock and 6% Convertible Subordinated Debentures from the AMEX. The Company's Common Stock and Debentures were delisted because the Company's financial condition no longer satisfied the AMEX's listing requirements. Subsequent to the AMEX de-listing the Company attempted to establish relations with a brokerage firm who would serve as a market maker for the Common Stock. Based on information received from The National Quotations Bureau, Inc., there have been no reported transactions in the Company's Common Stock since January 29, 1991. During the period January 1, 1991 through January 29, 1991 the high and low bid price for the Common Stock was $.03 and the high and low offer price was $.10. No dividends have ever been paid on the Common Stock, and payment of dividends is restricted under the terms of the two indentures pursuant to which the Company's outstanding debentures are issued. As of December 31, 1998 there were 647 holders of record of the Company's Common Stock and approximately 447 debenture holders. -7- Item 6. Management's Discussion and Analysis or Plan of Operation - ------- --------------------------------------------------------- PRELIMINARY NOTE With the sale of over 90% of the Company's undeveloped land inventory in 1998, the Company is evaluating whether it will pursue the development and sale of the remaining property in accordance with its traditional core business plans or whether it will attempt to sell such property in bulk. That decision will depend, in part, on whether the Company believes it can generate more revenue by developing and selling individual commercial properties or by selling in bulk. RESULTS OF OPERATIONS Revenues for the year ended December 31, 1998 increased by $14,200,000 to $14,796,000 compared to revenues of $510,000 for the year ended December 31, 1997 as a result of the bulk acreage sale in 1998. Net income before the extraordinary item was $2,862,000($.42 per share) for 1998 compared to a net loss of $3,300,000($.87 per share) for 1997. Included in the 1998 and 1997 earnings per share computation is $640,000 ($.19 per share of Common Stock) of annual cumulative preferred stock dividends in arrears. Real Estate Activities - ---------------------- Sales revenues for real estate operations for the years of 1998 and 1997 were: 1998 1997 ---- ---- Sales: ($ in thousands) - Homesite Sales 37 15 - Acreage Sales 13,447 - ------ -- 13,484 15 ====== == Cost of sales for real estate operations for the years of 1998 and 1997 were: 1998 1997 ---- ---- Cost of Sales: ($ in thousands) - Homesite Sales 8 12 - Acreage Sales 8,427 - ----- -- 8,435 12 ===== == -8- Gross profit margins for real estate operations for the years of 1998 and 1997 were:
1998 % 1997 % ---- ----- ---- ----- Gross Profit Margin: ($ in thousands) - Homesite Sales 29 78.4% 3 20.0% - Acreage Sales 5,020 37.3% - - ----- -- 5,049 3 ===== ==
Other Activities The Company's cash accounts are substantially larger due to funds released with the bulk acreage sale in 1998. Interest income in 1998 increased by $53,000 compared to a 1997 decrease of $58,000 from 1996. Other income for the years of 1998 and 1997 was: 1998 1997 ---- ---- ($ in thousands) Commission income 247 365 Other income 113 101 --- --- 360 466 === === Commission income decreased by $118,000 in 1998 to $247,000 from $365,000 in 1997 due to the sale of Sugarmill Woods Sales, Inc. on September 15, 1998. Other income increased by $12,000 in 1998 to $113,000 from $101,000 in 1997. Costs and Expenses - ------------------ Selling expenses increased by $12,000 during 1998 compared to 1997. The current year increase is a result of more contract sales being paid off and cost associated with recording deeds over to customers. General and administrative expenses decreased by $405,000 in 1998 compared to 1997 due to a reduction in legal fees and real estate taxes with the bulk acreage sale in May 1998. In 1997 they increased by $15,000 compared to 1996. In an effort to conserve cash and reduce overhead, the Company consolidated its administrative office functions in St. Louis, Missouri in June 1994. The Company has contracted out the services to Love Real Estate Company ("LREC"), an affiliate of Love-PGI Partners, the Company's Preferred Shareholder (see Note 16), to handle the day-to-day accounting for a fee. -9- Interest expense for the two years ended December 31, 1998 and 1997 was: 1998 1997 ---- ---- ($ in thousands) Interest Expense $2,149 $2,698 Interest expense in 1998 decreased by $549,000 compared to 1997 and increased by $186,000 (7.4%) in 1997 compared to 1996. The current year decrease is a result of reduced debt concurrent with the bulk acreage sale. Other expenses decreased by $280,000 (98%) in 1998 compared to 1997. In 1997 other expenses increased by $275,000 (229.2%) compared to 1996 due to changes in valuation allowances. FINANCIAL CONDITION Assets totaled $3,300,000 at December 31, 1998 compared to $11,100,000 at December 31, 1997 reflecting the following changes: 1998 1997 Inc. (Dec.) ---- ---- ----------- ($ in thousands) Cash and Cash Equivalents $ 161 $ 2 159 Restricted Cash 1,903 1,173 730 Receivables 149 184 (35) Land and Improvement 889 8,992 (8,103) Net property and Equipment 1 18 (17) Other Assets 156 759 (603) ------ ------- ------ $3,259 $11,128 (7,869) ====== ======= ====== Cash increased by $159,000 to $161,000 at December 31, 1998 compared to $2,000 at December 31, 1997. Net cash flow provided by operations was $8,373,000 for the year ended December 31, 1998 compared to net cash flow used in operations of $128,000 for the year ended December 31, 1997. Cash received from operations during 1998 was $13,837,000, a $13,100,000 increase from cash received during 1997. The majority of the increase is attributable to the bulk acreage sale in 1998. Cash expended for operations increased by $4,599,000 to $5,464,000 during 1998 from $865,000 in 1997, reflecting increased payments in the following classifications; real estate operations ($427,000), general and administrative ($421,000), interest payments ($3,863,000) and decreases in other payments of ($112,000). Cash expended for operations decreased by $30,000 to $865,000 during 1997 from $895,000 in 1996, reflecting decreases in the following classifications; general and administrative ($32,000), interest expense ($33,000) and increases in payments for real estate operations of ($2,000) and other of ($33,000). -10- The $893,000 utilized during 1998 by investing activities was comprised of restricted cash funds established and released concurrent with the bulk acreage sale in May 1998 and with funds released upon settlement of obligations with Finova Capital Corporation in June 1998. The $7,321,000 utilized during 1998 in financing activities represents payments of primary lender debt, and debt obligations with Love Investment Company and the Finova Capital Corporation. The $137,000 utilized during 1997 by financing activities represents payments to Finova from collections on the receivables on real estate sold to Finova in 1988. In order to satisfy its debt obligations, the Company has been and intends to continue to: -- actively seek buyers for the remaining portion of the undeveloped acreage, when appropriate; -- diligently pursue collection of its receivables; and -- determine if potential merger or joint venture candidates exist. No assurances can be made that the Company can achieve any of the three above alternatives. A comparison of the contract receivable delinquency status at December 31, 1998 and 1997 follows:
1998 % 1997 % ---- ----- ---- ----- ($ in thousands) Current $ 13 2.0 $ 68 8.3 31 to 60 days delinquent 11 1.7 3 .4 61 days to 90 days delinquent 0 0 8 1.0 Over 90 days $620 96.3 $737 90.3 ---- ----- ---- ----- Total delinquents $631 98.0 $748 91.7 ---- ----- ---- ----- Total contracts $644 100.0 $816 100.0 ==== ===== ==== =====
The Company has experienced deterioration in the quality of the contracts receivable portfolio over the past several years. The Company believes the deterioration is the result of the adverse publicity regarding community developers as a result of the GDC bankruptcy, as well as the difficulty of implementing foreign contract collection activities. -11- Liabilities were $25,400,000 at December 31, 1998 compared to $37,000,000 at December 31, 1997, reflecting the following changes:
1998 1997 Inc. (Dec.) ---- ---- ----------- ($ in thousands) Accounts payable 26 285 (259) Other liabilities 1,218 1,727 (509) Accrued interest 11,391 13,328 (1,937) Credit agreements - primary lender 1,000 7,344 (6,344) Notes and mortgages payable 1,198 3,750 (2,552) Convertible subordinated Debentures payable 9,059 9,059 - Convertible debentures payable 1,500 1,500 - ------ ------ ------- 25,392 36,993 (11,601) ====== ====== =======
The $1,937,000 decrease in accrued interest at December 31, 1998 compared to year-end 1997 reflects changes in the following:
1998 1997 Inc. (Dec.) ---- ---- ----------- ($ in thousands) Primary lender 22 3,461 (3,439) Debentures 9,715 8,238 1,477 Other 1,654 1,629 25 ------ ------ ------ 11,391 13,328 (1,937) ====== ====== ======
