Attached files
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EX-21.1 - EXHIBIT 21.1 - Pernix Group, Inc. | prxg_ex21.htm |
EX-32.1 - EXHIBIT 32.1 - Pernix Group, Inc. | prxg_ex321.htm |
EX-32.2 - EXHIBIT 32.2 - Pernix Group, Inc. | prxg_ex322.htm |
EX-31.2 - EXHIBIT 31.2 - Pernix Group, Inc. | prxg_ex312.htm |
EX-31.1 - EXHIBIT 31.1 - Pernix Group, Inc. | prxg_ex311.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
COMMISSION FILE NUMBER
333-92445
PERNIX
GROUP, INC.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
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36-4025775
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|||
(State
or other jurisdiction of
Incorporation
or organization)
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(I.R.S.
Employer Identification No.)
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860
Parkview Blvd
Lombard,
Illinois 60148
(Address
of Principal Executive Offices and Zip Code)
REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 620-4787
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON
STOCK, PAR VALUE $.01 PER SHARE
(Title of
each class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Exchange Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes o No x
Indicate
by check mark whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to the Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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|||
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal
quarter. $438,600.
Number of
shares of Common Stock outstanding as of the close of business on March 31,
2010: 140,881,235 shares.
Documents Incorporated by Reference
None
Page
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PART I
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3
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Item 1.
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Description of Business
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9
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Item 2.
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Properties
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9
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Item 3.
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Legal Proceedings
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9
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PART II
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10
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Item 5.
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Market for the Registrant’s Common Equity, Related
Stockholder Matters, and Small Business Issuer Purchase of Equity
Securities
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10
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Item 6.
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Selected Financial Data
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12
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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12
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Item 8.
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Financial Statements and Supplementary Data
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16
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Item
8B.
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Subsequent
Purchase of an Additional 23.6% of TransRadio Shares
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43
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Item 9.
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Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
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43
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Item 9B.
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Other Information
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43
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PART III
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45
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Item 10.
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Directors,
Executive Officers, and Corporate Governance
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45
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Item 11.
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Executive Compensation
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46
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Item 12.
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Security Ownership of Certain Beneficial Owners
and Management
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47
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Item 13.
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Certain Relationships and Related Transactions,
and Director Independence
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48
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Item 14.
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Principal Accountant Fees and
Services
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48
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PART IV
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Item 15.
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Exhibits and
Financial Statement Schedules
Signatures
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49
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Disclosure
Regarding Forward-Looking Statements
You are
cautioned that the Form 10-K contains “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995. When the
words “believes,” “plans,” “anticipates,” “will likely result,” “will continue,”
“projects,” “expects,” and similar expressions are used in the Form 10-K,
they are intended to identify “forward-looking statements,” and such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Furthermore, the Company strategizes
and objectively plans based upon certain current expectations and intentions
which are subject to change at any time at the discretion of management and the
Board. These forward-looking statements speak only as of the date this report is
filed. The Company does not intend to update the forward-looking statements
contained in this report, so as to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events, except as may
occur as part of its ongoing periodic reports filed with the SEC.
The terms
“Pernix Group,” “Company,” “our,” and “us,” as used in this annual report, refer
to Pernix Group, Inc. (formerly known as Telesource International,
Inc). The term “SHBC” refers to Sayed Hamid
Behbehani & Sons Co., W.L.L.
GENERAL
Pernix
Group is an international company engaged in three business segments: General
Construction, Power Generation Services and Design, Installation and Service of
Transmitter Systems including high power radio transmitters and
receivers.
The
Company is a leading construction and power infrastructure company, offering
diversified general contracting, design/build and construction management
services to public agencies and private clients. We have provided power and
construction services since 1995 and have established a strong reputation within
our markets by executing complex projects on time and within budget while
adhering to strict quality control measures.
We offer
general contracting, pre-construction planning and comprehensive project
management services, including the planning and scheduling of the manpower,
equipment, materials and subcontractors required for a project. In our
international markets, we also offer select self-performed construction services
including construction fit-out, electrical and mechanical services, plumbing and
heating, ventilation and air conditioning (“HVAC”). As a general contractor,
Pernix Group pursues U.S. government contracts worldwide.
Pernix Group is also a global provider
of power plant engineering, design, procurement, construction, operations and
maintenance services. Together with our affiliates and specialty service
providers, we employ industry-leading processes, technologies and business
practices. Our team includes a trained staff of mechanics, engineers and
technicians capable of managing multiple power plants. We have the capabilities
to address a variety of power generating requirements from initial conceptual
design to construction and through operating and maintaining power facilities.
Our Operation and Maintenance (“O&M”) services are designed to improve the
operating performance of a particular facility and to reduce overall power
generation costs to our customers. The Company also invests in energy projects
as an independent power producer (“IPP”) if the projects are for credit worthy
customers and are bankable without recourse to Pernix Group.
The
Company implements state of the art project management tools and systems. We
have extensive references from projects executed during the past 10 years and
are leveraging these credentials and experiences for future growth. Our past
experience includes an airport runway expansion; to an adult prison; government
buildings; a shortwave radio relay station; a US embassy building; diesel power
plants and operations and maintenance of power facilities.
Pernix
Group utilizes longstanding relationships with world-class design firms to
ensure that our projects and customers have the benefit of the best design
services available in the United States. The Company has experience
as an IPP and with Build Own Operate Transfer (“BOOT”) projects. Our energy
projects to date have been in the North and South Pacific and we seek and review
opportunities throughout the world including North America.
3
Pernix
Group acquired a 54.4% controlling interest in TransRadio SenderSysteme, Berlin,
AG (“TransRadio”) on December 28, 2009. Through this new German subsidiary we
engage in the design, distribution and installation of transmitter systems and
provide related services at customer sites world-wide.
The
Company conducts its operations through four subsidiaries from its headquarters
in Lombard, Illinois, U.S.A. In addition to the aforementioned
and recently acquired German subsidiary, TransRadio, the company’s joint venture
with SHBC (“Pernix/SHBC JV” or the “JV”) bids construction projects. The
Company’s Mariana subsidiary, Telesource CNMI, Inc. (“TCNMI”), handles the
management of the Company’s energy conversion facilities in the Commonwealth of
the Northern Mariana Islands (“CNMI”). The Company’s other wholly-owned
subsidiary, Telesource (Fiji), Ltd. (“TFL”), handles the Company’s power
generation activities in Fiji.
General
Construction Segment
In 2006,
the Company entered into a joint venture with SHBC, called Pernix-SHBC JV,
formerly Telesource International, Inc/Sayed Behbehani & Sons Company, Joint
Venture, L.P. This JV operates out of the Company’s Lombard, Illinois office and
is a limited partnership with an equity split of 51% for Pernix Group and 49%
for SHBC. Pernix Group, Inc. is the general partner of the Pernix/SHBC
JV. Pernix/SHBC JV was formed for the purpose of bidding U.S.
government construction and infrastructure development
projects. In January 2007 the JV received a final award and
notice to proceed with a $42.5 million contract to design and build a new
embassy compound for the United States Department of State in Suva, Fiji. To
execute the local works the JV formed a wholly owned subsidiary in Fiji called
Telesource SHBC (Fiji), Ltd. (“TSF”).
Pernix
Group’s strategy for the construction market is to independently seek
out and bid on projects under the Pernix/SHBC and /or other joint
ventures.. SHBC’s experienced personnel and success in the
construction industry benefit the Company in the bidding process. The Company
will employ its new systems for project management and controls that are
designed to increase the likelihood of success and profitability on our
projects. Pernix Group has augmented its management team by hiring prominent
construction industry professionals who have a proven track record of strong
operational and financial management on construction projects. Our future growth
will be built on four pillars of success: transparency, customer
satisfaction, state of the art technology and a fair profit.
As stated
above, the Pernix/SHBC JV has been awarded the contract to build a United States
Embassy in Suva, Fiji. The Company will leverage its extensive experience in
Fiji, primarily from building and operating power plants in the country,
combined with the successful execution and completion of the United States
Embassy project, to bid on and obtain additional embassy and / or U.S.
government projects. Through its Fiji experience the Company has developed a
strong understanding of the economic, business and cultural challenges in
operating and constructing in international environments. The
Department of State intends to build approximately 60 new embassies in the next
7 years and Pernix/SHBC JV will continue to bid embassy work.
Pernix
Group has worked extensively with the United States Information Agency
(previously known as Voice of America). Along with our recent
experience on the U.S. Embassy project in Suva with the State Department’s
Overseas Buildings Office (“OBO”). The Company is now poised to leverage our
ability to work with, understand and respond to complex U.S. government
contractual and regulatory requirements. These experiences have tremendously
improved our identification of potential projects and the technical proposal
responses. The ability to competently and competitively respond to
government-issued requests for proposals and to execute projects when awarded to
the satisfaction of government contracting officers is a skill set that Pernix
Group has now demonstrated on numerous projects.
The
Company is employing custom management tools and technology to ensure that all
risks inherent with the construction of complex buildings and structures is
controlled and mitigated. It is the Company’s intention to continue to employ
state-of-the art management practices and to employ the best project managers
and superintendents resulting in producing the most value possible on our
customers’ projects.
Pernix
Group may pursue opportunities at the municipal and state levels. We may
consider international projects but we will be extremely selective and only do
so when the customer is very creditworthy and meets certain Company-established
criteria. The Company may also bid on U.S. based non-government projects if the
customers are creditworthy and the projects meet the Company’s financial
pre-requisites and conditions.
Although
our focus historically has been on the international markets, the Company
intends to pursue U.S. government projects located in the continental United
States wherever possible. In furtherance of this effort the Company is
developing a strategy to secure and expand its bonding capacity and to identify
well situated business partners.
Power
Generation Services Segment
4
The
Company seeks to conduct its construction and power business independently and
through strategic joint ventures and other alliances. Pernix Group is committed
to pursuing clean and renewable energy projects in addition to its historical
energy business that has been focused on building and operating fossil fuel
power generation plants. All marketing and business development activities in
the North Pacific and the Oceania regions are directed through TCNMI’s Saipan
office.
The
Company is uniquely situated to bring state of the art construction and design
capabilities to its power generation/utility customers. As a potential stake
holder in BOOT or IPP power contracts, Pernix Group would be involved not only
on the operations and financial side of projects, but also in constructing the
power plants thereby giving us a vested interest to ensure that the power
facilities are built under the most stringent and highest international
standards. We believe that this approach will be very appealing to
our customers and will give Pernix Group a competitive advantage.
Pernix
Group also has longstanding financial relationships with many international
banks and equity investors. We feel confident in our ability to raise the
required equity and project financing necessary to pursue financially sound and
bankable energy projects that meet our investment criteria.
Operation of Existing Power
Generation Plants - Pernix Group has designed, built and
currently operates and maintains, on a 20 year contract, a 20 MW diesel fired
power plant on the Island of Tinian in the CNMI. We also built power plants in
Fiji and currently operate and maintain, on a 20 year contract basis, two
separate plants with a total output of 78 MW.
