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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Pernix Group Inc (CE) | USOTC:PRXG | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.2529 | 0.00 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 30, 2015
PERNIX GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware |
| 333-92445 |
| 36-4025775 |
(State or Other Jurisdiction |
| (Commission File Number) |
| (I.R.S. Employer |
151 E. 22nd Street |
| 60148 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(630) 620-4787
(Registrant’s telephone number, including area code)
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
This current report on Form 8-K/A amends and supplements Item 9.01, Financial Statements and Exhibits, of the current report on Form 8-K filed by Pernix Group, Inc. on July 7, 2015. This current report on Form 8-K/A provides additional information in connection with the acquisition by Pernix Building Group, LLC (“Pernix Building Group”), a wholly owned subsidiary of Pernix Group, Inc., of all of the outstanding limited liability company interests of KBR Building Group, LLC, now known as “BE&K Building Group” (“BEK BG”), from BE&K, Inc., a subsidiary of KBR, Inc.. The acquisition was completed on June 30, 2015. This amendment includes the financial statements of KBR Building Group, LLC and pro forma financial information required by Item 9.01 of Form 8-K with respect to the acquisition of BEK BG.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
The audited financial statements of KBR Building Group, LLC, as of and for the years ended December 31, 2014 and December 31, 2013, the notes related thereto and the related independent auditors’ report of KPMG LLP, are filed as Exhibit 99.1 to this report and incorporated herein by reference.
The unaudited financial statements of KBR Building Group, LLC, as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014 and notes related thereto, are filed as Exhibit 99.2 to this report and incorporated herein by reference.
(b) Pro forma financial information.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014, unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2015, and the notes related thereto, are filed as Exhibit 99.3 to this report and incorporated herein by reference.
(d) Exhibits.
Exhibit |
| Description |
23.1 |
| Consent of KPMG, LLP. |
|
|
|
99.1 |
| Audited consolidated financial statements of KBR Building Group, LLC, as of and for the years ended December 31, 2014 and 2013, the notes related thereto and the related independent auditors’ report of KPMG, LLP. |
|
|
|
99.2 |
| Unaudited consolidated financial statements of KBR Building Group, LLC, as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014 and notes related thereto. |
|
|
|
99.3 |
| Unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2015, unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 and the notes related thereto. |
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| PERNIX GROUP, INC. | |
|
|
|
| By: | /s/ Nidal Z. Zayed |
|
| Nidal Z. Zayed |
|
| President and Chief Executive Officer |
Dated: September 11, 2015
|
|
|
|
EXHIBIT INDEX
Exhibit |
| Description |
23.1 |
| Consent of KPMG, LLP. |
|
|
|
99.1 |
| Audited consolidated financial statements of KBR Building Group, LLC, as of and for the years ended December 31, 2014 and 2013, the notes related thereto and the related independent auditors’ report of KPMG, LLP. |
|
|
|
99.2 |
| Unaudited consolidated financial statements of KBR Building Group, LLC, as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014 and notes related thereto. |
|
|
|
99.3 |
| Unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2015, unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 and the notes related thereto. |
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Pernix Group, Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-196460) on Form S-8 of Pernix Group, Inc. of our report dated September 11, 2015, with respect to the balance sheets of KBR Building Group, LLC as of December 31, 2014 and 2013, and the related statements of operations, stockholder’s equity and cash flows for each of the years in the two-year period ended December 31, 2014, which report appears in the Form 8-K/A of Pernix Group, Inc. dated September 11, 2015.
/s/ KPMG LLP
Houston, Texas
September 11, 2015
Exhibit 99.1
KBR BUILDING GROUP, LLC
FINANCIAL STATEMENTS
December 31, 2014 and 2013
(With Independent Auditors Report Thereon)
KBR BUILDING GROUP, LLC
FINANCIAL STATEMENTS
December 31, 2014 and 2013
TABLE OF CONTENTS
Independent Auditors Report | 2 |
|
|
FINANCIAL STATEMENTS |
|
|
|
Balance Sheets | 3-4 |
|
|
Statements of Operations | 5 |
|
|
Statements of Stockholders Equity | 6 |
|
|
Statements of Cash Flows | 7 |
|
|
Notes to Financial Statements | 8-15 |
1
Independent Auditors Report
The Board of Directors
KBR Building Group, LLC:
We have audited the accompanying financial statements of KBR Building Group, LLC, which comprise the balance sheets as of December 31, 2014 and 2013, and the related statements of operations, stockholders equity and cash flows for the years then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KBR Building Group, LLC as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
September 11, 2015
2
KBR BUILDING GROUP, LLC
BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
| December 31, | ||
| 2014 |
| 2013 |
ASSETS |
|
|
|
CURRENT ASSETS |
|
|
|
Cash and equivalents | $- |
| $91 |
Receivables: |
|
|
|
Trade receivable, net of allowance for doubtful Accounts of $0 and $0 | 37,788 |
| 99,056 |
Other | 247 |
| 250 |
Costs and estimated earnings in excess of billings on uncompleted contracts | 30,740 |
| 5,203 |
Due from Parent and affiliates, net | 51,459 |
| 69,133 |
Deferred income taxes | - |
| 4,803 |
Prepaid expenses and other | 133 |
| 194 |
Total current assets | 120,367 |
| 178,730 |
|
|
|
|
DEFERRED INCOME TAXES | - |
| 336 |
|
|
|
|
PROPERTY, PLANT, AND EQUIPMENT (AT COST) |
|
|
|
Land and buildings | 598 |
| 2,180 |
Equipment, furniture, and fixtures | 488 |
| 3,687 |
| 1,086 |
| 5,867 |
Less accumulated depreciation | 1,086 |
| 5,487 |
|
|
|
|
NET PROPERTY, PLANT, AND EQUIPMENT | - |
| 380 |
|
|
|
|
INVESTMENT IN UNCONSOLIDATED AFFILIATES | 1,370 |
| 2,700 |
|
|
|
|
OTHER ASSETS | 197 |
| 297 |
|
|
|
|
TOTAL ASSETS | $121,934 |
| $182,443 |
See accompanying notes to financial statements
3
KBR BUILDING GROUP, LLC
BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
| December 31, | ||
| 2014 |
| 2013 |
LIABILITIES AND STOCKHOLDER'S EQUITY |
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
Trade accounts payable | $47,949 |
| $71,489 |
Accrued compensation and benefits | 2,818 |
| 3,855 |
Retainage payable | 16,437 |
| 40,167 |
Billings in excess of costs and estimated earnings on uncompleted contracts | 12,675 |
| 17,225 |
Accrued liabilities | 8,224 |
| 11,617 |
Other current liabilities | 1,318 |
| 342 |
Total current liabilities | 89,421 |
| 144,695 |
|
|
|
|
OTHER NONCURRENT LIABILITIES | 201 |
| 292 |
|
|
|
|
STOCKHOLDER'S EQUITY |
|
|
|
Common stock, $1 par value; 1,000 shares authorized, 1,000 shares issued and outstanding | 1 |
| 1 |
Captial in excess of par value | 27,548 |
| 27,576 |
Retained earnings | 4,763 |
| 9,879 |
Total stockholder's equity | 32,312 |
| 37,456 |
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $121,934 |
| $182,443 |
See accompanying notes to financial statements
4
KBR BUILDING GROUP, LLC
STATEMENTS OF OPERATIONS
(In thousands)
|
|
|
|
| Years Ended December 31, | ||
| 2014 |
| 2013 |
|
|
|
|
Revenues | $317,030 |
| $608,200 |
Cost of revenues | (299,376) |
| (581,817) |
Gross profit | 17,654 |
| 26,383 |
Equity in earnings (loss) of unconsolidated affiliates | 69 |
| (18) |
General and administrative expenses | (16,576) |
| (18,137) |
Loss on disposition of assets | (1,491) |
| - |
Operating income (loss) | (344) |
| 8,228 |
Other non-operating expense | - |
| (3) |
Income (loss) before income taxes | (344) |
| 8,225 |
Provision for income taxes | (4,772) |
| (2,405) |
Net income (loss) | $(5,116) |
| $5,820 |
See accompanying notes to financial statements
5
KBR BUILDING GROUP, LLC
STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
| Common stock, $1 par |
| Capital in excess of par value |
| Retained Earnings |
| Total Stockholder's Equity |
Balance at December 31, 2012 | $1 |
| $27,586 |
| $4,059 |
| $31,646 |
|
|
|
|
|
|
|
|
Net Income | - |
| - |
| 5,820 |
| 5,820 |
Share-based compensation | - |
| (10) |
| - |
| (10) |
Balance at December 31, 2013 | $1 |
| $27,576 |
| $9,879 |
| $37,456 |
|
|
|
|
|
|
|
|
Net Loss | - |
| - |
| (5,116) |
| (5,116) |
Share-based compensation | - |
| (28) |
| - |
| (28) |
Balance at December 31, 2014 | $1 |
| $27,548 |
| $4,763 |
| $32,312 |
See accompanying notes to financial statements
6
KBR BUILDING GROUP, LLC
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
| Years Ended December 31, | ||
| 2014 |
| 2013 |
|
|
|
|
Cashflows from operating activities: |
|
|
|