The decrease in primary lender accrued interest is due to payoff of accrued interest and debt with the bulk acreage sale in May 1998. The accrued interest relating to debentures increased due to the nonpayment of interest on the company's debentures (see Notes 10 and 11 to the consolidated financial statements under Item 7). The $2,552,000 decrease in notes and mortgages payable primarily represents payoff and settlement of debt with Finova Capital Corporation which related to the 1988 financing transaction for the sale of contract receivables. The Company also made payments to Love Investment Company, and accomplished the release of $700,000 in debt (See Note 16 to the consolidated financial statements under Item 7). The Company's capital deficiency decreased to $22,133,000 at December 31, 1998 from a $25,865,000 capital deficiency at December 31, 1997, reflecting the 1998 operating gain. -12- As of the date of this filing, the Company is in default of the entire principal plus interest on its subordinated debentures payable in amounts indicated in the following table: 12/31/98 -------- Principal Unpaid Amount Due Interest ---------- -------- ($ in thousands) Subordinated debentures due June 1, 1991 1,034 611 Subordinated debentures due May 1, 1992 8,025 5,200 ----- ----- 9,059 5,811 ===== ===== The Company does not have funds available to make any payments of either principal or interest on the above debentures. If a debenture holder or Trustee institutes action to collect on the debentures, such action could prohibit the Company from continuing to operate in the normal course of business (see Notes 9 and 10 to the consolidated financial statements under Item 7). The Company has investigated the consequences of a bankruptcy filing and believes that such an event is not in the best interest of either the debenture or equity holders because a bankruptcy filing would negatively impact the Company's business, as well as cause an acceleration of the First Mortgage Indebtedness, and secured debenture debt. Management believes that a bankruptcy filing would prompt all secured lenders to initiate foreclosure proceedings. Since Company assets are encumbered by mortgages, the secured lenders have a perfected security interest and priority over the unsecured debenture holders. Year 2000 Issues - ---------------- The year 2000 issue is determined to have an immaterial effect on the Company. As of January 1, 1999, the Company has begun maintaining the financial records on different software, which is also used by a related party. The related party is responsible for testing and modifying the software for the year 2000 processing and expects this exercise to be complete by August 31, 1999. The related party is not expected to charge PGI, Incorporated for the cost of the conversion or modifications. As a result, any changes required, as part of any year 2000 conversions made to the financial records will have a minimal effect on the business, results of operations and financial condition. The Company has no material third party relationships with vendors which would require year 2000 modifications, does not own or operate any building, and has no other major information technology system with imbedded technology. -13- New Accounting Standards - ------------------------ Financial Accounting Standard ("FAS") 130, "Reporting Comprehensive Income," was issued in June 1997. Comprehensive income is defined as net income plus certain items that are recorded directly to the shareholders' equity, such as unrealized gains and losses on available- for-sale securities. This pronouncement had no effect on the Company's financial statements for the year ended December 31, 1998. FAS 131, "Disclosures about Segments of an Enterprise and Related Information," is effective for financial statements for periods beginning after December 15, 1997. An operating segment is defined under FAS 131 as a component of an enterprise that engages in business activities that generate revenue and expense for which operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance. This pronouncement had no effect on the Company's financial statements for the year ended December 31, 1998. FAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," addresses disclosure of such benefit plans and is effective for fiscal years beginning after December 15, 1997. This pronouncement had no effect on the Company's financial statements for the year ended December 31, 1998. FAS 133, "Accounting for Derivative Instruments and Hedging Activities," which was issued in June 1998, establishes accounting and reporting standards for derivative instruments and hedging activities. Under FAS 133, derivatives are recognized on the balance sheet at fair value as an asset or liability. Changes in fair value of derivatives are reported as a component of other comprehensive income or recognized as earnings through the income statement depending on the nature of the instrument. FAS 133 is effective for all quarters of fiscal years beginning after June 15, 1999 with earlier adoption permitted. The Corporation has not adopted FAS 133 yet and is currently evaluating FAS 133's effect on its financial position and results of operations, but it is not expected to have a material impact. -14- Item 7. Financial Statements and Supplementary Data - ------- ------------------------------------------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholders and Board of Directors PGI, Incorporated St. Louis, Missouri We have audited the accompanying consolidated statements of financial position of PGI Incorporated and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PGI Incorporated and subsidiaries at December 31, 1998 and 1997, and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 10 to the financial statements, the Company is currently in default of certain sinking fund and interest payments on its convertible subordinated debentures. The Company has a significant accumulated deficit, is in default of its primary debt (Note 9), certain sinking fund and interest payments on its convertible subordinated debentures (Note 10) and its convertible debentures (Note 11). These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in this regard are described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman LLP St. Louis, Missouri March 12, 1999 -15- PGI INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31, 1998 and 1997
ASSETS LIABILITIES ====== =========== 1998 1997 1998 1997 ---- ---- ---- ---- Cash and cash equivalents 161,000 2,000 Accounts Payable 26,000 285,000 Restricted Cash (Note 3) 1,903,000 1,173,000 Receivables on real estate Other liabilities (Note 8) 1,218,000 1,727,000 sales-net (Note 4) 97,000 156,000 Other receivables 52,000 28,000 Accrued interest: Primary lender 22,000 3,461,000 Land and improvement Debentures 9,715,000 8,238,000 Inventories (Note 5) 889,000 8,992,000 Other 1,654,000 1,629,000 Property and Equipment - net (Note 6) 1,000 18,000 Other assets (Note 7) 156,000 759,000 Credit Agreements - (Note 9) Primary lender 1,000,000 7,344,000 Notes and mortgages Payable 1,198,000 3,750,000 Subordinated Convertible Debentures payable (Note 10) 9,059,000 9,059,000 Convertible debentures Payable (Note 11) 1,500,000 1,500,000 ---------- ---------- 25,392,000 36,993,000 ---------- ---------- Commitments and contingencies (Note 15) 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 $4.00 per share of $8,000,000) (Note 13) 2,000,000 2,000,000 Common stock, par value $.10 per share; authorized 25,000,000 shares; 5,317,758 shares issued and outstanding (Note 13) 532,000 532,000 Paid-in capital 13,498,000 13,498,000 Accumulated deficit (38,163,000) (41,895,000) ----------- ----------- (22,133,000) (25,865,000) ----------- ----------- 3,259,000 11,128,000 3,259,000 11,128,000 ========= ========== =========== =========== See accompanying notes to consolidated financial statements.
-16- PGI INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1998 and 1997
1998 1997 ---- ---- Revenues: Real estate sales (Note 2) 13,484,000 15,000 Interest income 82,000 29,000 Other income (Note 2) 360,000 466,000 ---------- ---------- 13,926,000 510,000 ---------- ---------- Costs and expenses: Cost of real estate sales (Note 2) 8,435,000 12,000 Selling expenses 20,000 8,000 General and administrative expenses (Note 16) 453,000 858,000 Interest 2,149,000 2,698,000 Other expenses (Note 2) 7,000 287,000 ---------- ---------- 11,064,000 3,863,000 ---------- ---------- Income (loss) before extraordinary item 2,862,000 (3,353,000) Extraordinary item-gain on debt extinguishment (Note 4) 870,000 - ---------- ---------- Net Income(loss) 3,732,000 (3,353,000) ========== ========== EARNINGS (LOSS) PER SHARE Earnings (loss) per share before extraordinary item 0.42 (0.87) Extraordinary item 0.16 - ---------- ---------- Earnings (loss) per share 0.58 (0.87) ========== ========== Diluted earnings (loss) per share before extraordinary item 0.26 (0.87) Extraordinary item 0.10 - ---------- ---------- Diluted earnings (loss) per share 0.36 (0.87) ========== ========== See accompanying notes to consolidated financial statements.
-17- PGI INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998 and 1997
1998 1997 ---- ---- Cash flows from operating activities: Cash received from operations: Collections from real estate sales and receivables on such sales $14,932,000 $ 275,000 Interest on homesite and acreage contracts 6,000 22,000 Collections from amenity and other operations 259,000 416,000 Other interest received 15,000 12,000 Other receipts 6,000 12,000 ----------- --------- 15,218,000 737,000 ----------- --------- Cash expended for operations: Payments to subcontractors and vendors for 438,000 11,000 Real estate operations and sale and marketing activities Payments for amenity and other operations 235,000 339,000 General and administrative costs 741,000 320,000 Interest paid 4,023,000 160,000 Other disbursements 27,000 35,000 ----------- --------- 5,464,000 865,000 ----------- --------- Net cash flow provided by (used in) operating activities 9,754,000 (128,000) ----------- --------- Cash flows from investing activities: Purchases of property and equipment (2,000) Proceeds from sale of property and equipment 25,000 Proceeds from release of restricted cash 807,000 Payments to establish restricted cash (1,532,000) - ----------- --------- Net cash flow (used in) investing activities (700,000) (2,000) ----------- --------- Cash flows from financing activities: Proceeds from notes receivable 1,000 Proceeds from borrowings 257,000 Principal payments on debt (8,896,000) (137,000) ----------- --------- Net cash flow provided by (used in) financing activities (8,895,000) 120,000 ----------- --------- Net increase (decrease) in cash and cash equivalents 159,000 (10,000) Cash and cash equivalents at beginning of year 2,000 12,000 ----------- --------- Cash and cash equivalents at end of year 161,000 2,000 =========== ========= Non-cash investing and financing activities: Earnings capitalized into restricted cash 42,000 24,000 ----------- --------- Interest paid from restricted cash 64,000 - ----------- --------- Preferred stock dividends paid in common stock - 200,000 ----------- --------- See accompanying notes to consolidated financial statements.