The
Company maintains a wholly-owned subsidiary in the CNMI. This Mariana
subsidiary, Telesource CNMI, Inc. (TCNMI) is located on the Island of
Saipan with operations on the Island of Tinian, both islands being part of the
CNMI which is a U.S. Commonwealth. Since its incorporation in 1997
TCNMI has executed over $80 million worth of construction work in the
CNMI. TCNMI, financed, designed and built a 20 MWh power plant on the
Island of Tinian on a 20 year BOOT basis. Our agreement with the Commonwealth
Utility Corporation (“CUC”) stipulates that we sell power into the grid based on
contractually determined rates and without risk of fuel cost fluctuation. The
contract for this project will expire in 2020; however, a 2001 change order
provides the customer with an early termination option beginning on
March 31, 2010 and available annually thereafter; however, the customer is
required to give a six-month notice and to pay an early termination fee of
$6,000,000 if they choose to exercise the early termination option. No notice of
early termination has been received by TCNMI or the Company. The change order
also prohibits the customer from purchasing power from any source other than
Pernix Group for the first 30 MW. The expanded agreement does not require
additional performance by Pernix Group with respect to building additional power
generation capacity. The construction loan for the project was repaid in full
during 2008 and the Company’s recorded remaining exposure to CUC is
approximately $290,000 consisting of accounts receivable (net of allowance) and
it is secured by the plant title that is held by the Company / TCNMI. The plant
title will be transferred from TCNMI to CUC upon CUC’s satisfaction of all
contractual obligations to TCNMI.
TFL has a
20-year contract with the Fiji Electricity Authority to operate and maintain two
separate diesel-fired power generation plants, with a total output of 78
MWh. The power produced at the power plants is connected directly
into the main power grid of Fiji. In addition, our contract is to
sell power on a wholesale level at a contractually determined rate without
assuming the risk of fuel price fluctuation. The Company has been
operating in Fiji for over eight years and is attempting to develop and expand
its services in the country and the South Pacific region.
Pernix
Group depends on two customers, CUC and FEA, for power-generation
revenues. The loss of either single customer would have a material
adverse impact on the Company’s financial performance. Together, CUC
and FEA represent 35.9% of Pernix Group’s total revenues of $14.8
million. Revenues from CUC totaled $1,744,644 or 32.8% of combined
power generation revenues whereas FEA totaled $3,577,547 or 67.2% of combined
power generation revenues.
With respect to future power segment
opportunities, based on previous experience, extensive research and basic
knowledge of the energy markets, management believes there will be a growing
demand for power around the world while competition, deregulation and current
economic conditions could limit the market potential and
opportunities. However, future demand for these services is expected
to grow due to the need to supplement or replace aging equipment coupled with
the need for expansion and applications that operate at a lower cost. In the
U.S., two-thirds of the country’s installed plants are 25 or more years old and
need to be replaced and re-powered, principally with new combustion turbines.
The world’s use of electricity is projected to increase by two-thirds over the
forecast horizon, from 13 trillion kilowatt hours in 1999 to 22 trillion
kilowatt-hours in 2020. The strongest growth rates in electricity consumption
are projected for the developing world. Our focus will be on small power plants
with generating capacity of less than 75 MW given the Company’s experience in
managing the related regulatory and environmental demands of plants of this
size.
5
Transmitter
System Design, Installation and Service Segment
The name
TransRadio dates back to 1918 when it was
founded as a subsidiary of TELEFUNKEN. A year later in 1919, TransRadio
made history by introducing duplex transmission. Paying tribute to the famous
name TransRadio, the new name symbolized the transition from the analogue into
the digital world of radio. Today TransRadio develops, produces and distributes
transmitting and receiving equipment for broadcast and news transmission, and
provides services for transmitter systems. TransRadio provides high power radio
transmitters to a host of customers through contracts for projects located
primarily in Europe, Africa and Asia and delivers customer-tailored solutions.
The core products include VHF/FM and AM transmitters and digital radio mondiale
(“DRM”) transmitter systems. The professional service of TRANSRADIO ranges from
the delivery of the transmitters, antennas, power supplies and air-conditioning
systems to the management of turnkey projects, including all facilities to
operate a broadcasting station. Pernix Group results only include
operations from TransRadio for the last several days of 2009 as the acquisition
of TransRadio occurred on December 28, 2009. We anticipate it will account for a
significant portion of Pernix Group consolidated revenue and operations going
forward.
Sales
and Marketing Strategies
The
Company is primarily interested in government-funded and government-sponsored
construction, power and broadcasting projects. Due to the nature of
these projects they often are obtained through a public bid
process. In obtaining contracts:
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·
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Pernix
Group reviews market trends in the geographic locations it presently
operates, or where it wishes to expand. Pernix Group’s research
also includes analyzing numerous government documents and reviewing
previous and current international tenders and requests for
proposals.
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·
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Pernix
Group utilizes its relationships with industry specialists and equipment
manufacturers, including consultants who have experience and have been in
their respective industries for a long period of
time.
|
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·
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Pernix
Group is actively involved in public relations with the governments and
agencies that might contract for Pernix Group’s services. Much of this
effort is informational and intelligence gathering, learning the specific
needs of each governmental agency while at the same time explaining what
services Pernix Group has to offer.
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·
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Pernix
Group has created and provides to potential clients a survey to help
governmental agencies evaluate whether Pernix Group’s resources and
services might be more efficient and cost-effective than their current
system.
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Engineering
and Product Development
Our
engineering and product development programs are focused on product
improvements, innovations, and cost reductions. As a construction contractor, we
have been focused on further development of our design and construction methods
for our existing types of projects (government buildings, fossil fuel based
power plants and broadcasting projects) as well as developing our ability to
provide renewable energy projects and services.
Our
efforts with respect to the engineering and product development for the
transmitter system business is primarily focused on the launch of digital AM
transmitter and development activities are aimed at turning digital radio
mondiale into an official transmitter standard and at achieving
market acceptance for the standard while providing transmitters, programs and
receivers. DRM is the universal, standardized, digital radio system for
short-wave, medium-wave and long-wave - digital radio for the radio frequencies
below 30MHz. In the VHF sector, the Company recently completed its new high
performance transmitter. The business also strives to design its products in a
manner that increase the efficiency and the cost of operating the transmitters
for its customers. Our engineering and product development expenditures were
$1.7 million in 2009 compared to $1.4 million in 2008.
Competition
Construction
and Power Generation Services - The population and composition of the
competition has created a fragmented market. Aggregators and brokers of electric
power and natural gas seek profits from that portion of the commodity price
structure that can be brokered. Utilities with an interest in maintaining their
customer base will often discount to large customers such as oil refiners.
Equipment suppliers bring innovative lease financing that supports sales of
their equipment. Creating a complete development package that addresses this
fragmentation of revenue and profit is challenging.
Competition
in this industry is primarily based on price, with competitors discovering lower
cost alternatives for providing electricity. The electric industry is also
characterized by rapid changes in regulations, which could continue to increase
competition. Pernix Group does not believe the Tinian power plant would be
significantly impacted by competition in the wholesale energy market since its
revenues are subject to contracted rates which are substantially fixed for
several years.
6
Competition
for attractive development opportunities is expected to be intense as there are
a number of competitors in the industry. Many of the companies competing in this
market have substantially greater resources. Pernix Group believes its project
development experience and its experience in creating strategic alignments with
other development firms with greater financial and technical resources could
enable Pernix Group to continue to compete effectively in the development market
if and when opportunities arise. Presently, Pernix Group believes there are a
number of opportunities for project development similar to those previously
developed by Pernix Group.
Transmitter
system design, installation and service – TransRadio generally provides
transmitter systems ranging from 50KW to 400KW and provides replacement parts
for the transmitter systems with historical revenues ranging up to approximately
$20 million. TransRadio’s competition primarily consists of a limited number of
companies generally providing transmitters up to 200KW with revenues ranging up
to $100 million in the transmitter business. The barriers to entry are
significant due to technological factors and the required specialization of the
sales force. TransRadio utilizes its knowledge of it customers, high quality
control measures and its reputation coupled with product innovation and its
workforce expertise to compete effectively.
The
industry is currently facing increased price awareness within individual sales
areas. The industry is somewhat protected from the recent bad global economic
conditions as many of its customers are government agencies and the project lead
times can be several years.
From time
to time, Pernix Group may consider merger, acquisition and joint venturing
proposals when they appear to present an opportunity to enhance stockholder
value. In addition to the December 28, 2009 acquisition of 54.4%
of the common voting shares of TransRadio, Pernix
Group completed the acquisition of an additional 23.6% or 354,350
common voting shares of TransRadio on March 25, 2010 for 708,700 Euro or
approximately $1 million. Other than these recent acquisitions,
Pernix Group is not currently involved in any such discussions or negotiations
at this time and there can be no assurance that any additional opportunities
will develop.
Customer
Dependence
Since
March 1999, Pernix Group began deriving a portion of its revenues from the
sale of electric power. Under Pernix Group’s agreement with a governmental
agency, the electrical power generated at Pernix Group’s power generation
facility is owned by the governmental agency. Pernix Group is paid a fee to
produce the electric power. The governmental agency in turn sells the electric
power to the various users throughout the Island of Tinian.
If the
end-user customer defaults or increases in power use do not materialize as
anticipated, Pernix Group’s revenue base may not grow to support other
operations.
Pernix
Group operates two additional power plants for a period of 20 years within Fiji
for one customer, the Fiji Electric Authority. Pernix Group is to operate the
two power plants in Fiji by converting fuel provided by the customer into
electricity for which Pernix Group receives a fee. The Fiji Electric Authority
in turn sells the power produced to various users in Fiji. If the end-user
customer defaults or increases in power use do not materialize as anticipated,
Pernix Group’s revenue base may not grow to support other
operations.
TransRadio
was acquired by the Company on December 28, 2009 and as such the revenue for
2009 does not include significant TransRadio revenue. TransRadio from time to
time engages in contracts that can be individually significant (in excess of 10
percent) to the Company’s results. These contracts are generally with foreign
government entities. TransRadio customers accounting for 10 percent or more of
TransRadio 2009 revenues (prior to the acquisition) include the Algerian
Ministry of Communication and Egyptian Ministry of Defense and Video Medias S.A.
– VIMESA.
Customer
Contract Acceptance
TransRadio
contracts often require customer acceptance based on customer specified
criteria. Revenue on these contracts is not recognized until customer acceptance
occurs and documentation of such acceptance is received. At December 31, 2009,
the Company was working on completing a large contract in Qatar with the goal of
receiving customer acceptance in the first quarter of 2010. The authorized
certificate of site acceptance was received from the customer on March 15,
2010.
Energy
Regulation
7
Pernix
Group’s projects are subject to regulation under federal and local energy laws
and regulations. Pernix Group is subject to the requirements established by its
permitting authorities, i.e. the Department of Environmental Quality
(“DEQ”), the Environmental Protection Agency (“EPA”) and the Fiji
Electricity Authority.
Presently,
neither the Customer Choice Act nor other similar proposed legislation dealing
with U.S. energy policies directly impacts Pernix Group because the legislation
and restructuring plan pertain to the retail market or new contracts in the
wholesale market. However, as discussed above, Pernix Group could be impacted in
the future by, among other things, increases in competition as a result of
deregulation. Pernix Group is actively monitoring these developments in energy
proceedings in order to evaluate the impact on existing projects and also to
evaluate new business opportunities created by the restructuring of the electric
industry.