Net Income (loss) | $(5,116) |
| $5,820 |
Adjustments to reconcile net income (loss) to cash flows from operating activities: |
|
|
|
Depreciation | 90 |
| 66 |
Loss on disposition of assets | 1,491 |
| - |
Deferred income tax | 4,830 |
| 12,710 |
Equity in (earnings) losses of unconsolidated affiliates | (69) |
| 18 |
Other | 290 |
| (1) |
Changes in operating assets and liabilities: |
|
|
|
Trade receivable | 61,268 |
| (715) |
Costs and estimated earnings in excess of billings on uncompleted contracts | (25,537) |
| 25,501 |
Trade accounts payable | (23,540) |
| (10,251) |
Retainage payable | (23,730) |
| 5,151 |
Billings in excess of costs and estimated earnings on uncompleted contracts | (4,550) |
| (16,615) |
Other assets | 4,786 |
| (4,758) |
Due from Parent and affiliates | (10,629) |
| (15,594) |
Distributions of earnings from unconsolidated affiliates | 1,400 |
| 500 |
Accrued expenses and other liabilities | (9,378) |
| (13,186) |
Net cash used in operating activities | (28,394) |
| (11,354) |
Cash flows from investing activities: |
|
|
|
Funds received from Parent and affiliates | 28,303 |
| 11,771 |
Expenditures for leasehold improvements | - |
| (417) |
Net cash provided by investing activities | 28,303 |
| 11,354 |
Cash flows from financing activities: |
|
|
|
Net cash provided by financing activities | - |
| - |
Net decrease in cash and equivalents | (91) |
| - |
Cash and equivalents at beginning of year | 91 |
| 91 |
Cash and equivalents at end of year | $- |
| $91 |
See accompanying notes to financial statements
7
KBR BUILDING GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
KBR Building Group, LLC (the Company) is a wholly-owned subsidiary of KBR, Inc. (the Parent). KBR Building Group, LLC's principal business is that of a general contractor performing industrial and commercial construction contracts under cost-plus, cost-plus with a guaranteed maximum, and fixed-price contracts.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include:
revenues under long term construction contracts, including estimates of costs to complete projects and provisions for contract losses
allowances for doubtful accounts
provisions for income taxes and related valuation allowances and tax uncertainties
recoverability of equity method investments
reserves for self-insured risks
Revenue Recognition - Construction Contracts
The Company recognizes revenues from construction contracts using the percentage-of-completion method of accounting in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605 Revenue Recognition. Progress is measured based upon costs incurred to total estimated costs at completion. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Precontract costs directly associated with a specific anticipated contract are recorded as construction costs only if these costs are determined to be recoverable through the contract. All known or anticipated losses on contracts are recognized in the period in which they become evident. Revenues recognized in excess of amounts billed and the associated costs are classified as current assets, since it is anticipated that these earnings and costs will be billed and collected in the next fiscal year. Contract amounts billed to clients in excess of costs incurred and revenues recognized to date are classified as current liabilities. Profit incentives are included in revenue when their realization is reasonably assured.
Revenues and gross profit on contracts can be significantly affected by change orders and claims that may not have been approved by the customer until the later stages of a contract or subsequent to project completion. If it is not probable that costs will be recovered through a change in the contract price, the costs attributable to such pending change orders are treated as contract costs without incremental revenue. For contracts where it is probable that the costs will be recovered through a change order, total estimated contract revenue is increased by the lesser of the amount management expects to recover or the costs expected to be incurred.
8
When we negotiate any type of contract, we frequently are required to accomplish the scope of work and meet certain performance criteria within a specified time frame; otherwise, we could be assessed damages, which in some cases are agreed-upon liquidated damages. We include an estimate of liquidated damages in our estimates of total contract value when it is deemed probable that they will be assessed. Profits are recorded based upon the product of estimated contract profit at completion times the current percentage-complete for the contract.
Cost Estimates
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Indirect costs, included in cost of revenues, include charges for such items as facilities, engineering, project management, quality control, bid and proposals and procurement.
General and Administrative Expenses
Our general and administrative expenses represent corporate overhead expenses that are not associated with the execution of the contracts. General and administrative expenses include charges for such items as executive management, corporate business development, information technology, finance and corporate accounting, human resources and various other corporate functions.
Cash and Equivalents
The Company considers short-term highly liquid investments with maturities of 90 days or less at the time of purchase to be cash equivalents.
Trade Receivable
Trade receivables are recorded at the invoiced amount based on contracted prices. Amounts collected on trade receivables are included in net cash provided by operating activities in the statements of cash flows.
We establish an allowance for doubtful accounts based on the assessment of the clients willingness and ability to pay. In addition to such allowances, there are often items in dispute or being negotiated that may require us to make an estimate as to the ultimate outcome. Past due receivable balances are written off when our internal collection efforts have been unsuccessful in collecting the amounts due. As of December 31, 2014 and 2013, the Company had receivables of $0.9 million and $0.9 million, respectively, related to contract claims.
Retainage, included in trade receivable, represents amounts withheld from billings by our clients pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods. As of December 31, 2014 and 2013, the Company had receivables of $17.0 million and $36.0 million, respectively, related to retainage.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts, Including Claims, and Advanced Billings and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method of accounting. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract costs and profits recognized to date using the percentage-of-completion method over billings to date on certain contracts. Billings in excess of costs and estimated earnings on uncompleted contracts represents the excess of billings to date over the amount of contract costs and profits recognized to date using the percentage-of-completion method on certain contracts. With the exception of claims and change orders that we are in the process of negotiating with customers, unbilled receivables are usually billed during normal billing processes following achievement of the contractual requirements.
9
Property, Plant, and Equipment
Property, plant and equipment are reported at cost less accumulated depreciation except for those assets that have been written down to their fair values due to impairment. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. The cost of property, plant and equipment sold or otherwise disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operating income for the respective period. Depreciation for equipment, furniture, and fixtures is generally provided on the straight-line method over the estimated useful lives of the related assets of three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the useful life of the improvement or the lease term, generally up to 10 years.
Management assesses the carrying value of property, plant, and equipment when indicators of impairment are identified. Impairment losses are recorded in the year incurred as a permanent reduction in the carrying value of the related assets.
Income Taxes
The Company is included in a consolidated federal income tax return with its Parent and other affiliates. The Company provides for income taxes as if it filed a separate income tax return, subject to certain modifications.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. A current tax asset or liability is recognized for the estimated taxes refundable or payable on tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies in making this assessment. Additionally, we use forecasts of certain tax elements such as taxable income in making this assessment of realization. Given the inherent uncertainty involved with the use of such estimates and assumptions, there can be significant variation between estimated and actual results.