-18- PGI INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended December 31, 1998 and 1997
1998 1997 ---- ---- Reconciliation of net income (loss) to net cash provided by operating activities: Net Income (loss) $ 3,732,000 $(3,353,000) Adjustments to reconcile net income (loss) to net cash Provided by (used in) operating activities: Depreciation and amortization 8,000 14,000 Net allowance and valuations related to real estate sales 118,000 (108,000) (Gain)Loss on sale or disposition of property, plant & equipment (16,000) 16,000 Earnings capitalized into restricted cash (76,000) (24,000) Interest released from restricted cash 64,000 - (Increase) decrease in: Contracts and mortgages receivable (59,000) 270,000 Other receivables (24,000) (2,000) Land and improvement inventories-net 8,103,000 24,000 Prepaid expenses & deposits 609,000 - Increase (decrease) in: Accounts payable (259,000) 207,000 Accrued interest (1,937,000) 2,538,000 Other accrued expenses (509,000) 308,000 Restricted escrow deposits and advances - (18,000) ----------- ----------- Net cash flow provided by (used in) operating activities $ 9,754,000 $ (128,000) =========== =========== See accompanying notes to consolidated financial statements.
-19- PGI INCOPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY Years ended December 31, 1998 and 1997
Preferred Stock Common Stock Retained --------------------- --------------------- Paid-In Earnings Shares Par Value Shares Par Value Capital (Deficit) ------ --------- ------ --------- ------- --------- Balances at 1/1/97 2,000,000 $2,000,000 3,317,555 $332,000 $13,698,000 $(38,542,000) Dividend Paid 2,000,203 200,000 (200,000) Net Loss (3,353,000) --------- ---------- --------- -------- ----------- ------------ Balances at 12/31/97 2,000,000 $2,000,000 5,317,758 $532,000 $13,498,000 $(41,895,000) Net Income - - - - - 3,732,000 --------- ---------- --------- -------- ----------- ------------ Balances at 12/31/98 2,000,000 $2,000,000 5,317,758 $532,000 $13,498,000 $(38,163,000) ========= ========== ========= ======== =========== ============ See accompanying notes to consolidated financial statements.
-20- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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. 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 - ------------------------------ Homesites - --------- Prior to July 1992, homesites were generally sold under contracts for deed or deed, note and mortgage which provide for a down payment and monthly installments, including interest, for periods up to ten years. Prior to 1990 income from sales of homesites was recorded when minimum down payment (including interest) and other requirements were met. However, because of collectibility problems with certain off-site broker/foreign sales programs, effective January 1, 1990, the Company adopted the installment method of profit recognition in accordance with Statement of Financial Accounting Standard No. 66 "Accounting for Sales of Real Estate". Acreage - ------- Sales of undeveloped and developed acreage tracts are recognized, net of any deferred revenue and valuation discount, when minimum down payment and other requirements are met. Provisions for Cancellations - ---------------------------- For sales prior to January 1, 1990, the Company provided for estimated future cancellations of receivables on real estate sales by charges to operations based on historical collection experience and analysis of delinquencies. Balances related to canceled receivables are charged to the allowance for cancellations. -21- Land and Improvement Inventories - -------------------------------- Land held for sale to customers and land held for bulk sale are stated at cost, which is not in excess of estimated net realizable value. Homesite costs are allocated to projects based on area methods, which consider footage, future improvements costs and frontage. Property and Equipment - ---------------------- Property and equipment are stated at cost. Depreciation is provided principally by the straight-line method over the estimated useful lives of the related assets. Gains or losses resulting from the disposition of property and equipment are respectively included in other income and other expense. Cash and Cash Equivalents - ------------------------- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. New Accounting Standards - ------------------------ Financial Accounting Standard ("FAS) 130, "Reporting Comprehensive Income," was issued in June 1997. Comprehensive income is defined as net income plus certain items that are recorded directly to shareholders' equity, such as unrealized gains and losses on available- for-sale securities. This pronouncement had no effect on the Company's financial statements for the year ended December 31, 1998. FAS 131, "Disclosures about Segments of an Enterprise and Related Information," is effective for financial statements for periods beginning after December 15, 1997. An operating segment is defined under FAS 131 as a component of an enterprise that engages in business activities that generate revenue and expense for which operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance. This pronouncement had no effect on the Company's financial statements for the year ended December 31, 1998. FAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," addresses disclosure of such benefits plans and is effective for fiscal years beginning after December 15, 1997. This pronouncement had no effect on the Company's financial statements for the year ended December 31, 1998. FAS 133, "Accounting for Derivative Instruments and Hedging Activities," which was issued in June 1998, establishes accounting and reporting standards for derivative instruments and hedging activities. Under FAS 133, derivatives are recognized on the balance sheet at fair value as an asset or liability. Changes in the fair value of derivatives -22- are reported as a component of other comprehensive income or recognized as earnings through the income statement depending on the nature of the instrument. FAS 133 is effective for all quarters of fiscal years beginning after June 15, 1999 with earlier adoption permitted. The Corporation has not adopted FAS 133 yet and is currently evaluating FAS 133's effect on its financial position and results of operations, but it is not expected to have a material impact. Year 2000 Issues - ---------------- The year 2000 issue is determined to have an immaterial effect on the Company. As of January 1, 1999, the Company has begun maintaining the financial records on different software, which is also used by a related party. The related party is responsible for testing and modifying the software for year 2000 processing and expects this exercise to be complete by August 31, 1999. The related party is not expected to charge PGI, Incorporated for the cost of the conversion or modifications. As a result, any changes required, as part of any year 2000 conversions made to the financial records will have a minimal effect on the business, results of operations and financial condition. Rounding - -------- The dollar amounts in the accompanying financial statements and notes to the financial statements have been rounded to the nearest thousand. 2. Real Estate Sales, Other Income and Other Expense: -------------------------------------------------- Real estate sales and cost of sales consisted of: 1998 1997 ---- ---- Sales: Homesites sales $ 37,000 $15,000 Bulk acreage sale 13,447,000 - ----------- ------- $13,484,000 $15,000 =========== ======= 1998 1997 ---- ---- Cost of Sales: Homesite sales $ 8,000 $12,000 Bulk acreage sale 8,427,000 - ----------- ------- $ 8,435,000 $12,000 =========== ======= On May 13, 1998, a bulk acreage sale comprising approximately 4,890 acres of undeveloped real property was consummated. After this sale, the Company has approximately 370 acres of undeveloped real property remaining. -23- Other income consisted of: Commission income $ 247,000 $ 365,000 Other income 113,000 101,000 --------- --------- $ 360,000 $ 466,000 ========= ========= Other expenses consisted of: Reduction in allowance for cancellation of contracts receivable - (100,000) Reduction of previously accrued property taxes (248,000) - Reduction in estimated recourse liability for receivables sold - (8,000) Other expenses 255,000 395,000 --------- -------- $ 7,000 $287,000 ========= ======== 3. Restricted Cash: ---------------- Restricted cash includes cash and certificates of deposit pledged to agencies in various states and local Florida governmental units related to land development and environmental matters, escrowed receipts related to pledged receivables on real estate sales and the servicing of sold receivables, customer payments and deposits related to home site and housing contracts, and reserves held by the primary lender as collateral for debt repayment and payment of disputed real estate taxes. 