Environmental
Regulation
Pernix
Group’s projects often are subject to regulation under federal, foreign and
local environmental laws and regulations and/or to applicable laws pertaining to
the protection of the environment, primarily in the areas of water and air
pollution. These laws and regulations in many cases require a lengthy and
complex process of obtaining and maintaining licenses, permits and approvals
from federal and local agencies. As regulations are enacted or adopted in any of
these jurisdictions, Pernix Group cannot predict the effect of compliance
therewith on its business. Pernix Group’s failure to comply with all applicable
requirements could result in delays in proceeding with any projects under
development or require modifications to operating facilities. During periods of
non-compliance, Pernix Group’s operating facilities also may be forced to shut
down until the instances of non-compliance are corrected and/or be subject to
fines or penalties. Pernix Group is responsible for ensuring compliance of its
facilities with applicable requirements and, accordingly, attempts to minimize
these risks by dealing with reputable contractors and using appropriate
technology to measure compliance with the applicable standards.
TransRadio
is compliant with all of the required various German and international
environmental regulations which primarily pertain to the use of water and
energy.
Insurance and
Bonding
Pernix
Group maintains general and excess liability, construction equipment, and
workers’ compensation insurance all in amounts consistent with industry
practices and contractual requirements. Pernix Group believes its insurance
programs are adequate subject to deductibles some of which are approximately
$650,000.
Pernix/SHBC
JV was required to obtain two stand-by letters of credit representing
performance and payment bonds on its most recent construction project, the
United States Embassy in Fiji. The Company was able to obtain these stand-by
letters of credit with Al Ahli Bank of Kuwait and confirmed by the Bank of New
York Mellon. The total of the stand-by letters of credit was $21.5
million. These stand-by letters of credit expired on October 15,
2009 and were not renewed as they were no longer required by the
client.
TransRadio
is required to maintain restricted cash balances to secure performance
obligations on certain contracts for which it receives advance payments. The
total of the restricted cash related to these contracts as of December 31, 2009
was $962,690.
Employees
As of
December 31, 2009, Pernix Group employed 177 people, consisting of 14
managers, 50 engineers and technicians, 31 support staff, 11 sales persons, and
71 hourly employees. All of Pernix Group’s employees are non-union workers,
although Pernix Group may employ union subcontractors from time to
time.
Pernix
Group’s non-engineering level employees are hourly workers, while its
engineering and supervisory staffs are full-time employees on monthly
salaries.
Sources and Availability of
Raw Materials
Pernix
Group relies on third parties for important raw materials and technical
expertise. Pernix Group’s ability to enter into new engagements or to conduct
the business in a profitable manner will be harmed if its access to these
important resources is limited or becomes too costly.
Pernix
Group relies on third-party suppliers for raw materials like wood, copper,
electronic components, steel and concrete; for fabrication of technical
equipment subsystems including diesel generation and technical expertise. Pernix
Group’s ability to
8
obtain
cost-effective raw materials, fabrication services and technical assistance is
subject to a number of external factors which are outside of its control,
including:
|
·
|
Third
parties may increase the price of the raw materials, fabrication services
or technical assistance they
provide.
|
|
·
|
Third-party
raw material suppliers, fabricators or technical expertise providers may
decide not to provide Pernix Group with materials or
services.
|
|
·
|
Pernix
Group has no long-term contracts with third-party suppliers of raw
materials, fabrication services or technical expertise
providers.
|
|
·
|
Pernix
Group’s third-party contracts are usually short term in duration and are
cancelable by such third party.
|
TransRadio
has established contractual agreements with various suppliers in order to meet
demands respecting ongoing production activities, provide customers with
replacement parts for up to ten years after product delivery and in order to
mitigate reliance on one or just a few suppliers.
Pernix
Group maintains leased office space. In the corporate offices in Lombard,
Illinois, Pernix Group has leased space through April 30, 2011. Pernix
Group’s Mariana subsidiary’s head office in the Commonwealth of the Northern
Mariana Islands was leased for a term that expired in December 2004 and is
currently on a month-to-month renewal. In Fiji, Pernix Group’s power generation
subsidiary is leasing office space for a three-year term ending February 28,
2012. We lease office and factory space in Berlin, Germany under
non-cancelable operating leases that expire in 2012. Management believes its
existing arrangements for its office facilities and the condition of such
facilities are adequate.
In the
ordinary course of its business Pernix Group becomes involved from time to time
in legal proceedings and claims asserted by and against Pernix Group. It is the
opinion of management that the ultimate disposition of these routine pending
matters will not have a materially adverse impact on the Company.
In 1999,
Telesource CNMI, Inc. was awarded a contract to build 45 housing units for the
Northern Mariana Housing Agency, a government unit of the CNMI. The houses were
built and subsequently occupied. The Northern Marianas Housing Corporation has
filed a lawsuit against Telesource CNMI, Inc. and two other parties for
approximately $3.0 million in damages related to this project. These claims
involve allegations of various construction, design and other
defects. Subsequently, homeowners in the project filed their own
and/or joined into this action. The consolidated matter is Case No. 06-0123,
pending in the Superior Court for the Commonwealth of the Northern Mariana
Islands. The Company and other defendants also have filed counter- and
cross-claims. The Company estimates that, if the claims against it
are successful, the Company may have an estimated liability in the range of
$500,000 to $1,200,000. The Company recorded a $300,000 estimated loss during
2004, $200,000 during 2006, and an additional $609,000 during 2007 with respect
to these claims. In 2007, the Company paid $139,000 to claimants
resulting in a remaining accrual of $970,000 at December 31,
2007. In 2008 the Company paid an additional $92,817 to claimants
reducing the accrual to $877,183 at December 31, 2008. No
incremental accruals or payments were made during of 2009. The Company has denied
any liability and will aggressively defend itself to mitigate and/or dismiss the
claims against it.
9
ITEM
5.
|
MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITY
SECURITIES
|
MARKET
INFORMATION. - Pernix Group’s common stock currently is traded in the
Over-the-Counter Bulletin Board (OTCBB) under the symbol “PRXG”. -
The
following table sets forth high and low sales prices for the common stock for
the periods indicated as reported on OTCBB:
HIGH
|
LOW
|
|||||||
2009
|
||||||||
First
Quarter
|
0.25 | 0.10 | ||||||
Second
Quarter
|
0.10 | 0.10 | ||||||
Third
Quarter
|
1.25 | 0.05 | ||||||
Fourth
Quarter
|
1.25 | 1.01 | ||||||
2008
|
||||||||
First
Quarter
|
0.51 | 0.51 | ||||||
Second
Quarter
|
0.51 | 0.51 | ||||||
Third
Quarter
|
0.51 | 0.51 | ||||||
Fourth
Quarter
|
0.51 | 0.25 |
On the
most recent trade date of February 25, 2010, the stock traded at $0.06 per
share for 806 shares. The Company did not declare any dividends in 2009 or 2008
and are not expected to make dividend payments in the foreseeable
future.
HOLDERS.
As of December 31, 2009, there were 181 shareholders of
record.
Equity Compensation
Plans
|
2000
Non-Employee Director’s Stock Option
Plan
|
In
January 2001, the Company’s board of directors adopted the 2000
Non-Employee Director’s Stock Option Plan that provides for the issuance of
nonqualified stock options to outside directors. Under the terms of this plan,
under which 285,000 shares of common stock were reserved for issuance, options
to purchase common stock are granted at not less than fair market value, become
exercisable over a 3 year period from the date of grant (vesting occurs
annually on anniversaries of the grant date at 33.3% of the grant), and expire
10 years from the date of grant.
December 31, 2009
|
December 31, 2008
|
|||||||||
Number
of
shares
to be issued upon exercise of stock options
|
Weighted
average Exercise
price
|
Number
of
shares
to be issued upon exercise of stock options
|
Weighted
average Exercise
price
|
|||||||
Options
outstanding at January 1
|
180,000
|
$
|
1.25
|
180,000
|
$
|
1.25
|
||||
Granted
|
—
|
—
|
||||||||
Exercised
|
—
|
—
|
||||||||
Cancelled
|
—
|
—
|
||||||||
Options
outstanding at December 31
|
180,000
|
1.25
|
180,000
|
1.25
|
||||||
Options
exercisable at December 31
|
180,000
|
1.25
|
180,000
|
1.25
|
||||||
Shares
available for future grant at December 31
|
105,000
|
105,000
|
2000 Incentive Stock Option
Plan
In
January 2001, the Company’s board of directors adopted the 2000 Incentive
Stock Option Plan that provides for the issuance of qualified stock options to
employees. Under the terms of this plan, under which 888,000 shares of common
stock were reserved for issuance, options to purchase common stock are granted
at not less than fair market value, become exercisable over a
3 year
10
period
from the date of grant (vesting occurs annually on anniversaries of the grant
date at 33.3% of the grant), and expire 10 years from the date of grant. As of
December 31, 2009, no options had been awarded under this
plan.
UNREGISTERED SALES OF
SECURITIES.
We issued
unregistered securities to SHBC and Affiliates in the following
transactions during 2007, 2008, 2009 and up to March 31, 2010:
|
·
|
On
February 1, 2007 we issued 310,000 shares of common stock pursuant to
an exemption under Regulation S of the Securities Act for
$155,000.
|
|
·
|
On
February 19, 2007 we issued 730,000 shares of common stock pursuant
to an exemption under Regulation S of the Securities Act for
$365,000.
|
|
·
|
On
April 10, 2007 we issued 530,000 shares of common stock pursuant to
an exemption under Regulation S of the Securities Act for
$265,000.
|
|
·
|
On
May 4, 2007 we issued 350,000 shares of common stock pursuant to an
exemption under Regulation S of the Securities Act for
$175,000.
|
|
·
|
On
June 6, 2007 we issued 1,348,000 shares of common stock pursuant to
an exemption under Regulation S of the Securities Act for
$674,000.
|
|
·
|
On
July 5, 2007 we issued 280,000 shares of common stock pursuant to an
exemption under Regulation S of the Securities Act for
$140,000.
|
|
·
|
On
September 5, 2007 we issued 410,000 shares of common stock pursuant
to an exemption under Regulation S of the Securities Act for
$205,000.
|
|
·
|
On
September 26, 2007 we issued 15,000,000 shares of common stock
pursuant to an exemption under Regulation S of the Securities Act for
$7,500,000.
|
|
·
|
On
October 8, 2007 we issued 510,000 shares of common stock pursuant to
an exemption under Regulation S of the Securities Act for
$255,000.
|
|
·
|
On
November 12, 2007 we issued 800,000 shares of common stock pursuant
to an exemption under Regulation S of the Securities Act for
$400,000.
|
|
·
|
On
January 7, 2008 we issued 2,950,000 shares of common stock pursuant
to an exemption under Regulation S of the Securities Act for
$1,475,000.
|
|
·
|
On
February 7, 2008 we issued 600,000 shares of common stock pursuant to
an exemption under Regulation S of the Securities Act for
$300,000.
|
|
·
|
On
May 7, 2008 we issued 2,000,000 shares of common stock pursuant to an
exemption under Regulation S of the Securities Act for
$1,000,000.
|
|
·
|
On
July 7, 2008 we issued 950,000 shares of common stock pursuant to an
exemption under Regulation S of the Securities Act for
$475,000.
|
|
·
|
On
October 24, 2008 we issued 4,440,000 shares of common stock pursuant
to an exemption under Regulation S of the Securities Act for
$2,220,000.
|
|
·
|
On
December 22, 2008 we issued 364,906 shares of common stock pursuant
to an exemption under Regulation S of the Securities Act for
$182,453.
|
|
·
|
On
December 22, 2009 we issued 2,934,000 shares of common stock pursuant to
an exemption under Regulation S of the Securities Act for
$2,200,500.
|
11
|
On
March 12, 2010 we issued 1,306,668 shares of common stock for $980,001
under Regulation S of the Securities
Act.
|
The funds
received from the sales in 2009 and early 2010 were used to purchase 54.4% and
23.6% of the common voting shares of TransRadio, respectively.