We recognize the effect of income tax positions only if it is more-likely-than-not that those positions will be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The company records potential interest and penalties related to unrecognized tax benefits in income tax expense.
Fair Value of Financial Instruments
For all of the Companys financial instruments, including cash and cash equivalents, receivables, and other accrued liabilities, the carrying amounts on the balance sheet approximate their fair values due principally to their short maturities.
10
Concentration of Credit Risk
As is customary in the industry, the Company grants uncollateralized credit to its customers, which include large multinational corporations operating in a broad range of industries. In order to mitigate its credit risk, the Company continually evaluates the creditworthiness of its major customers. The following tables present summarized data regarding revenues and trade receivables attributable to customers that account for 10% or more of the Companys revenues.
Revenues from major customers: |
|
|
|
|
|
| Years ended December 31, | ||
Dollars in thousands |
| 2014 |
| 2013 |
The Boeing Company |
| 78,721 |
| 96,559 |
Triumph Group, Inc. |
| 8,915 |
| 75,359 |
Kettler, Inc. |
| 54,400 |
| - |
|
|
|
|
|
Percentage of revenues from major customers: |
|
|
| |
|
| Years ended December 31, | ||
|
| 2014 |
| 2013 |
The Boeing Company |
| 25% |
| 16% |
Triumph Group, Inc. |
| 3% |
| 12% |
Kettler, Inc. |
| 17% |
| - |
|
|
|
|
|
Percentage of trade receivable from major customers: |
|
|
| |
|
| December 31, | ||
|
| 2014 |
| 2013 |
The Boeing Company |
| 22% |
| 11% |
Triumph Group, Inc. |
| 1% |
| - |
Kettler, Inc. |
| 9% |
| - |
2. RELATED PARTY TRANSACTIONS
Certain of the Companys transactions are with its Parent and affiliates. The Companys financial statements reflect these transactions based on actual costs or on a proportionate allocation basis determined by management of the Parent. The cumulative net balance resulting from these transactions is included in due from Parent and affiliates in the accompanying balance sheets. Balances due from Parent and affiliates are not interest bearing and are recorded as current as either party has the ability at its sole discretion to demand payment.
The Companys employees participate in the Parents employee benefit plans. The Parent allocates employee benefit costs to the Company based on standardized rates, with the associated liability recorded on the Parents books. Charges for such employee benefits totaled approximately $7.9 million and $11.8 million during 2014 and 2013, respectively, and are included in cost of revenues and in general and administrative expenses in the accompanying statements of operations.
The Company participates in centralized programs administered by the Parent for business insurance and surety bonding. The Parent also provides certain shared support services to the Company and other affiliates consisting primarily of information systems, accounting and real estate services. Charges for such shared services totaled approximately $1.5 million and $2.0 million during 2014 and 2013, respectively, and are included in general and administrative expenses in the accompanying statements of operations.
11
The Parent and its affiliates are partially self-insured with respect to workers compensation benefits and general liability claims. The Company is charged by the Parent for its proportionate share of the estimated cost on a basis determined by management of the Parent, with the corresponding liability recorded on the Parents books. Charges for such services totaled approximately $1.2 million and $1.9 million during 2014 and 2013, respectively, and are included in cost of revenues and in general and administrative expenses in the accompanying statements of operations.
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts were as follows at December 31, 2014 and 2013:
| December 31, | ||
| 2014 |
| 2013 |
Dollars in thousands |
|
|
|
Costs incurred on uncompleted contracts | $2,177,985 |
| $2,224,687 |
Estimated earnings | 89,909 |
| 74,105 |
|
|
|
|
| 2,267,894 |
| 2,298,792 |
Less billings to date | 2,249,829 |
| 2,310,814 |
|
|
|
|
| $18,065 |
| $(12,022) |
Costs and estimated earnings on uncompleted contracts at December 31, 2014 and 2013 are included in the accompanying balance sheets under the following captions (in thousands):
Costs and estimated earnings in excess of billings on uncompleted contracts | $30,740 |
| $5,203 |
Billings in excess of costs and estimated earnings on uncompleted contracts | (12,675) |
| (17,225) |
|
|
|
|
| $18,065 |
| $(12,022) |
The amounts of unapproved change orders and claims included in determining the profit or loss on contracts as of December 31, 2014 and 2013 were $4.7 million and $17.9 million, respectively. Substantially all of these amounts were subsequently resolved with the customers. An immaterial amount of income was recognized on the favorable resolution of these amounts.
4. EQUITY METHOD INVESTMENTS
The Company holds a 50% interest in the BE&K-Turner Boeing JV, which was formed for the execution of a project for Boeing. The project was substantially completed in 2012 other than residual responsibilities under the project-specific insurance programs. As of December 31, 2014 and 2013, the joint venture retained cash balances of $1.4 million and $2.7 million, respectively, to cover future liabilities under the insurance programs. Management has determined that the joint venture is not a variable interest entity.
12
5. INCOME TAXES
The Company is a disregarded single member LLC for federal income tax purposes. Income taxes are allocated to the Company under the Separate Return Method. The Companys current income tax assets and liabilities are included in Due from Parent and affiliates in the accompanying balance sheets. The components of the provision for income taxes were as follows:
Dollars in thousands |
| Current |
| Deferred |
| Total |
Balance as of December 31, 2014 |
|
|
|
|
|
|
Federal |
| $242 |
| $4,545 |
| $4,787 |
State and other |
| (300) |
| 285 |
| (15) |
Provision for income taxes |
| $(58) |
| $4,830 |
| $4,772 |
|
|
|
|
|
|
|
Balance as of December 31, 2013 |
|
|
|
|
|
|
Federal |
| $(8,495) |
| $10,487 |
| $1,992 |
State and other |
| (1,810) |
| 2,223 |
| 413 |
Provision for income taxes |
| $(10,305) |
| $12,710 |
| $2,405 |
The Companys effective tax rates on income from operations differed from the statutory U.S. federal income tax rate of 35% as a result of the following:
| Years ended December 31, | ||
| 2014 |
| 2013 |
U.S. statutory federal rate, expected (benefit) provision | (35%) |
| 35% |
Increase (reduction) in tax rate from: |
|
|
|
State and local income taxes, net of federal benefit | - |
| (6%) |
Valuation allowance and other permanent differences | 1,422% |
| - |
Temporary differences | - |
| 132% |
Tax adjustments | - |
| (132%) |
Effective tax rate on income from operations | 1,387% |
| 29% |
13
The primary components of deferred tax assets and liabilities were as follows:
|
| Years ended December 31, | ||
Dollars in thousands | 2014 |
| 2013 | |
Deferred tax assets: |
|
|
| |
Employee compensation and benefits | $810 |
| $1,338 | |
Loss carryforwards | 1,623 |
| - | |
Insurance accruals | 3,163 |
| 4,536 | |
Accrued liabilities | 390 |
| 39 | |
Total gross deferred tax assets | 5,986 |
| 5,913 | |
Valuation allowance | (4,810) |
| - | |
Net deferred tax asset | 1,176 |
| 5,913 | |
Deferred tax liabilities: |
|
|
| |
Construction contract accounting | (400) |
| 65 | |
Intangibles | 168 |
| - | |
Depreciation and amortization | (373) |
| (485) | |
Other | 1,781 |
| 1,479 | |
Total gross deferred tax liability | 1,176 |
| 1,059 | |
Deferred income tax asset, net | $- |
| $4,854 |
The valuation allowance for deferred tax assets was $4.8 million and $0 million at December 31, 2014 and 2013, respectively. The net change in the total valuation allowance was an increase of $4.8 million in 2014. The valuation allowance at December 31, 2014 was primarily related to U.S. federal net operating loss carryforwards and other deferred tax assets that, in the judgment of management, are not more-likely-than-not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. Based upon the risk of the Companys ability to generate sufficient future taxable income, management believes that it was not more-likely-than-not that the Company would be able to realize the benefits of the deductible differences and accordingly recognized a full valuation allowance for the deferred tax assets in the year ended December 31, 2014.