4. Receivables on Real Estate Sales: --------------------------------- Net receivables on real estate consisted of: 1998 1997 ---- ---- Contracts receivable on homesite sales $ 644,000 $ 816,000 Other 84,000 89,000 --------- --------- 728,000 905,000 Less: Allowance for cancellations (631,000) (706,000) Unamortized valuation discount - (43,000) --------- --------- $ 97,000 $ 156,000 ========= ========= Stated interest rates for contracts receivable on homesite sales, as well as contracts and mortgages receivable on acreage sales, ranged up to 10% with payment terms varying from seven to ten years. The weighted average interest rate for such receivables outstanding at December 31, 1998 and 1997 was 9.37% and 9.35% respectively. The Company generally considers receivables on real estate sales delinquent if the scheduled installment payment is over 30 days past due. At December 31, 1998 and 1997 delinquent receivables approximated $631,000 and $748,000 respectively. -24- Contracts receivable on homesite sales and contracts and mortgages receivable on acreage sales have been discounted to yield an effective interest rate of 14%. Contracts receivable on homesite sales recorded under the installment method have not been discounted. The estimated scheduled principal collections for receivables on real estate sales at December 31, 1998 are: 1999 (Including past-due balances) $639,000 2000 28,000 2001 27,000 2002 33,000 2003 1,000 -------- $728,000 ======== Effective June 1, 1998 the Company purchased the contracts receivable back from Finova Capital Corporation and settled on related debt obligations with Finova. The Company had originally sold the contracts receivable on homesite sales totaling approximately $9,246,000 before consideration of a related unamortized valuation discount of approximately $1,197,000 at the time of the sale. For financial reporting purposes this transaction has been treated as a financing transaction (see Note 9), since the Company had a potential obligation to repurchase the contracts receivable on homesite sales under conditions other than the recourse provision of the sales agreement. The repurchase resulted in an extraordinary gain of $870,000 in settlement of debt and elimination of an unamortized valuation discount of $39,000. At December 31, 1998, 44% of the Company's gross receivables from real estate sales were generated by a broker in two geographic regions, certain districts in New York City and Taiwan. These sales were under contract for deed with terms similar to sales to other customers. This concentration of credit risk has been considered by management in determining the allowance for cancellations. 5. Land and Improvements: ---------------------- Land and improvement inventories consisted of: 1998 1997 ---- ---- Unimproved land $613,000 $8,724,000 Fully improved land 276,000 268,000 -------- ---------- $889,000 $8,992,000 ======== ========== -25- 6. Property and Equipment: ----------------------- Property and equipment consisted of: 1998 1997 ---- ---- Furniture, fixtures and other $ 93,000 $ 212,000 equipment Less accumulated depreciation (92,000) (194,000) -------- --------- $ 1,000 $ 18,000 ======== ========= Depreciation: $ 8,000 $ 14,000 ======== ========= 7. Other Assets: ------------- Other assets consisted of: 1998 1997 ---- ---- Guaranteed future connections $ - $621,000 Deposit with Trustee of 6 1/2% debentures 138,000 131,000 Other 18,000 7,000 -------- -------- $156,000 $759,000 ======== ======== 8. Other Liabilities: ------------------ Other liabilities consisted of: 1998 1997 ---- ---- Accrued property taxes - current $ 32,000 $ 230,000 - delinquent 675,000 745,000 Other accrued expenses 328,000 342,000 Deposits, advances and 174,000 336,000 escrows Estimated recourse liability 9,000 58,000 for receivables sold Other - 16,000 ---------- ---------- $1,218,000 $1,727,000 ========== ========== 9. Credit Agreements - Primary Lender and Notes and Mortgages Payable: ------------------------------------------------------------------- Credit agreements with the Company's primary lender and notes and mortgages payable consisted of the following: 1998 1997 ---- ---- Credit agreements - primary lender (Balance is past due, bearing interest at prime plus 5.0%): $1,000,000 $7,344,000 -26- Notes and mortgages payable - $1,176,000 bearing interest at prime rate plus 2%, the remainder bearing interest at varying rates to 23%; maturing through 1999 1,198,000 3,750,000 ---------- ----------- $2,198,000 $11,094,000 ========== =========== The prime rate at December 31, 1998 was 7.75%. At December 31, 1998 assets collateralizing the Company's credit agreements with its primary lender and notes and mortgages payable totaled $2,582,000, of which $961,000 represented escrow held by the primary lender, $728,000 represented gross receivables on real estate sales, $52,000 represented other receivables, $840,000 represented land and improvement inventories, and $1,000 represented property and equipment. The overall weighted average interest rate for the Company's credit agreements with its primary lender and all remaining notes and mortgages was approximately 13.1% as of December 31, 1998 and 13.0% as of December 31, 1997. As discussed in Note 4, the Company settled with Finova on note obligations relating to the 1988 sale of receivables on real estate sales on June 1, 1998. Prior to June 1, 1998 the principal and interest payments were recorded by the Company based on the collections from receivables applicable to the sale and the application of the 12-1/4% interest rate used to calculate the sale's discounted present value. At December 31, 1998 and 1997 the outstanding principal balance for this financing transaction was approximately $- and $1,263,000 respectively. Although substantially all of the Company's real and personal property including all of the stock of the Company's wholly-owned subsidiaries remains pledged as collateral, the Company negotiated agreements with its mortgage holders to allow the Company to sell part of its land holdings without requiring full payment of the secured debt. Scheduled payments applicable to the reduction of principal amounts of all primary lender debt based on the terms of the Company's primary lender credit agreements, and all other notes and mortgages payable (without giving effect to various cross-default provisions which could, upon formal notice, accelerate payment of substantially all of the Company's debt) will be required approximately as follows: 1999 $2,198,000 ========== -27- 10. Subordinated Convertible Debentures Payable: -------------------------------------------- Subordinated debentures payable consisted of: 1998 1997 ---- ---- 6 1/2%, due June 1991 $1,034,000 $1,034,000 6%, due May 1992 8,025,000 8,025,000 ---------- ---------- $9,059,000 $9,059,000 ========== ========== Since issuance, $650,000 and $152,000 of the 6 1/2% and 6% debentures, respectively, have been converted into common stock; however, this conversion feature is no longer in effect. The Company is currently in default of certain sinking fund and interest payments on both subordinated debentures, $9,059,000 in principal plus accrued and unpaid interest totaling $5,811,000 at December 31, 1998 and $5,119,000 as of December 31, 1997. The debentures are not collateralized and are not subordinated to each other, but are subordinated to senior indebtedness ($3,698,000 at December 31, 1998). 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. In order to satisfy the obligation to debenture holders, the Company has been and intends to continue to: - -- actively seek buyers for the remaining portion of the undeveloped acreage, when appropriate; - -- diligently pursue collection of its receivables; and - -- determine if potential merger or joint venture candidates exist. No assurances can be made that the Company can achieve any of the three above alternatives. 11. Convertible Debentures Payable: ------------------------------- In July and September 1989, the Company sold $1,282,000 and $1,000,000 respectively, of convertible debentures to a partnership affiliated with the Company's preferred shareholder. In connection with the July 1992 Secured Lender Transaction in partial consideration for the conveyance of 350 acres of property, the principal amount due to convertible debenture holders was reduced by $782,000 and accrued interest thereon was reduced by $389,000 leaving a balance of $1,500,000. The maturity date on all the remaining debentures was extended to July 8, 1997 so that the debentures are in default. The past due debentures accrue interest at 14% compounded quarterly. The Company's primary lender credit agreements, however, prohibit the payment of interest until such time as the primary lender loans are repaid. At maturity the Convertible -28- Debentures purchased on July 24, 1989, were convertible into 868,788 common shares and those purchased on September 29, 1989, were convertible into 1,726,568 common shares, or a total of 2,595,356 shares of common stock at an initial conversion price of $1.72 per share. The conversion price may be adjusted upon the occurrence of certain events. Accrued interest was $3,904,000 and $3,209,000 at December 31, 1998 and 1997 respectively. 12. Income Taxes: ------------- Reconciliation of the statutory federal income tax rates, 34% for the years ended December 31, 1998 and 1997, to the Company's effective income tax rates follows:
1998 1997 ---- ---- ($ in thousands) Amount of tax Amount of tax ------------- Percent of ------------- Percent of Pre-tax Loss Pre-tax Loss ------------ ------------ Expected tax (credit) 1,269 34.0% (1,140) (34.0%) State income taxes, net of 149 4.0% (134) (4.0%) federal tax benefits Current year unused book (1,418) (38.0%) 1,274 38.0% ------ ----- ------ ----- operating loss - - - - ======= ===== ====== =====
At December 31, 1998, the Company had an operating loss carry forward of approximately $34,000,000 which will expire at various dates through 2012. In addition, the Company had unused investment tax credits of approximately $215,000 which will expire at varying dates through 2004. 1998 1997 ---- ---- Deferred tax asset: Net operating loss carryover $ 12,580,000 $ 13,690,000 Adjustments to reduce land to net realizable value 12,000 12,000 Expenses capitalized under IRC 263(a) 56,000 56,000 ITC carry forward 215,000 215,000 Other - Valuation allowance (12,691,000) (11,510,000) ------------ ------------ 172,000 2,463,000 Deferred tax liability: Basis difference of land and improvement inventories 172,000 2,453,000 Excess tax over book depreciation - 10,000 ------------ ------------ Net deferred tax asset $ 0 $ 0 ============ ============ -29- 13. Capital Stock: -------------- In March 1987, the Company sold in a private placement 1,875,000 shares of its Class A cumulative convertible preferred stock to a limited partnership ("Partnership") 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 $.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, 1998 cumulative preferred dividends in arrears totaled $2,356,000 ($640,000 of which related to the year ended December 31, 1998). On May 15, 1997 preferred dividends accrued through April 25, 1995 totaling $4,260,433 were paid in the form of 2,000,203 shares of common stock. As of December 31, 1998, 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, 1998 the Company had reserved 4,684,138 common shares for the conversion of debentures. 