Not
applicable.
The
following discussion of our financial condition and results of operation should
be read in conjunction with our financial statements and the related notes
included elsewhere in this annual report on Form 10-K.
HIGHLIGHTS
Revenues
for the year ended December 31, 2009 were $14.8 million compared to $29.1
million for the year ended December 31, 2008. Net income to
common stockholders was $4.6 million for 2009 compared to net losses of $4.8
million for 2008, an increase of $9.4 million or 195.8%. Basic and diluted
net income to common stockholders per share was $0.03 for 2009 compared to
losses per share of $0.04 per share for 2008.
Liquidity
and Capital Resources
As of
December 31, 2009, the Company’s total assets exceeded total liabilities by
$11.4 million. This was a $8.3 million improvement over
2008. As of December 31, 2009 the Company had outstanding debt
of $1.7 million. As of December 31, 2009 the Company had an accumulated
deficit of $66.0 million and total stockholders’ equity of $8.4
million.
The
Company incurred operating losses of $8K (K=$1,000) and $3.1 million for the
years ended December 31, 2009 and 2008, respectively. As noted
above, the Company incurred net income to common stockholders of $4.6 million
and net losses of $4.8 million for the years ended December 31, 2009 and
2008, respectively.
Cash used
by operating activities was $3.2 million and provided $1.6 million for the years
ended December 31, 2009 and 2008, respectively. Funds provided
through financing activities amounted to $2.2 million and $1.0 million for the
years ended December 31, 2009 and 2008, respectively. Cash used
by investing activities was $2.1 million in 2009 and $31K in 2008.
During
2009 management utilized existing cash balances and funds generated from
financing activities to acquire a controlling interest in TransRadio and to fund
new development. As reported in Item 5, herein, management raised
$2.2 million in 2009 and $5.7 million in 2008 through issuances of common
stock. The sales of common stock were made through private,
unregistered sales of the Company’s securities. The $2.2
million raised in 2009 was used for the purchase of 54.4% of the common voting
shares of TransRadio. In addition, on March 25, 2010, the Company
acquired an additional 23.6% or 354,350 common voting shares of
TransRadio for 708,700 Euro or approximately $1.0 million, that was also
financed through private, unregistered sales of the Company’s
securities.
TransRadio
maintains bank deposits that are pledged to financial institutions as security
for bank guarantees of performance obligations to TransRadio’s customers.
TransRadio is restricted from access to these balances until the related
performance obligations are complete. The Company classifies the restricted cash
that is accessible within one year as restricted cash – current and cash that is
not accessible until after one year as restricted cash – non-current in the
Consolidated Balance Sheet. As of December 31, 2009, total restricted cash
deposits amounted to $962,690 of which $310,117 was reported as restricted cash
– current and $652,573 was reported as restricted cash –
non-current.
During
the first half of 2010, the Company expects to repay $1,448,210 of maturing debt
that was assumed in connection with the acquisition of TransRadio. In addition,
in March 2010 the Company received customer acceptance on a significant
transmitter project and expects to receive payment for the project in the first
half of 2010. Management has evaluated its cash requirements for the next twelve
months and believes that cash and cash equivalents as reported at December 31,
2009 combined with cash from our operations and existing available funds in our
line of credit will be sufficient to satisfy our working capital requirements
for the next twelve months.
OPERATING
SEGMENTS
12
Pernix
Group’s business consists of the following three operating segments:
construction, power generation, transmitter design, installation and service.
Revenue of the power generation segment includes sales-type lease revenues. The
construction segment represents revenue from building a U.S. Embassy in Suva,
Fiji. The power generation activities occurred in Fiji and the Commonwealth of
Northern Mariana Islands, a U.S. commonwealth. The Company purchased TransRadio,
the transmitter design, installation and service segment on December 28, 2009
and as such, only the last four days of fiscal 2009 TransRadio operating results
are included in our consolidated amounts. From Lombard, Illinois, the
Company’s international division bids on construction projects, manages its
procurement, export, and shipping of U.S. fabricated products for use by the
Company’s subsidiaries or for resale to customers outside of the mainland, and
is responsible for certain warranty work associated with the Adult Correctional
Facility located in Saipan. The financial impact of these activities conducted
from Lombard is not material and is included in the power generation segment
results in Note 21 (Business Segment Information) to the consolidated financial
statements.
OVERVIEW
During
2009, the total assets increased from 2008 by $8.4 million due primarily to the
acquisition of TransRadio. The TransRadio acquisition increased
assets by approximately $17.0 million partially offset by decreases in
non-TransRadio assets such as cash ($3.6 million), accounts receivable ($2.5
million) and other assets ($0.9 million).
The
TransRadio assets consisted of accounts receivables of $2.5 million, work in
process of $4.0 million, inventories of $3.6 million, other assets in the amount
of $1.6 million and intangible assets of $2.5 million. TransRadio
other assets are primarily comprised of restricted cash balances, tangible
assets and securities. The Pernix/SHBC joint venture cash and accounts
receivable decreased by $3.7 and $2.2 million, respectively, as a result of the
completion of the U.S. Embassy Project.
The
Company’s total liabilities increased from 2008 amounts by $44K. The
TransRadio acquisition increased liabilities by $6.1 million, which is comprised
of $1.3 million in trade payables, $1.7 million in short term debt (consisting
of- four loans, one with Bent Marketing Ltd ($0.4 million), two loans with Fedor
Commercial Corp. ($1.0 million), and a credit line with the Berliner Bank in the
amount of $0.3 million). Additional liabilities recorded
as part of the TransRadio acquisition are $1.6 million in prepayments, other
general liabilities of $0.8 million and a deferred tax liability of $0.6
million. The Company’s non – TransRadio liabilities decreased by $6.0
million due to a $1.2 million decrease in trade payables and a $4.1 million
dollar decrease in Billings in excess of costs and estimated earnings and a
decrease of $0.7 million in other liabilities, all related to the substantial
completion of the U.S. Embassy project.
Total
revenues decreased in 2009 by $14.3 million. This was due to the
completion of the U.S. Embassy Project ($14.7 million) and a slight decrease in
TFL revenue ($0.3 million), partially offset by a $0.7 million increase in power
generation revenues at TCNMI. The cost of revenues decreased by $16.7
million from 2008 levels attributed to the U.S. Embassy Project ($16.8 million)
and TCNMI ($0.1 million) partially offset by an increase at TFL ($0.2
million). As indicated above, the acquisition of TransRadio occurred
on December 28, 2009. The Company recorded a gain on the acquisition
of TransRadio of $5.2 million (net of $0.6 million tax
expense). TransRadio results of operations from December 28
through 31, 2009 are reflected in the Company’s Consolidated Statement of
Operations for 2009.
Operating
expenses decreased from 2008 amounts by $0.7 million in 2009, primarily due to
TCNMI ($1.1 million), offset by the corporate headquarters ($0.4
million).
RESULTS
OF OPERATIONS
Comparison
of the twelve months ended December 31, 2009 and 2008
Construction Revenues —
Construction revenues decreased to $9.5 million in 2009 from $24.2 million in
2008 due to the Company’s U.S. Embassy Project in Fiji, which began in
January 2007 and is substantially completed. The $46.2 million
revenue from this project is recorded on the Percentage of Completion
method. Approximately ninety nine (99%) percent of the project’s
revenue has been recognized through December 2009 as compared to eighty one
(81%) percent through December 2008. During 2008 approximately
fifty four (54%) percent of the total project revenue was recognized and was a
result of a large amount of site, concrete, steel, metal,
waterproofing, HVAC, plumbing and electrical work completed on the main
buildings and perimeter walls of the new embassy compound. During
2009, approximately eighteen (18%) of the total project revenue was recognized
as a result of site, carpentry, thermal and moisture protection, doors and
windows, finishes, specialties, mechanical, electrical, commissioning, change
order and punch list work.
Service Fees — Power Generation
Plant. Service fees — power generation plant revenue increased 13.0 % to
$5.3 million in 2009 from $4.7 million in 2008. The increase was due
to the combination of increased revenues in CNMI operations offset by lower
revenues, although increased production, in Fiji.
13
Revenue
from the CNMI power plant increased by $670K due to a combination of
contractually higher rates that went into effect in March of 2009 as well
as an increase in transmission and distribution works ($75K). Offsetting this
increase were decreases in Fiji’s revenue in the amount of $234K. The decrease
in Fiji revenue was a result of the discontinued transmission and distribution
work during 2008 ($144K) and the devaluation of the Fijian currency against the
US dollar by 20%, which occurred in April of 2009. The additional
production was due to FEA’s request to increase diesel production to take
advantage of lower fuel prices and decreased hydro production to conserve water.
During 2009, Fijian operations produced 44.4 million Kwh more than in 2008.
During 2009, the Fijian dollar (‘FJD”) declined in value against the US dollar
by 18.5% when compared to exchange rates during 2008; this resulted in a
reduction of revenue of $810K.
Service Fees — related party
— Service fees decreased to $11,767 in 2009 from $36,571 in
2008. The decrease was due to a lower demand for Pernix Group’s
purchasing services in locating products to be used by SHBC, our primary
customer for this line of revenue.
Other Income — represents
rental income, which decreased to zero in 2009 from $510 in 2008 due to minimal
power generation equipment rentals. This business is very erratic and
is offered only to supplement our services to our major customers.
Finance Lease Revenues.
Finance lease revenues decreased 97.0% to $5.3K in 2009 from $176K in 2008. The
decrease is due to the sales type lease for the Tinian power plant being fully
amortized as of February 2009.
Other income/ (expense) — Net
other income increased to $4.9 million in 2009 from an expense of
$1.1 million in 2008 due primarily to the gain on the bargain purchase of
TransRadio ($5.2million). An increase in interest income ($199K) and
a decrease in foreign exchange loss ($.6 million) also contributed to income,
partially offset by a slight decrease in other income ($13K).
Expenses
Construction Costs (including
Construction Costs — Related Party). Total construction costs
decreased to $8.1 million in 2009 from $24.9 million in 2008. The
increase was due to on-going construction activities of the U.S. Embassy Project
in Fiji. The decrease was due to a reduction in construction activity
as the project enters the final stages of completion. As the Embassy project
nears completion, the Company experienced a decrease in construction
subcontractor ($10.5 million), material ($5.1 million), general requirements
($0.7 million) and labor and benefits ($0.5 million) costs, during 2009. The
project was 98.6% complete at December 31, 2009 and 80.6% complete as of
December 31, 2008, respectively.