There are no unrecognized tax provisions at December 31, 2014 and 2013.
6. OPERATING LEASES
The Company leases vehicles and office space under lease agreements. Lease expense for 2014 and 2013 was $2,212,000 and $2,264,000, respectively. Lease commitments under non-cancelable leases for 2015 through 2019 and thereafter are approximately $1,391,000, $805,000, $702,000, $494,000, $494,000 and $135,000, respectively.
7. CONTINGENCIES
The Company is a party to various legal proceedings considered incidental to its business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Companys financial position or results of operations.
14
8. RECENT ACCOUNTING PRONOUNCEMENTS
On August 27, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern. This ASU provides guidance on management's responsibility to evaluate whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. Substantial doubt exists when relevant conditions and events indicate that it is probable that the entity will be unable to meet its obligations as they become due within the time frame specified earlier. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations or cash flows.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The effective date of the ASU as amended by ASU 2015-14 is January 1, 2019. The ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We are in the process of assessing the impact of the adoption of ASU 2014-09 on our financial position, results of operations or cash flows. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
On February 18, 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The amendment eliminates the deferral of certain consolidation standards for entities considered to be investment companies and makes changes to both the variable interest model and the voting model. These changes will require re-evaluation of certain entities for consolidation and will require us to revise our documentation regarding the consolidation or deconsolidation of such VIEs. This ASU is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We are in the process of assessing the impact of the adoption of ASU 2015-02 on our financial statements.
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events and their potential effects on these financial statements through September 11, 2015, the date the financial statements were available to be issued. On June 30, 2015 the Company was sold to Pernix Building Group LLC, a subsidiary of Pernix Group, Inc., for total consideration of approximately $22.9 million.
15
Exhibit 99.2
KBR BUILDING GROUP, LLC
CONDENSED FINANCIAL STATEMENTS
For the quarterly period ended
March 31, 2015
(unaudited)
KBR BUILDING GROUP, LLC
CONDENSED FINANCIAL STATEMENTS
March 31, 2015
TABLE OF CONTENTS
CONDENSED FINANCIAL STATEMENTS |
|
|
|
Condensed Balance Sheets | 2-3 |
|
|
Condensed Statements of Operations | 4 |
|
|
Condensed Statements of Stockholders Equity | 5 |
|
|
Condensed Statements of Cash Flows | 6 |
|
|
Notes to Condensed Financial Statements | 7-12 |
|
|
1
KBR BUILDING GROUP, LLC
CONDENSED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
| March 31, |
| December 31, |
| 2015 |
| 2014 |
| (unaudited) |
|
|
ASSETS |
|
|
|
CURRENT ASSETS |
|
|
|
Receivables: |
|
|
|
Trade receivable, net of allowance for doubtful accounts of $0 and $0 | $30,928 |
| $37,788 |
Other | 246 |
| 247 |
Costs and estimated earnings in excess of billings on uncompleted contracts | 29,620 |
| 30,740 |
Due from Parent and affiliates, net | 46,035 |
| 51,459 |
Prepaid expenses and other | 172 |
| 133 |
Total current assets | 107,001 |
| 120,367 |
|
|
|
|
PROPERTY, PLANT, AND EQUIPMENT (AT COST) |
|
|
|
Land and buildings | 598 |
| 598 |
Equipment, furniture, and fixtures | 488 |
| 488 |
| 1,086 |
| 1,086 |
Less accumulated depreciation | 1,086 |
| 1,086 |
|
|
|
|
NET PROPERTY, PLANT, AND EQUIPMENT | - |
| - |
|
|
|
|
INVESTMENT IN UNCONSOLIDATED AFFILIATES | 1,370 |
| 1,370 |
|
|
|
|
OTHER ASSETS | 123 |
| 197 |
|
|
|
|
TOTAL ASSETS | $108,494 |
| $121,934 |
See accompanying notes to condensed financial statements
2
KBR BUILDING GROUP, LLC
CONDENSED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
| March 31, |
| December 31, |
| 2015 |
| 2014 |
| (unaudited) |
|
|
LIABILITIES AND STOCKHOLDER'S EQUITY |
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
Trade accounts payable | $38,186 |
| $47,949 |
Accrued compensation and benefits | 2,895 |
| 2,818 |
Retainage payable | 18,654 |
| 16,437 |
Billings in excess of costs and estimated earnings on uncompleted contracts | 7,673 |
| 12,675 |
Accrued liabilities | 7,936 |
| 8,224 |
Other current liabilities | 1,100 |
| 1,318 |
Total current liabilities | 76,444 |
| 89,421 |
|
|
|
|
OTHER NONCURRENT LIABILITIES | 185 |
| 201 |
|
|
|
|
STOCKHOLDER'S EQUITY |
|
|
|
Common stock, $1 par value; 1,000 shares authorized, 1,000 shares issued and outstanding | 1 |
| 1 |
Capital in excess of par value | 27,548 |
| 27,548 |
Retained earnings | 4,316 |
| 4,763 |
Total stockholder's equity | 31,865 |
| 32,312 |
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $108,494 |
| $121,934 |
|
|
|
|
See accompanying notes to condensed financial statements
3
KBR BUILDING GROUP, LLC
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(unaudited)
|
|
|
|
| Three Months Ended March 31, | ||
| 2015 |
| 2014 |
|
|
|
|
Revenues | $67,914 |
| $98,408 |
Cost of revenues | (65,412) |
| (93,011) |
Gross profit | 2,502 |
| 5,397 |
Equity in earnings of unconsolidated affiliates | - |
| 69 |
General and administrative expenses | (2,728) |
| (4,308) |
Loss on disposition of assets | (221) |
| - |
Operating income (loss) | (447) |
| 1,158 |
Income (loss) before income taxes | (447) |
| 1,158 |
Provision for income taxes | - |
| (405) |
Net income (loss) | $(447) |
| $753 |
See accompanying notes to condensed financial statements
4
KBR BUILDING GROUP, LLC
CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
(unaudited)
| Common stock, $1 par |
| Capital in excess of par value |
| Retained Earnings |
| Total Stockholder's Equity |
Balance at December 31, 2014 | $1 |
| $27,548 |
| $4,763 |
| $32,312 |
Net Income | - |
| - |
| (447) |
| (447) |
Balance at March 31, 2015 | $1 |
| $27,548 |
| $4,316 |
| $31,865 |
|
|
|
|
|
|
|
|
| Common stock, $1 par |
| Capital in excess of par value |
| Retained Earnings |
| Total Stockholder's Equity |
Balance at December 31, 2013 | $1 |
| $27,576 |
| $9,879 |
| $37,456 |
Net Income | - |
| - |
| 753 |
| 753 |
Balance at March 31, 2014 | $1 |
| $27,576 |
| $10,632 |
| $38,209 |
See accompanying notes to condensed financial statements
5
KBR BUILDING GROUP, LLC
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
|
| ||||||||
| Three Months Ended March 31, | ||||||||||
| 2015 |
| 2014 | ||||||||
|
|
|
| ||||||||
Cash flows from operating activities: |
|
|
| ||||||||
Net income (loss) | $(447) |
| $753 | ||||||||
Adjustments to reconcile net income (loss) to cash flows from operating activities: |
|
|
| ||||||||
|
| Depreciation |
|
|
|
| - |
| 22 | ||
|
| Loss on disposition of assets |
|
| 221 |
| - | ||||
|
| Deferred income tax |
|
|
| - |
| 65 | |||
|
| Equity in earnings of unconsolidated affiliates |
| - |
| (69) | |||||
|
| Changes in operating assets and liabilities: |
|
|
|
| |||||
|
|
| Trade receivable |
|
|
| 6,861 |
| 13,841 | ||
|
|
| Costs and estimated earnings in excess of billings |
|
|
| |||||
|
|
|
| on uncompleted contracts |
|
| 1,121 |
| (851) | ||
|
|
| Other assets |
|
|
| (186) |
| 411 | ||
|
|
| Distributions of earnings from unconsolidated affiliates | - |
| 1,400 | |||||
|
|
| Due from Parent and affiliates |
|
| (2,096) |
| (3,324) | |||
|
|
| Trade accounts payable |
|
| (9,763) |
| (3,848) | |||
|
|
| Retainage payable |
|
|
| 2,217 |
| (10,054) | ||
|
|
| Billings in excess of costs and estimated earnings |
|
|
| |||||
|
|
|
| on uncompleted contracts |
|
| (5,002) |
| (5,399) | ||
|
|
| Accrued expenses and other liabilities |
| (446) |
| (1,023) | ||||
|
|
|
| Net cash used in operating activities |
| (7,520) |
| (8,076) | |||
Cash flows from investing activities: |
|
|
|
|
| ||||||
| Funds received from Parent and affiliates |
| 7,520 |
| 8,076 | ||||||
|
|
|
| Net cash provided by investing activities | 7,520 |
| 8,076 | ||||
Cash flows from financing activities: |
|
|
|
|
| ||||||
|
|
|
| Net cash provided by financing activities | - |
| - | ||||
|
|
|
| Net increase (decrease) in cash and equivalents | - |
| - | ||||
Cash and equivalents at beginning of period | - |
| 91 | ||||||||
Cash and equivalents at end of period | $- |
| $91 |
See accompanying notes to condensed financial statements
6
KBR BUILDING GROUP, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
KBR Building Group, LLC (the Company) is a wholly-owned subsidiary of KBR, Inc. (the Parent). KBR Building Group, LLC's principal business is that of a general contractor performing industrial and commercial construction contracts under cost-plus, cost-plus with a guaranteed maximum, and fixed-price contracts.