14. Quarterly Results: ------------------ In the fourth quarter of 1998 the contracts receivable and allowance for contracts receivable were adjusted to consider delinquent accounts for which quit claim deeds had been filed and property was effectively reacquired. 15. Commitments and Contingencies: ------------------------------ The Company is a party to various legal proceedings incidental to the normal operation of its business. One instance of litigation involves Sugarmill Woods, Inc. and Citrus County Tax Collector. In 1994, the Citrus County Tax Appraiser denied agricultural exemption status for the undeveloped Sugarmill Woods property and the Company was forced to sue the County to reclaim the tax benefit. In 1995, the Citrus County Tax Appraiser again denied -30- agricultural exemption status for the undeveloped Sugarmill Woods property, but was overruled by the Value Adjustment Board. As a result, the Tax Appraiser sued Sugarmill Woods, and was again successful in denying the agricultural exemption for the property. The Company has filed an appeal to reinstate the exemption. At this time the outcome of the appeal cannot be determined. At the closing of the bulk acreage sale in May 1998 an escrow was established in the amount of $557,000 to satisfy this potential obligation. The aggregate outstanding balances of receivables sold or exchanged with recourse by the Company, not including those receivables associated with the March 1988 financing transaction previously discussed in Notes 4 and 8, totaled approximately $48,000 and $145,000 at December 31, 1998 and 1997 respectively. Based on its collateral experience with such receivables, the Company maintained an allowance at December 31, 1998 and 1997 classified in other liabilities, of approximately $9,000 and $60,000 respectively for the recourse provisions related to all receivables sold. Under the terms of the receivables sale agreements the Company must repurchase contracts greater than 90 days past due or exchange current contracts owned by the Company. The repurchase price is equal to the outstanding principal balance of the delinquent contract plus accrued interest. At December 31, 1998, sold contracts receivable greater than 90 days past due totaled $9,000. The related accrued interest is considered immaterial. 16. Related Party Transactions: --------------------------- As of December 31, 1998 the Company was in default of its primary credit agreements with PGIP, LLC. In May 1998, concurrent with the bulk acreage sale the Company paid a portion of the principal and all of the past due accrued interest due PGIP, LLC (See Note 2). PGIP is owned and managed by Love Savings Holding Company ("LSHC"), Andrew S. Love, Jr. and Laurence A. Schiffer. Messrs. Love and Schiffer are directors and executive officers of LSHC and own slightly more than half of all the issued and outstanding voting stock of LSHC. Messrs. Love and Schiffer serve as the executive officers and directors of the Company and the other Borrowers and the Guarantors. In 1994, the Company moved its administration and accounting offices to Love Real Estate Company ("LREC"). LREC, which is an affiliate of Love-PGI, the Company's preferred shareholder, is paid a monthly fee for the following: 1. Maintain books of original entry; 2. Prepare quarterly and annual SEC filings; 3. Coordinate the annual audit; -31- 4. Assemble information for tax filing, review reports as prepared by tax accountants and file same; 5. Track shareholder records through transfer agent; 6. Maintain policies of insurance against property and liability exposure; 7. Handle payroll and benefits for Sugarmill location; and 8. Handle day-to-day accounting requirements. In addition, the Company receives office space, telephone service and computer service from LREC. The fee was reduced to $3,000 per month from $7,000 per month effective October 1, 1998. The fee reduction coincided with the sale of Sugarmill Woods Sales, Inc. Effective March 25, 1987, the Company entered into the Management 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 per cent of the book value of the Company's assets, plus reasonable out-of- pocket expenses. As of December 31, 1998, the book value of the Company's assets was approximately $3,300,000. Consulting fees totaling $29,000 and $45,000 were accrued during 1998 and 1997 respectively. The Company made payments of $22,000 in consulting fees in 1998. As of December 31, 1998, a total of $296,000 of unpaid fees had accrued under the Management Agreement. In 1998 and 1997, an affiliate of Love-PGI, the Company's preferred shareholder, Love Investment Company made uncollateralized loans to the Company, which were paid off June 19, 1998 in the amount of $585,000 plus accrued interest. Interest charged on these loans was $32,000 and $49,000 for 1998 and 1997, 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, 1998 had an outstanding balance, including accrued interest of $393,000. Interest accrued on this loan was $18,000 for 1998 and 1997. 17. 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 and Short-Term Investments: The carrying amount approximates fair value because of the short maturity of those instruments. -32- Real Estate Receivables: The fair value of real estate receivables is estimated by discounting the future cash flows using current rates at which similar receivables would be made to borrowers with similar credit ratings and for the same remaining maturities. Debt: It was not practicable to estimate the fair value of the Company's debt with its primary lender, its notes and mortgages 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. Accounts Payable: The carrying amount approximates fair value because of the short- term maturity of those debts. The estimated fair values of the Company's financial instruments are as follows: Carrying Fair 1998 Amount Value ---- ------ ----- Cash and short-term investments $2,064,000 $2,064,000 Principal plus accrued interest receivable on real estate 97,000 97,000 Accounts payable 26,000 26,000 Debt 12,757,000 - 18. Income (Loss) Per Share: ------------------------ The following is a summary of the calculations used in computing basic and diluted income (loss) per share: 1998 1997 ---- ---- Numerator: Net Income (Loss) $3,732,000 $(3,353,000) Preferred Dividends (640,000) (640,000) ---------- ----------- Income (Loss) Available to Common Shareholders $3,092,000 $(3,993,000) ========== =========== Denominator: BASIC Weighted average amount of shares outstanding 5,317,758 4,583,437 -33- DILUTED Weighted average amount of shares outstanding 5,317,758 5,317,758 Dilutive effect of assumed conversion of Preferred Stock 3,320,000 - --------- --------- Dilutive common shares 8,637,758 5,317,758 ========= ========= Earnings (loss) per share Basic 0.58 (0.87) Dilutive 0.36 (0.87) Item 8. Disagreements on Accounting and Financial Disclosure - ------- ---------------------------------------------------- Not Applicable. -34- PART III -------- Item 9. Directors and Executive Officers of the Registrant; - ------- --------------------------------------------------- Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- The following information, regarding executive officers and directors of the Company, is as of March 25, 1999. Position with Company and Business Experience Name and Age During the Last Five Years ------------ --------------------------------------------- Laurence A. Schiffer Director of the Company since April 1987; (age 59) President and Chief Executive Officer of the Company since February 1994; Vice Chairman of the Board since May 1987; President and Chief Executive Officer of Love Real Estate Company and Love Investment Company since 1973; Chairman of Heartland Bank and President of LSHC, the parent company of Heartland Bank since December 1985; Manager of PGIP since 1995; member of the Real Estate Board of Metropolitan St. Louis and the National Association of Real Estate Boards. Andrew S. Love Jr. Chairman of the Company's Board of Directors (age 55) since May 1987; Secretary since February 1994; Chairman of the Board of Love Real Estate Company and Secretary of Love Investment Company since 1973; Partner in St. Louis based law firm of Bryan, Cave, McPheeters & McRoberts until 1991; Director of Heartland Bank and Chairman of LSHC, the parent company of Heartland Bank since December 1985; Manager of PGIP since 1995. Executive officers of the Company are appointed annually by the Board of Directors to hold office until their successors are appointed and qualify. Item 10. Executive Compensation - -------- ---------------------- The Company's Chief Executive Officer is Mr. Laurence A. Schiffer. Because of the Company's impaired financial condition, it does not compensate Mr. Schiffer or Mr. Love, the Company's only other executive officer, for the services they perform for the Company in that capacity. Management services are provided to the Company by Love Real Estate Company ("LREC") pursuant to that certain Management Consulting Agreement by and between the Company and LREC dated March 25, 1987 (the "Management Agreement"). Mr. Schiffer is an employee of, and receives an annual salary from LREC. Mr. Love receives only a nominal salary from LREC. Neither the -35- Company nor LREC maintains records, which would allow either of them to attribute any portion of the remuneration Mr. Schiffer receives from LREC to the management services he performs for the Company. See Item 12. "Certain Relationships and Related Party Transactions" for additional information about the Management Agreement. Neither Mr. Schiffer nor Mr. Love received fees from any source directly attributable to their services as directors of the Company during 1998. Item 11. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- The table below provides certain information as of March 25, 1999 regarding the beneficial ownership of the Common Stock and the Preferred Stock by each person known by the Company to be the beneficial owner of more than five percent of either the Common Stock or the Preferred Stock, each director of the Company (which persons are also the Company's only executive officers), and by virtue of the foregoing, the directors and executive officers of the Company as a group.