Operation and Maintenance Costs —
Power Generation Plant — Operation and maintenance costs related to the
power generation plant increased 4.9% to $3.2 million in 2009 from $3.1 million
in 2008. The increase was attributed to higher engine maintenance
expenditures and labor expenditures at TFL of $0.4 million, partially offset by
lesser transmission and distribution costs of $0.2 million and a combination of
lesser engine maintenance and other costs of $0.1 million at TCNMI. Engine
maintenance is performed by the Company in strict compliance with the engine
manufacturer’s recommended intervals and specifications. Therefore,
maintenance costs will vary depending upon several factors including, but not
limited to the number of hours the machines are operating as well as the
manufacturer’s specifications.
Provision for Uncollectible Accounts
— Provision for uncollectible accounts decreased to $850in 2009 from the
amount of $51,697 in 2008. The decrease was wholly related to TCNMI
receivables.
Salaries and Employee
Benefits — Salaries and employee benefits decreased by $99K due to lesser
administrative employees at all locations in 2009 as compared to 2008 from
Pernix Group’s non TransRadio operations. As noted earlier TransRadio
was purchased on December 28, 2009 and consequently an insignificant amount of
salary and employee expense was recorded in the Pernix consolidated results for
2009.
Occupancy and Equipment —
Occupancy and equipment expenses decreased $95K to $132K in 2009 from $227K in
2008. The decrease was due to a reduction of occupancy expenses at
TCNMI. In 2009 TCNMI, which previously received staffing and office
space rental charges from Retsa, only received charges for
staffing.
General and Administrative
Expenses — General and administrative expenses decreased 24.1% to $1.7
million in 2009 from $2.2 million in 2008. The decrease stemmed from
the following: lower professional fees resulting from the Company’s reduced
demand for outside accounting ($32K); outside market research and bidding
($299K); lower travel and board meeting expenses ($49K) which are a result of
less travel by members of management; and overall general decreases in
depreciation, insurance, communication and office related expenses
($156K).
Income Tax Expense — Pernix
Group recognized an income tax provision of $0.3 million in 2009, down from
$614,942 in 2008. The year over year decrease in income tax expense was due to
the impact of lower current tax expense related to lower 2009 income in the
Company’s Fijian operations. Pernix Group had net operating loss
carry forwards for U.S. purposes of
14
approximately
$20.8 million and $22.6 million at December 31, 2009 and 2008,
respectively. The Company has approximately $47.1 million of net operating
loss carry forwards for the Commonwealth of Northern Mariana
Islands.
OFF
BALANCE SHEET ARRANGEMENTS
We enter into various arrangements not
recognized in our consolidated balance sheets that have or could have an effect
on our financial condition, results of operations, liquidity, capital
expenditures, or capital resources. The principal off-balance sheet arrangements
that we enter into are non-cancelable operating leases. Minimum rental
commitments under all noncancelable-operating leases with a remaining term of
more than one year are primarily related to property, vehicles, and construction
equipment, in effect at December 31, 2009 and total $1,035,398. The company
does not guarantee residual value of any leased assets. There were no off balance sheet
purchase commitments as of December 31, 2009.
RECENT ACCOUNTING
PRONOUNCEMENTS
See the discussion in note 2 to the consolidated
financial statements.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 be different from
those estimates.
Significant estimates used in preparing these financial statements
include those assumed in computing profit percentages under the
percentage-of-completion revenue recognition method and those used in
determining the fair value of assets, liabilities and noncontrolling interest in
connection with the acquisition of a controlling interest in TransRadio in
December 2009. See the discussion in note 21 to the consolidated financial
statements.
15
PERNIX
GROUP, INC.
AND
SUBSIDIARIES
Consolidated
Financial Statements
December 31,
2009 and 2008
Table
of Contents
Report
of Independent Registered Public Accounting Firm
|
15
|
Consolidated
Balance Sheets
|
16
|
Consolidated
Statements of Operations
|
17
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income
(Loss)
|
18
|
Consolidated
Statements of Cash Flows
|
19
|
Notes
to Consolidated Financial Statements
|
20
|
16
To the
Board of Directors and Stockholders
Pernix
Group, Inc.
Lombard,
Illinois
We have
audited the accompanying consolidated balance sheet of Pernix Group, Inc.
and subsidiaries (the Company) as of December 31, 2009, and the related
consolidated statement of operations, stockholders’ equity, comprehensive income
(loss), and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements
of Pernix Group, Inc. as of December 31, 2008 were audited by other auditors,
whose report dated March 25, 2009 expressed an unqualified opinion on those
statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Pernix Group, Inc. and
subsidiaries as of December 31, 2009, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Reznick
Group, P.C.
Skokie,
Illinois
March 31,
2010
17
To the
Board of Directors and Stockholders
Pernix
Group, Inc. (formerly known as Telesource International, Inc.)
Lombard,
Illinois
We have
audited the accompanying balance consolidated sheet of Pernix Group, Inc.
(formerly known as Telesource International, Inc. and subsidiaries) as of
December 31, 2008, and the related consolidated statements of operations,
stockholders’ deficit, comprehensive loss, and cash flows for the year ended
December 31, 2008. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial consolidated statements referred to above present fairly,
in all material respects, the financial position of Pernix Group, Inc. (formerly
known as Telesource International, Inc. and subsidiaries) as of
December 31, 2008, and the results of its operations and its cash flows for
the year ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America.
L J
Soldinger Associates, LLC
Deer
Park, Illinois
March 25,
2009
18
PERNIX
GROUP, INC.
AND
SUBSIDIARIES
December 31,
2009 and 2008
Assets
|
December
31, 2009
|
December
31, 2008
|
||||||
Current
assets:
|
||||||||
Cash and cash equivalents
|
$ | 2,994,989 | 6,313,886 | |||||
Marketable Securities
|
193,788 | — | ||||||
Accounts receivable less allowance
for doubtful accounts of $172,142 at
December 31, 2009 and $142,235 at December 31, 2008
|
3,242,666 | 3,299,625 | ||||||
Related Party Receivables
|
180,888 | — | ||||||
Current portion of net investment
in sales-type lease
|
— | 454,651 | ||||||
Work in process
|
4,036,546 | — | ||||||
Inventories
|
4,873,458 | 1,335,387 | ||||||
Restricted cash
|
310,117 | — | ||||||
Customer backlog
|
292,178 | — | ||||||
Prepaid expenses and other current
assets
|
466,131 | 601,443 | ||||||
Total current assets
|
16,590,761 | 12,004,992 | ||||||
Property,
plant, and equipment, net
|
639,728 | 320,263 | ||||||
Restricted
Cash greater than one year
|
652,573 | — | ||||||
Other
assets
|
399,901 | 88,689 | ||||||
Intangible
assets:
|
— | |||||||
Customer Relationships
|
1,563,080 | — | ||||||
Trademark
|
936,984 | |||||||
Total assets
|
$ | 20,783,027 | 12,413,944 | |||||
Liabilities
and Stockholders’ Equity
|
||||||||
Current
liabilities:
|
||||||||
Outstanding credit lines
|
276,343 | — | ||||||
Accounts payable
|
$ | 2,121,518 | 2,053,172 | |||||
Accounts payable – related
party
|
7,195 | 14,530 | ||||||
Accrued expenses
|
1,902,825 | 1,823,004 | ||||||
Interest payable – related
party
|
214,064 | 138,680 | ||||||
Other current liabilities
|
638,619 | 698,957 | ||||||
Short term debt
|
1,448,210 | — | ||||||
Prepayments received on
orders
|
1,616,612 | — | ||||||
Billings in excess of costs and
estimated earnings
|
529,995 | 4,629,941 | ||||||
Total current liabilities
|
8,755,381 | 9,358,284 | ||||||
Non
current liabilities
|
72,197 | — | ||||||
Deferred
tax liability
|
575,130 | — | ||||||
Total liabilities
|
9,402,708 | 9,358,284 | ||||||
Commitments
and Contingencies
|
||||||||
Equity:
|
||||||||
Pernix Group, Inc. and Subsidiaries
stockholders' Equity
|
||||||||
|
||||||||
Convertible Preferred Stock, $0.01 par value
authorized 50,000,000 shares, none issued and outstanding at December
31, 2009 and December 31, 2008.
|
— | — | ||||||
Common stock, $0.01 par value. Authorized
200,000,000 shares, 139,574,567 issued at December 31,
2009 and 136,640,567 at December 31, 2008.
|
1,395,746 | 1,366,406 | ||||||
Additional paid-in capital
|
73,692,529 | 71,521,369 | ||||||
Accumulated deficit
|
(66,031,010 | ) | (70,663,993 | ) | ||||
Accumulated comprehensive income
(loss)
|
(604,440 | ) | (259,992 | ) | ||||
Total Pernix Group, Inc. and Subsidiaries
stockholders equity
|
8,452,825 | 1,963,790 | ||||||
Noncontrolling Interest
|
2,927,494 | 1,091,870 | ||||||
Total equity
|
11,380,319 | 3,055,660 | ||||||
Total liabilities and
equity
|
$ | 20,783,027 | 12,413,944 | |||||
See
accompanying notes to consolidated financial statements
19
PERNIX
GROUP, INC.
AND
SUBSIDIARIES
Years
ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Revenues:
|
||||||||
Construction
revenues
|
$ | 9,476,144 | 24,159,865 | |||||
Service
fees – power generation plant
|
5,316,842 | 4,708,713 | ||||||
Service
fees – related party
|
11,767 | 36,571 | ||||||
Finance
lease revenue
|
5,349 | 176,181 | ||||||
Other
revenue
|
— | 510 | ||||||
Gross
revenues
|
14,810,102 | 29,081,840 | ||||||
Costs
and expenses:
|
||||||||
Construction
costs
|
7,960,013 | 24,590,312 | ||||||
Construction
costs - related party
|
185,291 | 312,000 | ||||||
Operation
and maintenance costs - power generation plant
|
3,213,687 | 3,062,851 | ||||||
Provision
for unbilled and uncollected accounts
|
850 | 51,697 | ||||||
Cost
of revenues
|
11,359,841 | 28,016,860 | ||||||
Gross
profit
|
3,450,261 | 1,064,980 | ||||||
Operating
expenses:
|
||||||||
Salaries
and employee benefits
|
1,639,921 | 1,739,141 | ||||||
Occupancy
and equipment
|
32,659 | 61,632 | ||||||
Occupancy -
related party
|
99,714 | 165,603 | ||||||
General
and administrative
|
1,685,814 | 2,222,474 | ||||||
Total
operating expenses
|
3,458,108 | 4,188,850 | ||||||
Operating
income/(loss)
|
(7,847 | ) | (3,123,870 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income/(expense), net
|
48,511 | (150,189 | ) | |||||
Interest
expense - related party
|
(75,384 | ) | (73,764 | ) | ||||
Foreign
currency exchange (loss)
|
(380,440 | ) | (996,241 | ) | ||||
Other
income, net
|
91,469 | 103,976 | ||||||
Gain
on bargain purchase, net of deferred tax liability
|
5,222,080 | |||||||
Total
other income/(expense)
|
4,906,236 | (1,116,218 | ) | |||||
Income/(loss)before
income taxes
|
4,898,389 | (4,240,088 | ) | |||||
Income
tax expense
|
281,039 | 614,942 | ||||||
Consolidated
net income/(loss)
|
4,617,350 | (4,855,030 | ) | |||||
Less: Net
(loss) attributable to noncontrolling interest
|
(15,633 | ) | (20,887 | ) | ||||
Net
income/(loss) attributable to the stockholders of Pernix Group, Inc.
and
|
||||||||
Subsidiaries
|
$ | 4,632,983 | (4,834,143 | ) | ||||
Basic and diluted net income/(loss) attributable to the stockholders of Pernix Group, Inc. and Subsidiaries | 0.03 | (0.04 | ) | |||||
Weighted
average shares outstanding
|
136,712,912 | 131,360,809 | ||||||
See accompanying notes to consolidated financial statements
20
PERNIX
GROUP, INC.