Use of Estimates
The preparation of condensed financial statements in conformity with U.S. 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 condensed financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include:
revenues under long term construction contracts, including estimates of costs to complete projects and provisions for contract losses
allowances for doubtful accounts
provisions for income taxes and related valuation allowances and tax uncertainties
recoverability of equity method investments
reserves for self-insured risks
Revenue Recognition - Construction Contracts
The Company recognizes revenues from construction contracts using the percentage-of-completion method of accounting in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605 Revenue Recognition. Progress is measured based upon costs incurred to total estimated costs at completion. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Precontract costs directly associated with a specific anticipated contract are recorded as construction costs only if these costs are determined to be recoverable through the contract. All known or anticipated losses on contracts are recognized in the period in which they become evident. Revenues recognized in excess of amounts billed and the associated costs are classified as current assets, since it is anticipated that these earnings and costs will be billed and collected in the next fiscal year. Contract amounts billed to clients in excess of costs incurred and revenues recognized to date are classified as current liabilities. Profit incentives are included in revenue when their realization is reasonably assured.
Revenues and gross profit on contracts can be significantly affected by change orders and claims that may not have been approved by the customer until the later stages of a contract or subsequent to project completion. If it is not probable that costs will be recovered through a change in the contract price, the costs attributable to such pending change orders are treated as contract costs without incremental revenue. For contracts where it is probable that the costs will be recovered through a change order, total estimated contract revenue is increased by the lesser of the amount management expects to recover or the costs expected to be incurred.
7
When we negotiate any type of contract, we frequently are required to accomplish the scope of work and meet certain performance criteria within a specified time frame; otherwise, we could be assessed damages, which in some cases are agreed-upon liquidated damages. We include an estimate of liquidated damages in our estimates of total contract value when it is deemed probable that they will be assessed. Profits are recorded based upon the product of estimated contract profit at completion times the current percentage-complete for the contract.
Cost Estimates
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Indirect costs, included in cost of revenues, include charges for such items as facilities, engineering, project management, quality control, bid and proposals and procurement.
General and Administrative Expenses
Our general and administrative expenses represent corporate overhead expenses that are not associated with the execution of the contracts. General and administrative expenses include charges for such items as executive management, corporate business development, information technology, finance and corporate accounting, human resources and various other corporate functions.
Cash and Equivalents
The Company considers short-term highly liquid investments with maturities of 90 days or less at the time of purchase to be cash equivalents.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts, Including Claims, and Advanced Billings and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method of accounting. Costs and estimated earnings in excess of billings on uncompleted contracts represent the excess of contract costs and profits recognized to date using the percentage-of-completion method over billings to date on certain contracts. Billings in excess of costs and estimated earnings on uncompleted contracts represents the excess of billings to date over the amount of contract costs and profits recognized to date using the percentage-of-completion method on certain contracts. With the exception of claims and change orders that we are in the process of negotiating with customers, unbilled receivables are usually billed during normal billing processes following achievement of the contractual requirements.
8
Concentration of Credit Risk
As is customary in the industry, the Company grants uncollateralized credit to its customers, which include large multinational corporations operating in a broad range of industries. In order to mitigate its credit risk, the Company continually evaluates the creditworthiness of its major customers. The following tables present summarized data regarding revenues and trade receivables attributable to customers that account for 10% or more of the Companys revenues.
Revenues from major customers: |
|
|
|
| |
|
| Three months ended | |||
|
| March 31, | |||
Dollars in thousands |
| 2015 |
| 2014 | |
The Boeing Company |
| 6,084 |
| 39,420 | |
Kettler, Inc. |
| 14,511 |
| 7,757 | |
|
|
|
|
| |
Percentage of revenues from major customers: |
|
|
| ||
|
| Three months ended | |||
|
| March 31, | |||
|
| 2015 |
| 2014 | |
The Boeing Company |
| 9% |
| 40% | |
Kettler, Inc. |
| 21% |
| 8% | |
|
|
|
|
| |
Percentage of trade receivable from major customers: |
|
|
| ||
|
| March 31, |
| December 31, | |
|
| 2015 |
| 2014 | |
The Boeing Company |
| 24% |
| 22% | |
Kettler, Inc. |
| 25% |
| 9% |
2. TRADE RECEIVABLE
The components of our trade receivable are as follows (in thousands):
| March 31, |
| 2015 |
Trade | $14,342 |
Retainage | 16,586 |
Total | $30,928 |
|
|
| December 31, |
| 2014 |
Trade | $20,783 |
Retainage | 17,005 |
Total | $37,788 |
9
3. RELATED PARTY TRANSACTIONS
Certain of the Companys transactions are with its Parent and affiliates. The Companys condensed financial statements reflect these transactions based on actual costs or on a proportionate allocation basis determined by management of the Parent. The cumulative net balance resulting from these transactions is included in due from Parent and affiliates in the accompanying condensed balance sheets. Balances due from Parent and affiliates are not interest bearing and are recorded as current as either party has the ability at its sole discretion to demand payment.
The Companys employees participate in the Parents employee benefit plans. The Parent allocates benefit costs to the Company based on standardized rates, with the associated liability recorded on the Parents books. Charges for such employee benefits totaled approximately $1.3 million and $2.0 million during the three months ended March 31, 2015 and 2014, respectively, and are included in cost of revenues and in general and administrative expenses in the accompanying condensed statements of operations.
The Company participates in centralized programs administered by the Parent for business insurance and surety bonding. The Parent also provides certain shared support services to the Company and other affiliates consisting primarily of information systems, accounting and real estate services. Charges for such shared services totaled approximately $0.3 million and $0.4 million during the three months ended March 31, 2015 and 2014, respectively, and are included in general and administrative expenses in the accompanying condensed statements of operations.