Percent of Total ----------------------- Percent of Common Preferred Common Preferred Total Voting Name Stock Stock Stock Stock Power ---- ------ --------- --------- --------- ------------ Estate of Harold Vernon 998,777 - 18.8% - 13.7% Alfred M. Johns 437,414 125,000 8.2% 6.3% 7.7% Love-PGI Partners, L.P. 2,260,706 1,875,000 42.5% 93.8% 56.5% Andrew S. Love, Jr. 385,516 1,875,000 42.5% 93.8% 56.5% Laurence A. Schiffer 385,516 1,875,000 42.5% 93.8% 56.5% All executive officers and directors as a group (2 persons) 385,516 1,875,000 42.5% 93.8% 56.5% The above table does not include 2,595,356 shares that may be received upon conversion of the Company's Convertible Secured Debentures. The shares of Common Stock owned by Mr. Vernon are currently in the possession of the Federal Deposit Insurance Corporation ("FDIC") which is the receiver for First American Bank and Trust, Lake Worth, Florida ("First American"). First American previously made a loan to Mr. Vernon, which was secured by these shares. The loan is in default and the Company understands that the FDIC has the right, pursuant to a pledge agreement, to vote the shares at any annual or special meeting of shareholders. Information obtained from filings made with the Securities and Exchange Commission. Sole voting and investment power over 302,401 shares of Common Stock; shared voting and investment power over 10,100 shares of Common Stock included in the table which are owned by Mr. John's wife; sole voting and investment power over the 125,000 shares of Preferred Stock. The controlling general partner of L-PGI is Love Investment Company, a Missouri Corporation owned by Mr. Love, Love family members and trusts, the Estate of Martha Love Symington and Mr. Schiffer. Messrs. Love and Schiffer serve as the executive officers and directors of Love Investment Company. These shares are the same shares owned by L-PGI. Mr. Love is an indirect owner of L-PGI. See Footnote 5 above and Item 12. "Certain Relationships and Related Transactions" for more information. These shares are the same shares owned by L-PGI. Mr. Schiffer is an indirect owner of L-PGI. See Footnote 5 above and Item 12. "Certain Relationships and Related Transactions" for more information. These shares are the same shares reflected in Footnotes 5, 6 and 7. See Footnote 5 above and Item 12. "Certain Relationships and Related Transactions" for more information.
-36- Item 12. Certain Relationships and Related Transactions - -------- ---------------------------------------------- In order to conserve cash and permit management to concentrate on achieving a sale of all or a portion of its real estate, in 1994 the Company moved its administration and accounting offices to the offices of Love Real Estate Company ("LREC") in St. Louis, Missouri. LREC, a Missouri Corporation, is an affiliate of L-PGI, and is located at 212 South Central Avenue, Suite 100, St. Louis, Missouri 63105. A fee of $7,000 per month was paid to LREC for the first nine months of 1998, and reduced to $3,000 per month October 1, 1998. The fee reduction coincided with the sale of Sugarmill Woods Sales, Inc. The following is a list of services provided: 1. Maintain books of original entry; 2. Prepare quarterly and annual SEC filings; 3. Coordinate the annual audit; 4. Assemble information for tax filing, review reports as prepared by tax accountants and file same; 5. Track Shareholder records through transfer agent; 6. Maintain policies of insurance against property and liability exposure; 7. Handle payroll and benefits for Sugarmill location; 8. Handle day-to-day accounting requirements; and 9. Provide telephone and computer service. Although an amount is paid to LREC as reimbursement for expenses and as a fee for providing management services to the Company, neither the Company nor LREC maintain records which would allow them to attribute to any portion of the aforementioned monthly fee to reimbursement of particular expenses or to payment for the management services performed for the Company by individual employees of LREC, including Messrs. Love and Schiffer. Effective as of March 25, 1987, the Company entered into the Management 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 per cent of the book value of the Company's assets, plus reasonable out-of-pocket expenses. As of December 31, 1998, the book value of the Company's assets was approximately $3.3 million. Consulting fees totaling $29,000 were accrued during 1998 and the Company made payments of $22,000 in consulting fees in 1998. As of December 31, 1998, a total of $296,000 of unpaid fees had accrued under the Management Agreement. In July 1992 accrued management fees were reduced by $1,042,000 as partial consideration for the conveyance by the Company of 350 acres of real estate to L-PGI, which conveyance is described in more detail in the paragraph below describing the Debentures. These 350 acres comprise a portion of the Property sold in May 1998. -37- The Management Agreement will continue in effect until terminated upon 90 days prior written notice by a majority vote of the Company's directors who have no financial interest in LREC or in any LREC affiliated entity. Currently all directors have a financial interested in LREC or one of its affiliates. Mr. Love receives a nominal salary from LREC. Although Mr. Schiffer receives a salary from LREC, such salary compensates him for his services to LREC, which provides consulting services for numerous other entities affiliated with the Company, and none of the amount earned by LREC under the Management Agreement is intended to be allocated or attributable to any officer of employee, including Mr. Schiffer, of LREC. No part of Mr. Schiffer's annual salary from LREC is directly attributable to the management services he performs for the Company as an employee of LREC pursuant to the Management Agreement. In 1998 and 1997, an affiliate of L-PGI, Love Investment Company, made uncollateralized loans to the Company, which were paid off June 19, 1998 in the amount of $585,000 plus accrued interest. Interest charged on these loans was $32,000 and $49,000 for 1998 and 1997 respectively. In 1989, the Company sold an aggregate $2,282,451 principal amount of the Convertible Debentures in a private placement to Love-1989 Florida Partners, L.P.("Love-1989") The general partner of Love-1989 is Love Investment Company, which is owned by Mr. Love, Love family members and trusts, the Estate of Martha Love Symington and Mr. Schiffer. The above purchase by Love-1989 of the Debentures was funded in part with a loan from L-PGI. Love-1989 has since repaid the debt to L-PGI in full, in part by transferring a portion of the Debentures held by Love-1989 to L-PGI. In July 1992, as partial consideration for the Company's conveyance of 350 acres of property to L-PGI, the Company retired $782,000 in principal amount of the Debentures held by L-PGI together with $389,000 in accrued interest. The maturity date on all of the remaining Debentures was extended to July 8, 1997 so that the Debentures are in default. The Debentures were in part collateralized by a second mortgage in favor of Love-1989 on 650 acres of the Property owned by the Company, which was sold in May 1998. The 350 acres transferred to L-PGI as described above were also included in the Property sold. Messrs. Love and Schiffer have caused the Company to grant a second mortgage on the Retained Acreage to Love-1989 and in their capacities as control persons of Love-1989, they caused Love-1989 to release its second mortgage on the 650 acres of the Property sold and they caused the Company to grant a security interest to Love-1989 behind that held by PGIP in the escrow of the Restricted Proceeds which is under the control of Messrs. Love and Schiffer since they and a company they control are the managers of PGIP. As of December 31, 1998, Love-1989 held $796,950 in principal amount of the Debentures with respect to which there was at that date accrued and unpaid interest in the -38- amount of $2,095,000. In 1990, $703,050 principal amount of the Debentures was transferred by Love-1989 to one of its (now former) limited partners. That former limited partner continues to hold such Debentures and as of December 31, 1998 there was accrued and unpaid interest with respect thereto in the amount of $1,808,000. In 1985, a corporation owned by Alfred M. Johns, the former Chairman of the Company, and his family made an uncollateralized loan to the Company, which at December 31, 1998 had an outstanding balance, excluding accrued interest, of $176,000. Besides being a direct owner of Common and Preferred Stock, Mr. Johns has no other direct or indirect affiliations with the Company. For the past several years, First Union, the Company's former primary bank lender, had been threatening to foreclose on substantially all of the Company's real estate. This would have forced a liquidation of the Company. To prevent foreclosure, Messrs. Love and Schiffer, who control a large portion of the Voting Capital Stock through their affiliation with L-PGI and who