AND
SUBSIDIARIES
Years
ended December 31, 2009 and 2008
Accumulated
|
||||||||||||||||||||||||||||||
Other
|
Additional
|
|||||||||||||||||||||||||||||
Comprehensive
|
Accumulated
|
Comprehensive
|
Common
|
paid-in
|
Noncontrolling
|
|||||||||||||||||||||||||
Total
|
Income
(Loss)
|
deficit
|
income
(loss)
|
Stock
|
capital
|
Interest
|
||||||||||||||||||||||||
Balance
at December 31, 2007
|
$ | 2,668,743 | $ | (65,829,850 | ) | $ | 150,514 | 1,253,357 | $ | 65,981,965 | $ | 1,112,757 | ||||||||||||||||||
Sale
of common stock -
|
||||||||||||||||||||||||||||||
11,304,906 shares at $0.50 per share | 5,652,453 | — | — | — | 113,049 | 5,539,404 | — | |||||||||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||
Net
income(loss)
|
(4,855,030 | ) | (4,834,143 | ) | (4,834,143 | ) | — | — | (20,887 | ) | ||||||||||||||||||||
Foreign
currency translation adjustment
|
(410,506 | ) | (410,506 | ) | (410,506 | ) | ||||||||||||||||||||||||
Comprehensive
income (loss):
|
(5,265,536 | ) | $ | (5,244,649 | ) | |||||||||||||||||||||||||
Balance at December 31, 2008 | $ | 3,055,660 | $ | (70,663,993 | ) | $ | (259,992 | ) | $ | 1,366,406 | $ | 71,521,369 | $ | 1,091,870 | ||||||||||||||||
Sale
of common stock -
|
||||||||||||||||||||||||||||||
2,934,000 shares at $0.75 per share | 2,200,500 | — | — | — | 29,340 | 2,171,160 | — | |||||||||||||||||||||||
Comprehensive
income (loss):
|
||||||||||||||||||||||||||||||
Net
income(loss)
|
4,617,350 | 4,632,983 | 4,632,983 | — | — | (15,633 | ) | |||||||||||||||||||||||
Foreign
currency translation adjustment
|
(344,448 | ) | (344,448 | ) | — | (344,448 | ) | — | ||||||||||||||||||||||
Comprehensive
income (loss):
|
4,272,902 | $ | 4,288,535 | |||||||||||||||||||||||||||
Fair
value of noncontrollint interest in
|
||||||||||||||||||||||||||||||
connection
with business combination
|
1,851,257 | 1,851,257 | ||||||||||||||||||||||||||||
Balance
at December 31, 2009
|
$ | 11,380,319 | $ | (66,031,010 | ) | $ | (604,440 | ) | $ | 1,395,746 | $ | 73,692,529 | $ | 2,927,494 | ||||||||||||||||
See
accompanying notes to consolidated financial statements
21
PERNIX
GROUP, INC.
AND
SUBSIDIARIES
Years
ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income/(loss) including noncontrolling interest
|
$ | 4,617,350 | (4,855,030 | ) | ||||
Noncontrolling
Interest
|
(15,633 | ) | (20,887 | ) | ||||
Net
Income/(loss)
|
4,632,983 | (4,834,143 | ) | |||||
Adjustments
to reconcile net income/(loss) to net cash used in operating
activities:
|
||||||||
cash
used in operating activities:
|
||||||||
Depreciation
|
120,074 | 269,020 | ||||||
(Gain)/loss
on sale or disposal of fixed assets
|
(1,773 | ) | 33,059 | |||||
Gain
on bargain purchase, net of deffered tax liability
|
(5,222,080 | ) | — | |||||
Provision
for unbilled and uncollected accounts
|
— | 50,394 | ||||||
Noncontrolling
Interest
|
(15,633 | ) | (20,887 | ) | ||||
Changes
in assets and liabilities:
|
||||||||
Short
term investments
|
3,080 | — | ||||||
Accounts
receivable
|
2,951,475 | (1,287,171 | ) | |||||
Accounts
receivable - related party
|
(180,888 | ) | — | |||||
Prepaid
expenses and other current assets
|
264,146 | 986,269 | ||||||
Net
investment in sales-type lease
|
454,651 | 2,583,819 | ||||||
Other
assets
|
3,883 | 15,651 | ||||||
Accounts
payable
|
(1,124,196 | ) | 249,153 | |||||
Accounts
payable - related party
|
(7,335 | ) | (489,802 | ) | ||||
Accrued
expenses
|
(156,075 | ) | (22,061 | ) | ||||
Interest
payable - related party
|
75,384 | 73,764 | ||||||
Billings
in excess of cost and estimated earnings
|
(4,099,946 | ) | 3,304,557 | |||||
Other
liabilities
|
(914,360 | ) | 697,781 | |||||
Net
cash (used in)/provided by operating activities
|
(3,216,610 | ) | 1,609,403 | |||||
Cashflows from investing activities: | ||||||||
Acquisition
of subsidiaries, net of cash acquired
|
(2,049,685 | ) | — | |||||
Investment
in Pernix/UEI Joint Venture
|
5,251 | — | ||||||
Proceeds
from sale of equipment
|
1,773 | 66,839 | ||||||
Capital
expenditures
|
(56,418 | ) | (97,637 | ) | ||||
Net
cash (used in)/provided by
|
||||||||
investing
activities
|
(2,099,079 | ) | (30,798 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
of short-term debt
|
— | (4,617,730 | ) | |||||
Increase
in indebtedness
|
9,094 | — | ||||||
Proceeds
from sale of common stock
|
2,200,500 | 5,652,453 | ||||||
Net
cash provided by financing activities
|
2,209,594 | 1,034,723 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
(212,802 | ) | (332,073 | ) | ||||
Net
increase/(decrease) in cash and cash equivalents
|
(3,318,897 | ) | 2,281,255 | |||||
Cash
and cash equivalents at beginning of period
|
6,313,886 | 4,032,631 | ||||||
Cash
and cash equivalents at end of period
|
$ | 2,994,989 | $ | 6,313,886 | ||||
Supplemental
disclosure:
|
||||||||
Cash
paid during the period for interest
|
$ | — | $ | 249,256 | ||||
Cash
paid during the period for income taxes
|
$ | 289,226 | $ | 440,290 |
See accompanying notes to consolidated financial statements.
22
PERNIX
GROUP, INC.
AND
SUBSIDIARIES
(1)
|
Background
|
Pernix
Group, Inc. (“Pernix Group” or the “Company”), formerly Telesource
International, Inc., was established in 1994 and was incorporated in Delaware in
2001 and as of December 31, 2009 is 96.9% owned by SHBC and
Affiliates The term “SHBC” refers to Sayed Hamid Behbehani & Sons, Co.,
WLL. Pernix Group is an international company engaged in three business
segments: General Construction;, Power Generation Services and Design,
Installation and Service of Broadcasting Systems including high power radio
transmitters and receivers.
The
Company conducts its operations through the parent and its four
subsidiaries. Pernix Group acquired a 54.4% controlling
interest in the common voting shares of TransRadio SenderSysteme, Berlin, AG
(“TransRadio”) on December 28, 2009. Through this new German subsidiary we
engage in the design, distribution and installation of transmitter systems and
provide related services at customer sites world-wide including but not limited
to large projects in Europe, Asia and Africa. From Lombard, Illinois, the
Company’s international division bids on construction projects and manages its
procurement, export, and shipping of U.S. fabricated products for use by the
Company’s subsidiaries or for resale to customers outside of the mainland. The
Company’s Pernix/SHBC Joint Venture, formerly Telesource International
Inc./Sayed Behbehani & Sons Company Joint Venture L.P., subsidiary bids
construction projects. The Company’s Mariana subsidiary, Telesource
CNMI, Inc. (“TCNMI”), handles the management of the Company’s energy
conversion facilities in the Commonwealth of the Northern Mariana Islands. The
Company’s other wholly-owned subsidiary, Telesource (Fiji), Ltd. (“TFL”),
handles the Company’s power generation activities in Fiji.
The
Company is a leading construction and power infrastructure company, offering
diversified general contracting, design/build and construction management
services to private clients and public agencies. We offer general contracting,
pre-construction planning and comprehensive project management services. The
construction projects include government facilities such as the U.S. embassy
facility in Suva, Fiji and the design and construction of airport
runways. Pernix Group also constructs and manages the operation of
energy conversion power plants. The Company is a global provider of power plant
engineering, design, procurement, construction, operations and maintenance
services. We have the capabilities to address a variety of power generating
requirements, from initial conceptual design, to construction, and through
operating and maintaining (“O&M”) power facilities. Our O&M services are
designed to improve the operating performance of a particular facility and to
reduce overall power generation costs to our customers. The Company also invests
in Energy Projects as an Independent Power Producer (“IPP”). In Fiji and in
Tinian, an island in the Commonwealth of the Northern Mariana Islands (U.S.
Territory) (“CNMI”), the Company operates three diesel fired electric power
generation plants (two in Fiji and one in CNMI) for the sale of electricity to
the local power grids. In Germany, the Company’s TransRadio subsidiary develops,
produces and distributes transmitting and receiving equipment for broadcast and
news transmission, and provides services for the transmitter systems. The
products include providing high power radio transmitters to a host of customers
through contracts for projects located primarily in Europe, Africa and Asia.
TransRadio conducts its business under contracts that often require more than a
year to complete and the Company therefore utilizes customer advance payments
coupled with its own liquidity to carry work in process
inventory for more than a year. Other business segments generally operate in
less than a one year operating cycle.
Selected
financial data for each segment can be found in Note 20 – “Business Segment
Information” to the accompanying consolidated financial statements. The Lombard
facility (“trading”) operations are included in the power generation segment
results and are not material for 2009 or 2008.
(2)
|
Summary
of Significant Accounting Policies
|
|
(a)
|
Principles
and Basis of Consolidation
|
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries: Pernix Group, Telesource CNMI Inc., and Telesource
Fiji, Ltd. In addition, the consolidated financial statements also include 54.4%
of TransRadio, the majority owned subsidiary acquired in December
2009. Also included is the 51% investment in Pernix/SHBC JV, along
with the share of the JV earnings. All significant intercompany
transactions and accounts have been eliminated.