The Parent and its affiliates are partially self-insured with respect to workers compensation benefits and general liability claims. The Company is charged by the Parent for its proportionate share of the estimated cost on a basis determined by management of the Parent, with the corresponding liability recorded on the Parents books. Charges for such services totaled approximately $0.5 million and $0.8 million during the three months ended March 31, 2015 and 2014, respectively, and are included in cost of revenues and in general and administrative expenses in the accompanying condensed statements of operations.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts were as follows at March 31, 2015 and December 31, 2014:
| March 31, |
| December 31, |
| 2015 |
| 2014 |
Dollars in thousands |
|
|
|
Costs incurred on uncompleted contracts | $2,186,589 |
| $2,177,985 |
Estimated earnings | 75,617 |
| 89,909 |
|
|
|
|
| 2,262,206 |
| 2,267,894 |
Less billings to date | 2,240,259 |
| 2,249,829 |
|
|
|
|
| $21,947 |
| $18,065 |
10
Costs and estimated earnings on uncompleted contracts at March 31, 2015 and December 31, 2014 are included in the accompanying condensed balance sheets under the following captions:
|
|
|
|
| March 31, |
| December 31, |
Dollars in thousands | 2015 |
| 2014 |
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts | $29,620 |
| $30,740 |
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts | (7,673) |
| (12,675) |
|
|
|
|
| $21,947 |
| $18,065 |
The amounts of unapproved change orders and claims included in determining the profit or loss on contracts as of March 31, 2015 and 2014 were $6.2 million and $18.5 million, respectively. Substantially all of these amounts were subsequently resolved with the customers. An immaterial amount of income was recognized on the favorable resolution of these amounts.
5. EQUITY METHOD INVESTMENTS
The Company holds a 50% interest in the BE&K-Turner Boeing JV, which was formed for the execution of a project for Boeing. The project was substantially completed in 2012 other than residual responsibilities under the project-specific insurance programs. As of March 31, 2015 and December 31, 2014, the joint venture retained cash balances of approximately $1.4 million and $1.4 million, respectively, to cover future liabilities under the insurance programs. Management has determined that the joint venture is not a variable interest entity.
6. INCOME TAXES
The Company is a disregarded single member LLC for federal income tax purposes. Income taxes are allocated to the Company under the Separate Return Method. The Companys current income tax assets and liabilities are included in Due from Parent and affiliates in the accompanying condensed balance sheets. The Companys effective tax rate was 0% and 35% for the three months ended March 31, 2015 and 2014, respectively. The 0% rate in 2015 is lower than the U.S. statutory rate of 35% due to managements inability to conclude that it is more likely than not that the Company will be able to realize the benefit from net operating loss carryforwards. As such, the Company has provided a full valuation allowance for deferred tax assets as of March 31, 2015. The Companys effective tax rate for the three months ended March 31, 2014 approximated the U.S. statutory rate of 35%.
7. CONTINGENCIES
The Company is a party to various legal proceedings considered incidental to its business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Companys financial position or results of operations.
11
8. RECENT ACCOUNTING PRONOUNCEMENTS
On August 27, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern. This ASU provides guidance on management's responsibility to evaluate whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. Substantial doubt exists when relevant conditions and events indicate that it is probable that the entity will be unable to meet its obligations as they become due within the time frame specified earlier. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations or cash flows.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The effective date of the ASU as amended by ASU 2015-14 is January 1, 2019. The ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We are in the process of assessing the impact of the adoption of ASU 2014-09 on our financial position, results of operations or cash flows. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
On February 18, 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The amendment eliminates the deferral of certain consolidation standards for entities considered to be investment companies and makes changes to both the variable interest model and the voting model. These changes will require re-evaluation of certain entities for consolidation and will require us to revise our documentation regarding the consolidation or deconsolidation of such VIEs. This ASU is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We are in the process of assessing the impact of the adoption of ASU 2015-02 on our financial statements.
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events and their potential effects on these condensed financial statements through September 11, 2015, the date the condensed financial statements were available to be issued. On June 30, 2015, the Company was sold to Pernix Building Group LLC, a subsidiary of Pernix Group, Inc. for total consideration of approximately $22.9 million.
12
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements have been prepared to reflect the acquisition of all the outstanding limited liability company interests of KBR Building Group, LLC (“BEK BG”) from BE&K, Inc., a subsidiary of KBR, Inc., by Pernix Building Group, LLC, a wholly-owned subsidiary of Pernix Group, Inc. (the “Company” or “PGI”). The unaudited pro forma condensed combined statements of operations also reflect the impact of the issuance of 2,800,000 shares of Series C Preferred Stock in June 2015 for proceeds of $28,000,000 which were used to fund the acquisition of BEK BG. The Series C Preferred Stock is convertible into 1,428,572 shares of PGI common stock at the option of the Company and requires cumulative dividends at the rate $.80 per share per annum. The issuance of the Series C Preferred Stock and acquisition of BEK BG are reflected in PGI’s June 30, 2015 financial statements in the Company’s Quarterly Report on Form 10-Q filed on August 7, 2015. The unaudited pro forma condensed combined statements of operations combine the historical consolidated statements of operations of PGI and BEK BG and the impact of the dividends on the Series C Preferred Stock for the three months ended March 31, 2015 and for the year ended December 31, 2014, giving effect to these transactions as if they occurred on January 1, 2014. The historical consolidated combined statements of operations have been adjusted to give effect to events that are directly attributable to the acquisition, are expected to have a continuing impact on the combined results, and are factually supportable.
The pro forma condensed combined statements of operations have been prepared using the acquisition method of accounting for business combinations under accounting principles generally accepted in the United States and in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standard Codification (“ASC”), Topic 805 - Business Combinations (“ASC 805”), with PGI treated as the acquirer. The acquisition method of accounting requires the acquirer to estimate the fair value of the assets acquired and liabilities assumed at the date of acquisition based upon information available to the Company. The Company is still in the process of finalizing appraisals of tangible and intangible assets in order to complete its purchase price allocation for the BEK BG acquisition. Accordingly, the purchase price allocation is preliminary and subject to revision.
1
As additional information is obtained about the assets acquired and liabilities assumed within the measurement period (not to exceed one year from the date of acquisition), the Company may revise its estimates of fair value to more accurately allocate the purchase price and such changes may be significant. Accordingly, the pro forma adjustments included herein are preliminary, have been made solely for the purpose of providing pro forma financial statements, and are subject to revision. Differences between these preliminary estimates and the final acquisition accounting may have a material impact on the accompanying pro forma financial statements and PGI’s future results of operations and financial position.
The pro forma financial statements are provided for informational purposes only and do not purport to represent what the actual consolidated results of operations of PGI would have been had the combination occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations. Additionally, the pro forma financial statements do not give effect to the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any other synergies that may result from the acquisition.
The unaudited condensed consolidated balance sheet as of June 30, 2015 included in the Company’s Quarterly Report on Form 10-Q filed on August 7, 2015 reflects the preliminary purchase price allocation for the BEK BG acquisition and issuance of the Series C Preferred Stock. As such, this current report on Form 8-K/A does not include a pro forma balance sheet as these transactions are already reflected in PGI’s historical balance sheet as of June 30, 2015. The pro forma statements of operations should also be read in conjunction with the accompanying notes to the pro forma statements of operations as well as the unaudited consolidated financial statements and accompanying notes of PGI contained in its Quarterly Report on Form 10-Q for the three months ended March 31, 2015, the audited consolidated financial statements and accompanying notes of PGI contained in its Annual Report on Form 10-K for the year ended December 31, 2014, and the financial statements of KBR Building Group, LLC filed as Exhibits 99.1 and 99.2 to this current report on Form 8-K/A.