are the Company's only directors and executive offices, formed PGIP in August 1995 to purchase the Company's First Mortgage Indebtedness and to accept the assignment from First Union of the first mortgage securing repayment of the First Mortgage Indebtedness. On March 28, 1996, First Union assigned to PGIP all of its right, title and interest in and to the loan documents (i) evidencing First Union' s credit agreements with the Company and Company's subsidiaries, Sugarmill Woods, Burnt Store Marina, Inc., and Gulf Coast Credit Corporation, and (ii) securing such indebtedness with substantially all of the Company's real estate (the "Loan Documents"). At the time of the assignment, the First Mortgage Indebtedness was approximately $9,007,000 in principal and accrued interest. The largest investor in PGIP is Love Savings Holding Company ("LSHC") which holds an approximate 75% interest in, and is a manager of PGIP. Messrs. Love and Schiffer own approximately 52% of all the issued and outstanding voting stock of LSHC and serve as the directors and officers of LSHC. Messrs. Love and Schiffer are the managers of PGIP. The holders of the remaining limited liability company interests do not have any affiliation with PGI, LSHC, L-PGI or Love-1989 Florida Partners, L.P. As the purchaser of the loan documents from First Union, PGIP obtained a first mortgage (the "First Mortgage") on the PGI Property. PGIP accepted assignment of the credit agreements, which were in default and with respect to which maturity of the First Mortgage Indebtedness secured by the first mortgage had been accelerated, and advised the Company that so long as the Company were to market and sell its remaining undeveloped land with satisfactory efforts and results, including payments to PGIP out of the proceeds received from the sale of such undeveloped land, PGIP would not proceed with enforced collection of the principal and interest comprising the First Mortgage Indebtedness. -39- During 1998 and 1997, PGIP further advanced $186,240 and $36,908 to the company to pay fees incurred to continue professional work on the bulk sale of property under the aforementioned Option Agreement, as Amended. On May 13, 1998 upon closing of the bulk acreage sale, the Company paid PGIP $10,362,193 in principal and accrued interest which left $1,000,000 in principal outstanding. The closing of the bulk acreage sale on May 13, 1998 resulted in a payment of first mortgage principal and interest to PGIP of $10,362,193. After payment of its debts and liabilities, PGIP made cash distributions to its members in accordance with its Operating Agreement. LSHC, which holds approximately 75% of the PGIP limited liability company interests, received approximately $2,505,097 in excess of its investment in PGIP. Because Messrs. Love and Schiffer, the Company's only directors and executive officers, together own 52% of LSHC, they could be deemed to have "profited" by an aggregate of approximately $1,302,650. The amount of profit to LSHC and Messrs. Love and Schiffer is based on the use of proceeds set forth above. It could increase upon payment of the remaining $1,000,000 mortgage amount and interest and by an additional amount of up to ten percent of PGIP's profit over a specified minimum rate of return based upon the incentive arrangements that PGIP has with its members. At closing, the Company and PGIP executed an escrow agreement (the "Escrow Agreement"). The Escrow Agreement provides that $1,000,000 of the PGI Purchase Price would not be used to repay the First Mortgage Indebtedness, so that $1,000,000 (the "Remaining Indebtedness") of the First Mortgage Indebtedness would remain in place. The $1,000,000 was placed in escrow with PGIP as the escrow agent. Pursuant to the Escrow Agreement, the escrowed funds are to be paid out (i) as requested by PGI and agreed to by PGIP, or (ii) as deemed necessary and appropriate by PGIP, in either case, to protect PGIP's interest in the Retained Acreage (as hereinafter defined), including PGIP's right to receive principal and interest under the First Mortgage securing the Remaining Indebtedness, or (iii) to PGIP to pay any other obligations owed to PGIP by the Company. The real estate owned by the Company, which was not sold to the Purchaser (approximately 370 acres) (the "Retained Acreage") remains subject to the First Mortgage. The Company believes that the foregoing transactions were on terms comparable to those, which would have been obtained from unaffiliated persons. -40- Item 13. Exhibits, Financial Statement Schedules & Reports on Form 8-K - -------- ------------------------------------------------------------- 10-KSB Form (a) 1. Financial Statements Page Number Report of Independent Accountants 15 -- Consolidated Statements of Financial Position December 31, 1998 and 1997 16 -- Consolidated Statements of Operations Years Ended December 31, 1998 and 1997 17 -- Consolidated Statements of Cash Flows Years Ended December 31, 1998 and 1997 18-19 ----- Consolidated Statements of Stockholders' Deficiency Years Ended December 31, 1998 and 1997 20 -- Notes to Consolidated Financial Statements 21-34 ----- (a) 2. Exhibits Reference is made to the Exhibit Index contained on pages 44- 48 herein for a list of exhibits filed under this Item. (b) Reports on Form 8-K. None were filed in the fourth quarter of 1998. (c) See the Exhibit Index contained on pages 44 to 48 herein for a list of each management contract, compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this report: Exhibits 10.1, 10.2 and 10.5. (d) None -41- CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of PGI Incorporated and subsidiaries on Form S-8 (File 2- 77149) of our report dated March 12,1999, relating to the consolidated financial statements and financial statements schedule of PGI Incorporated and subsidiaries which report is included in this Annual Report on Form 10-KSB. Our report contains an explanatory paragraph regarding uncertainty as to the ability of the Company to continue as a going concern. St. Louis, Missouri /s/ BDO Siedman LLP April 15, 1999 -42- SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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, in the City of St.Louis, State of Missouri, on this 15th day of April, 1999. PGI INCORPORATED (Registrant) By: /s/ Laurence A. Schiffer ---------------------------- Laurence A. Schiffer, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Andrew S. Love, Jr. Chairman of the Board April 15, 1999 - -------------------------- Secretary Andrew S. Love, Jr. /s/ Laurence A. Schiffer Vice Chairman of the April 15, 1999 - -------------------------- Board, President, Principal Laurence A. Schiffer Executive Officer, Principal Financial Officer and Principal Accounting Officer
-43- EXHIBIT INDEX 3.1 Articles of Incorporation (filed as Exhibit 3.1 to Registrant's Form 10-K Annual Report for the year ended December 31, 1980 and incorporated herein by reference). 3.2 Certificate of the Designation, Powers, Preferences and Relative Rights, and the Qualifications, Limitations or Restrictions Thereof, which have not been set forth in the Articles of Incorporation, of the Class A Cumulative Convertible Preferred Stock, effective as of March 24, 1987 (filed as Exhibit 3.2 to Registrant's Form 10-K Annual Report for the year ended December 31, 1986 ("1986 Form 10-K") and incorporated herein by reference). 3.3 Bylaws of Registrant, as amended September 1987 (filed as Exhibit 3.3 to Registrant's original Form 10-K Annual Report for the year ended December 31, 1997 ("Original 1987 Form 10-K") dated as of March 29, 1987 and incorporated herein by reference). 3.4 Amendments to the Articles of Incorporation effective March 13, 1990 and July 27, 1990, dated as of November 13, 1990 (filed as Exhibit 19 to the September 30, 1990 Form 10-Q and incorporated herein by reference). 3.5 Amendments to the Bylaws of the Registrant by the Board of Directors of PGI Incorporated by the Unanimous Written Consent, dated as of March 17, 1995 (filed as Exhibit 3.5 to the December 31, 1995 Form 10KSB and incorporated herein by reference). 3.6 Articles of Incorporation of PGI Incorporated as amended through December 22, 1997 (filed as Exhibit 3.1 to Registrant's June 30, 1998 Form 10-QSB and incorporated herein by reference). 3.7 Restated Articles of Incorporation of PGI Incorporated executed September 4, 1998 with certificate from the State of Florida dated October 27, 1998 (filed as Exhibit 3.1 to Registrant's September 30, 1998 Form 10-QSB and incorporated herein by reference). 4.1 Extension and Forbearance Agreement among PGI Incorporated, Punta Gorda Developers, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit Corporation and BancFlorida (formerly Naples Federal Savings and Loan Association), dated as of March 25, 1987 (filed as Exhibit 4.4 to the 1986 Form 10-K and incorporated herein by reference). 4.2 Seventh Mortgage and Loan Modification Agreement among PGI Incorporated, Punta Gorda Developers, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit -44- Corporation and BancFlorida, dated as of March 25, 1987 (filed as Exhibit 4.5 to the 1986 Form 10-K and incorporated herein by reference). 