23
The equity method of accounting is used for investments in non-controlled
affiliates in which the Company's ownership ranges from 20 to 50 percent, or in
instances in which the Company is able to exercise significant influence but not
control (such as representation on the investee's Board of Directors). The
Company consolidates all investments in affiliates in which the Company has
control. In addition, the Company consolidates any variable interest entity
(“VIE”) for which the Company is considered the primary beneficiary. The Company
provides for non-controlling interests in consolidated subsidiaries for which
the Company's ownership is less than 100 percent.
A VIE is an entity in which either (a) the equity investment at risk is not
sufficient to permit the entity to finance its own activities without additional
financial support or (b) the voting rights of the equity investors are not
proportional to their obligations to absorb the expected losses of the entity or
their rights to receive the expected residual returns of the entity. The Company
evaluates whether entities in which it has an interest are VIEs and whether the
Company is the primary beneficiary of any VIEs identified in its
analysis. The Company has not identified any VIEs that require
consolidation at December 31, 2009 and 2008.
|
(b)
|
Reclassifications
|
Certain reclassifications were
made to prior years’ amounts to conform to the 2009 presentation.
|
(c)
|
Liquidity
|
Before
consideration of the gain on the acquisition of TransRadio, the Company
experienced negative cash flow of $3.2 million in 2009 and positive cash flows
of $1.6 million in 2008 from operations. The Company received $2.2
and $5.7 million in equity infusion for investing, payment of debt and funding
of operations from SHBC and Affiliates in 2009 and 2008, respectively.
During the latter part of 2005, a new management team was promoted and hired to
develop a plan to improve operations. The new management team has implemented
new marketing and sales plans as well as improvements in the Company’s systems
and controls. Management plans to improve profitability and cash flow
by reducing costs and securing additional projects. However, no assurance can be
given that such increased revenues will be achieved. The Company has and expects
to continue to seek support from its principal stockholders, SHBC and
Affiliates, for its operations, and for working capital needs, and business
expansion as may be required. SHBC and Affiliates have continued their support
of the Company.
|
(d)
|
Cash
and Cash Equivalents
|
Pernix
Group records as cash equivalents all highly liquid short-term investments with
original maturities of three months or less.
|
(e)
|
Restricted
Cash
|
TransRadio
maintains bank deposits that are pledged to financial institutions as security
for bank guarantees of performance obligations to TransRadio’s customers.
TransRadio is restricted from access to these balances until the related
performance obligations are complete. The Company classifies the restricted cash
that is accessible within one year as restricted cash – current and cash that is
not accessible until after one year as restricted cash – non-current in the
Consolidated Balance Sheet. As of December 31, 2009, total restricted cash
deposits amounted to $962,690 of which $310,117 was reported as restricted cash
– current and $652,573 was reported as restricted cash –
non-current.
(f) Inventories
Inventories
are valued at the lower of cost or market. Fiji inventories are stated at the
lower of cost or market using first-in, first-out (FIFO) method. TransRadio
inventories are determined using the average cost method.
|
(g)
|
Foreign
Currency
|
24
The
functional currency of the company’s foreign operations is the applicable local
currency with the exception of a Fijian division of the Pernix/SHBC
JV. The financial position and results of operations of the Company’s
Pernix/SHBC JV operations are recorded using the local currency (Fijian dollars)
however; the Company’s functional currency is U.S. dollars. The financial
statements for this subsidiary are measured in U.S. dollars using the historical
exchange rate for fixed assets and certain other assets and liabilities.
The exchange rate at the end of the reporting period is used to convert all
monetary assets and liabilities. An annual average exchange rate is used
for each period for revenues and expenses. The resulting foreign exchange
transaction gains or (losses) are recorded in the consolidated statement of
operations The functional currency is translated into U.S. dollars for balance
sheet accounts using current exchange rates in effect as of the balance sheet
date and for revenue and expense accounts using a weighted-average exchange rate
during the fiscal year. The translation adjustments are deferred as a separate
component of stockholders’ equity captioned accumulated other comprehensive
income (loss). Gains or losses resulting from transactions denominated in
foreign currencies are included in other income (expense), net in the
consolidated statements of earnings.
The
Company is exposed to foreign currency exchange risk on various foreign
transactions. The Company attempts to reduce this risk and manage
cash flow exposure of certain payables and anticipated transactions by entering
into forward exchange contracts. At December 31, 2009 and 2008,
the Company did not apply hedge accounting treatment to its forward exchange
contracts. Accordingly the change in fair value of these contracts was recorded
in income.
|
(h)
|
Concentration
of Credit Risk
|
The
Company maintains its cash accounts at numerous financial institutions. Those
accounts covered by the Federal Deposit Insurance Corporation (FDIC) are insured
up to $250,000 per institution. As of December 31, 2009, the amount of
domestic bank deposits that exceeded or are not covered by the FDIC insurance
was $1,160,263. Certain financial institutions are located in foreign
countries which do not have FDIC insurance and as of December 31, 2009, the
amount of bank deposits in these financial institutions was
$2,172,045.
|
(i)
|
Revenue
Recognition
|
|
Power
Production Revenue
|
The
Company receives variable monthly payments as compensation for its production of
power. The variable payments are recognized based upon power produced and billed
to the customer as earned during each accounting period.
Revenue
associated with the sale of the Tinian power plant constructed and sold under a
sales-type lease, measured as the present value of noncancelable rents, was
recognized in connection with recording the loss on sale in 1997 and 1998. The
Company recognizes finance lease revenue on the resulting sales-type lease
receivable at a constant rate using the interest method. Service revenues
received from operating and maintaining the Tinian power plant for the duration
of the lease are recognized as earned based on actual kilowatt hours of
electricity produced and delivered to the lessee’s customers. To the extent that
variable payments based on kilowatt-hours of production exceed the fair value of
operation and maintenance services provided, the Company recognizes such
contingent payments as additional finance lease revenue as they are
earned. The sales- type lease ended in February of
2009 and as such, all related lease activity related to the Tinian power plant
was terminated in 2009.
Transmitter
Revenue
Contracts
for TransRadio products and services generally contain customer-specified
acceptance provisions. The Company evaluates customer acceptance by
demonstrating objectively that the criteria specified in the contract acceptance
provisions are satisfied and recognizes revenue on these contracts when the
objective evidence and customer acceptance are demonstrated. Certain
contracts include prepayments, which are recorded as a liability until the
customer acceptance is received, at which time, the prepayments are recorded as
revenue.
Certain
TransRadio contracts require training services separate from acceptance of
provisions and are generally provided after the delivery of product to the
customer. These services are a separate element of the contract that
is accounted for as revenue is earned. The amount attributable to
services is based on the fair value of the services in the marketplace and is
typically stipulated separately with the customer.
25
Construction Revenue
Revenue
from construction contracts are recognized using the
percentage-of-completion method of accounting based upon costs incurred and
estimated total projected costs. Our current project with the United States
Government is a design/build contract with a fixed contract price and includes
provisions of termination for convenience by the party contracting with us. Such
provisions also allow payment to us for the work performed through the date of
termination.
The
Company only uses approved contract changes in its revenue recognition
calculation. This method of revenue recognition requires that we
estimate future costs to complete a project. Estimating future costs
requires judgment of the value and timing of material, labor, scheduling,
product deliveries, contractual performance standards, liability claims, impact
of change orders, contract disputes as well as productivity. In
addition, sometimes clients, vendors and subcontractors will present claims
against us for recovery of costs they incurred in excess of what they expected
to incur, or for which they believe they are not contractually
responsible. In turn, we may also present claims to our clients,
vendors and subcontractors for costs that we believe were not our responsibility
or may be beyond our scope of work. The company will include costs
associated with these claims in their financial information when such costs can
be reliably identified and estimated. Similarly, the company will
include in revenue amounts equal to costs for claims, where the outcome is
probable that the claim will be found in the favor of the
company. The Company will record a provision for losses when
estimated costs exceed estimated revenues.
Cost of
revenue consists of direct costs on contracts, including labor and materials,
amounts payable to subcontractors, direct overhead costs, equipment expense
(primarily depreciation, maintenance, and repairs), and interest associated with
construction projects, and insurance costs. The Company records a
portion of depreciation in cost of revenue. Contracts frequently extend over a
period of more than one year and revisions in cost and profit estimates during
construction are recognized in the accounting period in which the facts that
require the revision become known. Losses on contracts are provided for in total
when determined, regardless of the degree of project completion. Claims for
additional contract revenue are recognized in the period when it is probable
that the claim will result in additional revenue and the amount can be
reasonably estimated.
|
(j)
|
Property,
Plant, and Equipment
|
Property,
plant, and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method at rates sufficient to
depreciate the cost over the estimated economic lives of the assets. Depreciable
lives used for financial reporting purposes are as follows:
Asset description
|
Estimated
useful life
|
Leasehold
improvements
|
Lesser
of lease term or 7 years
|
Automobiles
|
5
years
|
Construction
machinery and equipment
|
10
years
|
Office
furniture and fixtures
|
5
years
|
Computer
and communication equipment
|
3-5
years
|
Other
assets
|
1
year
|
Cost and
accumulated depreciation are eliminated from the accounts when assets are sold
or retired and any resulting gain or loss is reflected in operations in the year
of disposition.
|
(k)
|
Impairment
of Long-lived Assets
|
Long-lived
assets and certain identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Fair values are determined based on quoted market value,
discounted cash flows or internal and external appraisals, as applicable. During
2009 and 2008 Pernix Group did not recognize asset impairment
charges.
|
(l)
|
Income
Taxes
|
Pernix
Group, Inc., TransRadio, Telesource CNMI, Inc., and Telesource Fiji,
Ltd. file separate corporate income tax returns. Pernix Group, Inc. is a
U.S. corporation that files a separate U.S. corporate income tax
return. TransRadio is a German Corporation and files a corporate tax
return in Germany. Telesource CNMI, Inc. is a Commonwealth
of
26
Northern Mariana Islands (CNMI) corporation and files a corporate tax
return for this commonwealth. Telesource Fiji, Ltd. is a Fijian corporation and
files a Fijian corporate tax return.
Deferred income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective income tax bases. 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.
A valuation reserve is recorded to offset a portion of the deferred tax
benefit if management has determined it is more likely than not that the
deferred tax assets will not be realized.
The Company’s subsidiary, TransRadio, prepares its corporate income tax
returns based on German tax code. The German tax liability is generally
comprised of three components: corporate income tax of 15%, a solidarity tax and
a trade tax. In connection with the 2009 acquisition of the controlling interest
inTransRadio, a deferred tax liability of $0.6 million was recorded as an offset
to the $5.8 million gain on the bargain purchase. The deferred tax liability was
recorded at the German tax rate and related to the intangible assets that were
acquired and will be amortized for book purposes but are not deductible for
German tax purposes. No tax expense was recorded on indefinite lived intangible
assets acquired (Trade name) or on the gain on the acquisition of TransRadio
under the assumption of permanent reinvestment.