2
PERNIX GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2015
|
| Historical |
|
| Pro Forma | |||||||||
|
| Pernix |
|
| BEK BG |
| Note |
|
| Adjustments |
| Note |
| Pro Forma |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction revenue | $ | 9,328,570 |
| $ | 67,914,047 |
|
|
| $ | - |
|
| $ | 77,242,617 |
Service fees – power generation plant |
| 1,264,087 |
|
| - |
|
|
|
| - |
|
|
| 1,264,087 |
Other revenue |
| 18,233 |
|
| - |
|
|
|
| - |
|
|
| 18,233 |
Gross revenues |
| 10,610,890 |
|
| 67,914,047 |
|
|
|
| - |
|
|
| 78,524,937 |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction costs |
| 9,235,379 |
|
| 65,412,038 |
|
|
|
| 766,667 |
| 4a |
| 75,414,084 |
Operation and maintenance costs - power generation plant |
| 519,042 |
|
| - |
|
|
|
| - |
|
|
| 519,042 |
Cost of revenues |
| 9,754,421 |
|
| 65,412,038 |
|
|
|
| 766,667 |
|
|
| 75,933,126 |
Gross profit |
| 856,469 |
|
| 2,502,009 |
|
|
|
| (766,667) |
|
|
| 2,591,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
| 2,885,902 |
|
| 2,948,583 |
| 5 |
|
| 28,531 |
| 4b |
| 5,863,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
| (2,029,433) |
|
| (446,574) |
|
|
|
| (795,198) |
|
|
| (3,271,205) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
| (69) |
|
| - |
|
|
|
| - |
|
|
| (69) |
Other expense - related party |
| (21,700) |
|
| - |
|
|
|
| - |
|
|
| (21,700) |
Foreign currency exchange loss |
| (42,126) |
|
| - |
|
|
|
| - |
|
|
| (42,126) |
Other income, net |
| 13,502 |
|
| - |
|
|
|
| - |
|
|
| 13,502 |
Total other income (expense) |
| (50,393) |
|
| - |
|
|
|
| - |
|
|
| (50,393) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before income tax expense |
| (2,079,826) |
|
| (446,574) |
|
|
|
| (795,198) |
|
|
| (3,321,598) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
| (17,768) |
|
| - |
|
|
|
| - |
|
|
| (17,768) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
| (2,097,594) |
|
| (446,574) |
|
|
|
| (795,198) |
|
|
| (3,339,366) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income (loss) attributable to non-controlling interest |
| (30,649) |
|
| - |
|
|
|
| - |
|
|
| (30,649) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) attributable to the stockholders of Pernix Group, Inc. and Subsidiaries |
| (2,066,945) |
|
| (446,574) |
|
|
|
| (795,198) |
|
|
| (3,308,717) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends |
| 112,253 |
|
| - |
|
|
|
| 560,000 |
| 4d |
| 672,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) attributable to the common stockholders of Pernix Group Inc. and Subsidiaries | $ | (2,179,198) |
| $ | (446,574) |
|
|
| $ | (1,355,198) |
|
| $ | (3,980,970) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS attributable to the stockholders of Pernix Group, Inc. and Subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings (loss) per share | $ | (0.23) |
|
|
|
|
|
|
|
|
|
| $ | (0.40) |
Weighted average shares outstanding – basic and diluted |
| 9,403,697 |
|
|
|
|
|
|
| 500,000 |
| 4d |
| 9,903,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the pro forma condensed combined financial statements. |
3
PERNIX GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Historical |
|
| Pro Forma | |||||||||
|
| Pernix |
|
| BEK BG |
| Note |
|
| Adjustments |
| Note |
| Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction revenue | $ | 78,573,035 |
| $ | 317,030,010 |
|
|
| $ | - |
|
| $ | 395,603,045 |
Service fees – power generation plant |
| 6,583,394 |
|
| - |
|
|
|
| - |
|
|
| 6,583,394 |
Other income – related party |
| 4,860 |
|
| - |
|
|
|
| - |
|
|
| 4,860 |
Other revenue |
| 139,450 |
|
| - |
|
|
|
| - |
|
|
| 139,450 |
Gross revenues |
| 85,300,739 |
|
| 317,030,010 |
|
|
|
| - |
|
|
| 402,330,749 |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction costs |
| 68,010,862 |
|
| 299,376,552 |
|
|
|
| 3,066,667 |
| 4a |
| 370,454,081 |
Operation and maintenance costs - power generation plant |
| 3,389,160 |
|
| - |
|
|
|
| - |
|
|
| 3,389,160 |
Cost of revenues |
| 71,400,022 |
|
| 299,376,552 |
|
|
|
| 3,066,667 |
|
|
| 373,843,241 |
Gross profit |
| 13,900,717 |
|
| 17,653,458 |
|
|
|
| (3,066,667) |
|
|
| 28,487,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
| 9,998,786 |
|
| 17,997,670 |
| 5 |
|
| 600,000 |
| 4b |
| 28,596,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
| 3,901,931 |
|
| (344,212) |
|
|
|
| (3,666,667) |
|
|
| (108,948) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
| 3,243 |
|
| - |
|
|
|
| - |
|
|
| 3,243 |
Other expense - related party |
| (83,103) |
|
| - |
|
|
|
| - |
|
|
| (83,103) |
Foreign currency exchange loss |
| (128,039) |
|
| - |
|
|
|
| - |
|
|
| (128,039) |
Other income, net |
| 117,254 |
|
| - |
|
|
|
| - |
|
|
| 117,254 |
Total other income (expense) |
| (90,645) |
|
| - |
|
|
|
| - |
|
|
| (90,645) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income taxes |
| 3,811,286 |
|
| (344,212) |
|
|
|
| (3,666,667) |
|
|
| (199,593) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
| (481,638) |
|
| (4,771,809) |
|
|
|
| 4,771,809 |
| 4c |
| (481,638) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) |
| 3,329,648 |
|
| (5,116,021) |
|
|
|
| 1,105,142 |
|
|
| (681,231) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to non-controlling interest |
| 4,712,504 |
|
| - |
|
|
|
| - |
|
|
| 4,712,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss attributable to the stockholders of |
| (1,382,856) |
|
| (5,116,021) |
|
|
|
| 1,105,142 |
|
|
| (5,393,735) |
Pernix Group, Inc. and Subsidiaries |
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends |
| 457,442 |
|
| - |
|
|
|
| 2,240,000 |
| 4d |
| 2,697,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss attributable to the common stockholders of Pernix Group, Inc. and Subsidiaries | $ | (1,840,298) |
| $ | (5,116,021) |
|
|
| $ | (1,134,858) |
|
| $ | (8,091,177) |
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS attributable to the stockholders of Pernix Group, Inc. and Subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share | $ | (0.20) |
|
|
|
|
|
|
|
|
|
| $ | (0.84) |
Weighted average shares outstanding – basic and diluted |
| 9,403,697 |
|
|
|
|
|
|
| 250,000 |
| 4d |
| 9,653,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the pro forma condensed combined financial statements. |
4
Note 1—Description of the Transaction
On June 30, 2015, the Pernix Building Group, LLC (“PBG”), a wholly owned subsidiary of Pernix Group, Inc. (“PGI”), acquired all outstanding limited liability company interests of KBR Building Group, LLC from BE&K, Inc., a subsidiary of KBR, Inc., pursuant to a definitive Membership Interest Purchase Agreement (the “Purchase Agreement”) for $22.0 million in cash subject to working capital adjustments, of which $0.9 million was paid on the acquisition date, based on a net working capital target of negative $6.0 million and remains subject to adjustment. KBR Building Group, LLC is a diversified construction company providing complex construction management and design build services in a variety of commercial and industrial sectors, including advance manufacturing and is now known as “BE&K Building Group” (“BEK BG”).