4.3 Eighth Mortgage and Loan modification Agreement among PGI Incorporated, Punta Gorda Developers, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit Corporation and BancFlorida, dated as of March 25, 1987 (filed as Exhibit 4.6 to the 1986 Form 10-K and incorporated herein by reference). 4.4 Restated Loan and Security Agreement among PGI Incorporated, Punta Gorda Developers, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit Corporation and BancFlorida, as well as Restated Consolidating Substituted Renewal Note and Future Advance Mortgage Note related thereto, dated as of March 25, 1987 (filed as Exhibit 4.7 to the 1986 Form 10-K and incorporated herein by reference). 4.5 Forbearance Agreement among PGI Incorporated, Punta Gorda Developers, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit Corporation and BancFlorida (Restated Loan Agreement No.1), dated as of October 19, 1985 (filed as Exhibit 4.1 to the Registrant's Form 10-Q Quarterly Report for the quarter ended September 30, 1985 and incorporated herein by reference). 4.6 Amendment to Restated Loan Agreement No. 1 (Receivables Loan), as well as Restated Consolidating Substituted Renewal Note relating thereto, dated as of March 25, 1987 (filed as Exhibit 4.9 to the 1986 Form 10-K and incorporated herein by reference). 4.7 Extension, Forbearance and Modification Agreement between PGI Incorporated, Punta Gorda Developers, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit Corporation, and BancFlorida, dated as of May 20, 1988 (filed as Exhibit 4.1 to the Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988 and incorporated herein by reference). 4.8 Ninth Mortgage and Loan Modification Agreement between PGI Incorporated, Punta Gorda Developers, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit Corporation, and BancFlorida, dated as of May 20, 1988 (filed as Exhibit 4.2 to Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1988 and incorporated herein by reference). 4.9 Purchase Agreement among Finova Financial Services, PGI Incorporated and Punta Gorda Developers, Inc., as well as certain Exhibits and the Mortgage related thereto, dated March 15, 1988 (filed as Exhibit 1 to Registrant's Form 8-K dated as of March 28, 1988 and incorporated herein by reference). 4.10 Tenth Mortgage and Loan Modification Agreement between PGI Incorporated, Punta Gorda Developers, Inc., as well as certain Exhibits and the Mortgage related thereto, dated May 30, 1989 (filed as Exhibit 1 to Registrant's Form 8-K -45- dated as of June 8, 1989 and incorporated herein by reference). 4.11 Eleventh Mortgage and Loan Modification among PGI Incorporated (formerly Punta Gorda Isles, Inc.), Sugarmill Woods, Inc. (formerly Punta Gorda Developers, Inc.), Burnt Store Marina, Inc. and Gulf Coast Credit Corporation and BancFlorida (formerly Naples Federal Savings and Loan Association), dated as of June 1, 1990 (filed as Exhibit 4.2 to Registrant's Form 10-Q Quarterly Report for the quarter ended June 30, 1990 and incorporated herein by reference). 4.12 Loan Forbearance Agreement among PGI Incorporated (formerly Punta Gorda Isles, Inc.), Sugarmill Woods, Inc, (formerly Punta Gorda Developers, Inc.), Burnt Store Marina, Inc. and Gulf Coast Credit Corporation and BancFlorida (formerly Naples Federal Savings and Loan Association), dated as of October 17, 1991 (filed as Exhibit 4.12 to Registrant's Form 10-K dated March 30, 1994 and incorporated herein by reference). 4.13 Twelfth mortgage and loan modification among PGI Incorporated, Sugarmill Woods, Inc., Burnt Store Marina, Inc. and Gulf Coast Credit Corporation and BancFlorida, dated as of July 8, 1992 (filed as Exhibit 4.1 to Registrant's Form 8-K dated as of July 24, 1992, and incorporated herein by reference). 4.14 Thirteenth mortgage and loan modification agreement among PGI Incorporated, Sugarmill Woods, Inc., Burnt Store Marina, Inc., Gulf Coast Credit Corporation and First Union, dated as of May 13, 1994 (filed as Exhibit 4.1 to Registrant's Form 8-K dated May 27, 1994 and incorporated herein by reference). 4.15 Forbearance Agreement dated as of October 12, 1995 by First Union National Bank of Florida, PGI Incorporated, Sugarmill Woods, Inc., Burnt Store Marina, Inc., Gulf Coast Credit Corporation, Southern Woods, Incorporated, Punta Gorda Isles, Inc., Deep Creek Utilities, Inc., Burnt Store Utilities, Inc., and Sugarmill Woods Sales, Inc. (filed as Exhibit 4(i) to Registrant's Form 8-K on November 1, 1995 and incorporated herein by reference). 4.16 Note and Loan Document Purchase Agreement dated as of October 12, 1995 by First Union National Bank of Florida, PGIP, L.L.C., PGI Incorporated, Sugarmill Woods, Inc., Burnt Store Marina, Inc., and Gulf Coast Credit Corporation (filed as Exhibit 4 (ii) to Registrant's Form 8-K on November 1, 1995 and incorporated herein by reference). 4.17 Note Purchase and Loan Transaction dated as of March 28, 1996, by First Union National Bank of Florida, PGIP, LLC, PGI Incorporated, Sugarmill Woods, Inc., Burnt Store Marina, Inc. and Gulf Coast Credit Corporation (filed as Exhibit 4.17 to Registrant's Form 10-KSB/A dated August 27, 1997, and incorporated herein by reference). -46- 9. Inapplicable. 10.1 PGI Incorporated Restated 1981 Incentive Stock Option Plan, as amended (filed as Exhibit 10.1 to the Original 1987 Form 10-K and incorporated herein by reference). 10.2 PGI Incorporated 1987 Non-Qualified Stock Option and Stock Appreciation Rights Plan (filed as Exhibit 10.2 to the Original 1987 Form 10-K and incorporated herein by reference). 10.3 Preferred Stock Purchase Agreement by and between PGI Incorporated and Love Development and Investment Company, dated as of February 16, 1987 (filed as Exhibit (i) to the Registrant's Form 8-K Current Report dated February 25, 1987 and incorporated herein by reference). 10.4 Form of Convertible Debenture Agreement due April 30, 1992 between PGI Incorporated and Love-1989 Florida Partners, L.P. and Mortgage and Security Agreement dated July 28, 1989 between Sugarmill Woods, Inc. and Love-1989 Florida Partners, L.P. (filed as Exhibit 10.9 to the Registrant's Form 10-K Annual Report for the year ended December 31, 1989 and incorporated herein by reference). 10.5 Consulting Agreement between PGI Incorporated and Love Real Estate Company, dated as of March 25, 1987 (filed as Exhibit 10.7 to the 1986 Form 10-K and incorporated herein by reference). 10.6 Option Agreement For Sale and Purchase dated January 31, 1997, between Sugarmill Woods, Inc., Love-PGI Partners, L.P., and The Nature Conservancy (filed as Exhibit 10.6 to Registrant's Form 10-KSB/A dated August 27, 1997 and incorporated herein by reference). 10.7 First Amendment to Option Agreement for Sale and Purchase dated August 25, 1997 between Sugarmill Woods, Inc., Love-PGI Partners, L.P., and The Nature Conservancy (filed as part of Appendix B to Registrant's Proxy Statement dated December 8, 1997 and incorporated herein by reference). 10.8 Second Amendment to Option Agreement for Sale and Purchase dated September 29, 1997 between Sugarmill Woods, Inc., Love- PGI Partners, L.P., and The Nature Conservancy (filed as part of Appendix B to Registrant's Proxy Statement dated December 8, 1997 and incorporated herein by reference). 11. See Note 19 to the consolidated financial statements. 12. Inapplicable. -47- 13. Inapplicable. 16. Coopers and Lybrand's letter to the SEC dated February 9, 1995 (filed as Exhibit 16 to the Registrant's Form 8-K dated February 9, 1995 and incorporated herein by reference). 18. Inapplicable. 19. Inapplicable. 21. Subsidiaries of the Registrant, filed herein. 22. Inapplicable. 23. Inapplicable. 27. Financial Data Schedule, filed herein. -48- EX-21 2 SUBSIDIARIES Exhibit 21 PGI INCORPORATED Page 1 of 1 - ---------- ---------------- SUBSIDIARIES ------------
State of Relationship -------- ------------ Incorporation ------------- Sugarmill Woods, Inc. Florida Wholly owned Sugarmill Woods Management, Inc. Florida Wholly owned Deep Creek Utilities, Inc. Florida Wholly owned Southern Woods, Incorporated Florida Wholly owned by Sugarmill Woods, Inc. Burnt Store Marina, Inc. Florida Wholly owned Punta Gorda Isles Sales, Inc. Florida Wholly owned Burnt Store Utilities, Inc. Florida Wholly owned Gulf Coast Credit Corporation Florida Wholly owned Sugarmill Woods Sales, Inc. Florida Wholly owned by Sugarmill Woods, Inc. Sugarmill Construction, Inc. Florida Wholly owned by Sugarmill Woods, Inc. - ------------ Included in the Company's consolidated financial statements.
EX-27 3 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,064,000 0 780,000 (631,000) 889,000 0 93,000 (92,000) 3,259,000 0 12,757,000 532,000 0 2,000,000 (24,665,000) 3,259,000 13,484,000 13,926,000 8,435,000 8,455,000 460,000 0 2,149,000 3,862,000 0 0 0 870,000 0 3,732,000 .58 .36 Current Assets and Current Liabilities values are zero because of an unclassified balance sheet.
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