Note 2—Basis of Presentation
The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2014 give effect to the BEK BG acquisition as well as the impact of the Series C Preferred Stock issued to fund the acquisition, as if these transactions occurred on January 1, 2014. The unaudited pro forma condensed combined financial information was prepared based on the historical financial information of PGI and BEK BG and the acquisition was accounted for using the acquisition method of accounting. In accordance with ASC 805, the acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date, using the fair value concepts defined in ASC Topic 820 - Fair Value Measurement. The acquisition method of accounting requires the acquirer to estimate the fair value of the assets acquired and liabilities assumed at the date of acquisition based upon information available to the Company. The Company is still in the process of finalizing appraisals of tangible and intangible assets in order to complete its purchase price allocation for the BEK BG acquisition. Accordingly, the purchase price allocation is preliminary and subject to revision. As additional information is obtained about the assets acquired and liabilities assumed within the measurement period (not to exceed one year from the date of acquisition), the Company may revise its estimates of fair value to more accurately allocate the purchase price and such changes may be significant. Following is the preliminary purchase price allocation of the assets acquired and liabilities assumed in the BEK BG acquisition, based on their estimated fair values, and included in the Company’s Quarterly Report on Form 10-Q filed August 7, 2015.
5
Consideration: |
|
Cash | $ 22,882,585 |
|
|
Fair Value of Assets Acquired and Liabilities Assumed: |
|
Cost and estimated earnings in excess of billings | 26,330,527 |
Accounts receivable | 35,538,329 |
Other assets | 1,564,526 |
Intangibles assets | 10,400,000 |
Billing in access of costs and estimated earnings | (11,715,545) |
Accounts payable and accrued expenses | (54,671,072) |
Other current liabilities | (1,140,228) |
Total Identifiable Net Assets | 6,306,537 |
Goodwill | 16,576,048 |
| $ 22,882,585 |
The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed combined financial information to give effect to pro forma events that are (i) directly attributable to the acquisition, (ii) with respect to the unaudited pro forma condensed combined statements of operations, are expected to have a continuing impact on the consolidated results, and (iii) factually supportable.
Note 3—Accounting Policies
Acquisition accounting rules require evaluation of certain assumptions and estimates, or determination of financial statement classifications which are completed during the measurement period as defined in current accounting standards. The accounting policies of PGI may vary materially from those of BEK BG. During preparation of the unaudited pro forma condensed combined financial statements, management has performed a preliminary analysis and did not identify any material differences. Accordingly, these unaudited pro forma condensed combined financial statements assume no material differences in accounting policies between the two companies. During the measurement period management will conduct a final review of BEK BG's accounting policies in order to determine if differences in accounting policies require adjustment or reclassification of BEK BG's results of operations or reclassification of assets or liabilities to conform to PGI’s accounting policies and classifications. As a result of this review, management may identify differences that, when conformed, could have a material impact on these unaudited pro forma condensed combined financial statements.
6
Note 4—Unaudited Pro Forma Condensed Combined Statements of Operations Adjustments
| ( a ) Costs and expenses: construction costs |
|
|
|
| The adjustment to costs and expenses – construction costs represents the amortization expense based on the fair value of customer contracts / backlog, the estimated fair value of which is $9.2 million and is amortized on a straight-line basis over the weighted average life of the contract / backlog of three years.
| |||
|
| Three months ended March 31, 2015 |
| Year ended December 31, 2014 |
| To record amortization of customer contract / backlog intangible asset | $766,667 |
| $3,066,667 |
|
|
|
|
|
| ( b ) General and administrative expenses |
|
|
|
| The adjustment to general and administrative expenses represents the net impact of 1) recording amortization expense based on the fair value of tradename acquired and 2) reversing non-recurring PGI transaction costs. The estimated fair value of tradename is $1.2 million and is amortized on a straight-line basis over the weighted average life of the tradename of two years. In accordance with ASC 805-10, transaction costs (i.e. legal, advisory, valuation and other professional fees) are expensed as incurred. These costs have been eliminated in the pro forma adjustments to the statement of operations as these expenses will not have a continuing impact. Additional transaction costs incurred by PGI subsequent to March 31, 2015 totaling $1.2 million are reflected in the Company’s June 30, 2015 financial statements in its Quarterly Report on Form 10-Q filed August 7, 2015. | |||
|
| Three months ended March 31, 2015 |
| Year ended December 31, 2014 |
| To record amortization of tradename intangible asset | $150,000 |
| $600,000 |
| Reversal of PGI non-recurring transaction costs incurred during the three months ended March 31, 2015 | (121,469) |
| - |
| Net adjustment to general and administrative expenses | $28,531 |
| $600,000 |
|
|
|
|
|
7
|
|
|
|
| |||
| ( c ) Income tax expense |
|
|
| |||
| BEK BG income taxes were allocated under the Separate Return Method by its former parent, KBR. PGI is reversing BEK BG’s December 31, 2014 income tax expense of $4,771,809. Subsequent to the acquisition, BEK BG is considered a disregarded entity for PGI income tax reporting. Accordingly, BEK BG’s taxable income / (loss) is consolidated with PGI’s taxable results. PGI has existing net operating loss (NOL) and capital loss carryforwards to offset any realized income tax obligations for the periods presented. Consequently, the income tax impact resulting from the acquisition has been removed. The related estimate of deferred income tax assets and liabilities, which reflects a full valuation allowance, is preliminary and subject to change based upon management's final determination of the fair value of assets acquired and liabilities assumed by jurisdiction. | ||||||
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| ( d ) Earnings per share and preferred stock dividends |
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| PGI paid cash to acquire BEK BG using the $28.0 million of proceeds from the sale of 2,800,000 shares of convertible Series C Preferred Stock, which are convertible into 1,428,572 shares of the Company’s common stock at the Company’s option. Consistent with the terms of the related Certificates of Designation, the Series C preferred stockholders are entitled to receive cumulative dividends at the rate $.80 per share per annum. During the first year subsequent to the BEK BG date of acquisition, which is assumed to be January 1, 2014 for purposes of pro forma presentation, all dividends accrued will be paid to the holders of Series C Preferred Stock in the form of the Company’s common shares. Consequently, the weighted average preferred dividends payable in PGI common shares are assumed to be 500,000 and 250,000 for the three months ended March 31, 2015 and the year ended December 31, 2014, respectively, used to compute pro forma basic and diluted earnings per share. Potential issuances of common stock related to the conversion of the Series C Preferred Stock and other outstanding equity instruments were determined to be antidilutive and thus excluded from the computation of diluted earnings per share. |
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Note 5—Related Party and Non-Recurring Transactions
BEK BG’s former parent, KBR, provided certain shared support services to BEK BG consisting primarily of information systems, accounting and real estate services. Charges for such shared services totaled $0.3 million and $1.5 million for the three months ended March 31, 2015 and the twelve months ended December 31, 2014, respectively, and are included in general and administrative expenses in the historical BEK BG statements of operations and the accompanying pro forma statements of operations.
Additionally, the historical financial statements of BEK BG include certain non-recurring transactions. These transactions, which are recorded in general and administrative expenses in the historical financial statements, totaled approximately $1.0 million and $4.8 million for the three months ended March 31, 2015 and the twelve months ended December 31, 2014, respectively, and include transactions such as the termination of two locations and related leases during 2014 which resulted in $0.2 million and $1.5 million of costs for the periods ended March 31, 2015 and December 31, 2014, respectively. These transactions continue to be reflected in the unaudited pro forma combined statements of operations for the periods presented.
The related party and non-recurring transactions noted above aggregate to $1.3 million and $6.3 million for the three months ended March 31, 2015 and twelve months ended December 31, 2014, respectively. This historical operating income would have been $0.8 million for the three months ended March 31, 2015 and $6.0 million for the twelve months ended December 31, 2014 excluding these costs. The company excluded these costs in determining the purchase price of BEK BG.
The pro forma financial statements do not give effect to the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any other synergies that may result from the acquisition.
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