The Company’s subsidiary, Telesource CNMI, Inc., prepares its
corporate income tax returns based on the local tax code. The tax code used is
outlined in the “Covenant to Establish a Commonwealth of the Northern Mariana
Islands in Political Union with the United States,” which adopted the Internal
Revenue Code as the local territorial income tax regime. Beginning
January 1, 1985, 95% of any income tax due on the CNMI source income is
rebated to the extent that it exceeds local business gross receipts taxes. In
1995, the rebate percent was decreased and currently ranges from 90% decreasing
to 50% depending upon the amount of taxable income. The amounts paid for the
gross receipts tax amounted to $52,232 and $74,108 in 2009 and 2008,
respectively, and are included in general and administrative expenses on the
accompanying consolidated statements of operations.
On January 1, 2007 the Company adopted FASB guidance on income taxes,
which seeks to reduce the diversity in practice associated with the accounting
and reporting for uncertainty in income tax positions. This guidance prescribes
a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns.
|
(m)
|
Use
of Estimates
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 be different from those
estimates.
Significant estimates used in preparing
these financial statements include those assumed in computing profit percentages
under the percentage-of-completion revenue recognition method and those used in determining the fair
value of assets, liabilities and noncontrolling interest in connection with the
acquisition of a controlling interest in TransRadio in December 2009.
|
(n)
|
Fair
Value of Financial Instruments
|
The
Company’s financial instruments include marketable securities, receivables
related to sales-type lease, and foreign currency contracts. The gross carrying
amount of the notes receivable related to the sales-type lease approximates fair
value as the notes were discounted at a rate approximating the Company’s
borrowing rate. Foreign currency contracts are recorded based on the applicable
foreign currency spot rate as of the balance sheet date.
|
(o)
|
Stock
Based Compensation
|
The
Company has stock incentive plans that provide for stock-based employee
compensation, including the granting of stock options to certain key employees.
The plans are more fully described in note 15.
27
The Company accounts for its stock based compensation using the modified
prospective application. Under this method, all equity-based compensation
awarded after the adoption date of January 1, 2006 will be determined under the
fair value provision. Additionally, for all equity-based compensation awarded
prior to the adoption date, compensation for the portion of awards for which the
requisite service is performed after the adoption date is recognized as service
is rendered.
There was no stock based compensation granted in 2009 or 2008.
|
(p)
|
Maintenance
of Power Generation Equipment
|
The
Company’s power generation equipment has required maintenance schedules based
upon hours of service and capacity. The Company accounts for this maintenance as
costs are incurred.
|
(q)
|
Recent
Accounting Pronouncements
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
new accounting guidance related to fair value measurements and related
disclosures. This new guidance defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. We
adopted this new guidance on January 1, 2008, as required for our financial
assets and financial liabilities. However, the FASB deferred the effective date
of this new guidance for one year as it relates to fair value measurement
requirements for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value on a recurring basis. We adopted these
remaining provisions on January 1, 2009. The adoption of this accounting
guidance did not have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued new accounting guidance that defines
collaborative arrangements and
establishes reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement and third
parties. It also establishes the appropriate income statement presentation and
classification for joint operating activities and payments between participants,
as well as the sufficiency of the disclosures related to those arrangements.
This new accounting guidance was effective for us on January 1, 2009, and
its adoption did not have a significant impact on our consolidated financial
statements.
In
December 2007, the FASB issued new accounting guidance related to the
accounting for noncontrolling interests in consolidated financial statements.
This guidance establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance requires that noncontrolling interests in subsidiaries
be reported in the equity section of the controlling company’s balance sheet. It
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company’s income statement. This guidance is
effective for fiscal years beginning after December 15, 2008. We adopted
this guidance on January 1, 2009, and it had no material impact on our
consolidated financial statements.
In December 2007, the FASB issued new accounting guidance related
to business combinations. The guidance establishes principles and requirements
for how an acquirer entity recognized and measures in its financial statements
the identifiable asset acquired, the liabilities assumed and any controlling
interests in the acquired entity; recognizes and measures the goodwill acquired
in the business combinaiton or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business
combination. Costs of the acquisition will be recognized separately from
the busiess combinatin. The new guidance was effective for periods beginning
after December 15, 2008. The Company has considered this standard when
evaluating current and potential transactions to which it would
apply.
In March
2008, new guidance was issued on disclosures about derivative instruments and
hedging activities. The new guidance amends and expands the disclosure
requirements of previously issued guidance and is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. The disclosures required by this guidance are included
in Note 3, Acquisition of a Business in Note 16, Financial Instruments
with Off-balance Sheet Risk and Concentrations of Credit Risk.
In June
2008, the FASB issued new accounting guidance clarifying that non-forfeitable
instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, should be included in the earnings
allocation in computing earnings per share under the two-class method. The
two-class method is an earnings allocation formula that treats participating
securities as having the same rights to earnings as available to common
shareholders. The adoption of the new guidance in first quarter 2009 did not
impact reported basic and diluted earnings per share amounts because the company
did not have any non-forfeitable instruments granted in share based payment
transactions. In November 2008, the FASB issued new accounting
guidance on equity method investment accounting considerations. The new guidance
generally continues existing practices under the equity method of accounting for
investments in common stock including the use of a cost-accumulation approach to
initial measurement of the investment. The new guidance does not require the
investor to perform a separate impairment test on the underlying assets of an
equity method investment. However, an equity-method investor is required to
recognize its proportionate share of impairment charges recognized by the
investee, adjusted for basis differences, if any, between the investee’s
carrying amount for the impaired assets and the cost allocated to such assets by
the investor. The new guidance is effective for fiscal years beginning on or
after December 15, 2008 and interim
28
periods
within those fiscal years and shall be applied prospectively. We adopted the
guidance effective January 1, 2009, the result of which did not have a
material impact on the Company since we currently have no equity method
investments.
In
December 2008, the FASB issued new accounting guidance concerning
disclosures about transfers of financial assets and interests in variable
interest entities. The new guidance includes disclosure objectives and requires
public entities to provide additional year-end and interim disclosures about
transfers of financial assets and involvement with variable interest entities.
The requirements apply to transferors, sponsors, servicers, primary
beneficiaries, and holders of significant variable interests in a
variable-interest entity or qualifying special purpose entity. The new guidance
is effective for the first interim period or fiscal year ending after
December 15, 2008. Effective January 1, 2009, we adopted the guidance.
Adoption of these provisions did not have a material impact on the Company’s
consolidated financial statements.
In
April 2009, the FASB issued new accounting guidance on fair value
measurements. The new guidance impacts certain aspects of fair value measurement
and related disclosures. The new guidance was effective beginning in the second
quarter of 2009. The impact of adopting this new guidance did not have a
material effect on the Company’s consolidated results of operations or financial
position.
In
May 2009, the FASB issued new accounting guidance related to the accounting
and disclosures of subsequent events. This guidance incorporates the subsequent
events guidance contained in the auditing standards literature into
authoritative accounting literature. It also requires entities to disclose the
date through which they have evaluated subsequent events and whether the date
corresponds with the release of their financial statements. This guidance is
effective for all interim and annual periods ending after June 15, 2009. We
adopted this guidance upon its issuance and it had no material impact on our
consolidated financial statements.
In
June 2009, the FASB issued new accounting guidance related to the
accounting and disclosures for transfers of financial assets. This guidance will
require entities to provide more information about sales of securitized
financial assets and similar transactions, particularly if the seller retains
some risk with respect to the assets. This guidance is effective for fiscal
years beginning after November 15, 2009. The Company adopted the guidance
on January 1, 2010 and it did not have a material impact on the consolidated
financial statements.
In
June 2009, the FASB issued new accounting guidance to improve financial
reporting by companies involved with variable interest entities and to provide
more relevant and reliable information to users of financial statements. This
guidance is effective for fiscal years beginning after November 15, 2009.
We are currently evaluating the impact that the adoption of this guidance will
have on our consolidated financial statements.
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued new
accounting guidance entitled, “The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162” (“ASC”), which identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This new guidance is effective for financial
statements issued for interim and annual periods ending after September 15,
2009 and was adopted by the Company during the third quarter of 2009. The
adoption of this guidance has changed how we reference various elements of GAAP
when preparing our financial statement disclosures, but did not have an impact
on the Company’s consolidated financial statements.
In
September 2009, the accounting standard regarding arrangements that include
software elements was updated to require tangible products that contain software
and non-software elements that work together to deliver the products essential
functionality to be evaluated under the accounting standard regarding multiple
deliverable arrangements. This standard update must be adopted no later than
January 1, 2011 and may be adopted prospectively for revenue arrangements
entered into or materially modified after the date of adoption or
retrospectively for all revenue arrangements for all periods presented. We are
currently evaluating the impact this new standard update will have on our
consolidated financial statements.
In
October 2009, the accounting standard regarding multiple deliverable
arrangements was updated to require the use of the relative selling price method
when allocating revenue in these types of arrangements. This method allows
a vendor to use its best estimate of selling price if neither vendor specific
objective evidence nor third party evidence of selling price exists when
evaluating multiple deliverable arrangements. This standard update must be
adopted no later than January 1, 2011 and may be adopted prospectively for
revenue arrangements entered into or materially modified after the date of
adoption or retrospectively for all revenue arrangements for all periods
presented. We are currently evaluating the impact this standard update will have
on our consolidated financial statements.
29
In
January 2010, the FASB issued new guidance regarding improving disclosures about
fair value measurements. The guidance requires new disclosures related to
transfers in and out of Level 1 and Level 2 as well as activity in Level 3 fair
value measurements. The guidance also provides clarification to existing
disclosures. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Our
effective date for the new disclosures and clarifications is the quarter ending
March 31, 2010. Our effective date for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements is January 1, 2011. When effective, we will comply with the
disclosure provisions of this new guidance.
3. Acquisitions
of a Business
On
December 28, 2009, Pernix Group, Inc. purchased 54.4% of the outstanding common
voting shares (or 815,650 shares) of TransRadio SenderSysteme, Berlin AG
(“TransRadio”) from two shareholders of TransRadio. The Company purchased
650,000 shares at $2.70 per share from Lorna Continental, S.A. and 165,650
shares at $2.70 per share from Senna Finanz Holding, A.G. The total
consideration paid for both transactions was $2,202,255. The acquisition was
financed through the sale of 2,934,000 shares of the Company’s common stock
yielding $2,200,500 to SHBC and Affiliates who currently own
approximately 85.3% of Pernix Group’s outstanding shares.
TransRadio
is engaged in the development, production and distribution of transmitting and
receiving equipment for broadcast and news transmission, including related
services. TransRadio specializes in research, development and design of modern
AM, VHF/FM and DRM transmitter systems and delivers customer tailored solutions.
The professional services of TransRadio range from the delivery of transmitters,
antennas, power supplies and air-conditioning systems to the management of
turnkey projects, including all facilities to operate a broadcasting station.
The purpose of the TransRadio acquisition is to grow the Company’s operations
globally in a manner that utilizes our strong international project management,
engineering strengths and experience in performing construction type projects
for government entities.
In
connection with the acquisition, the fair value of net assets acquired less the
fair value of the noncontrolling interest in TransRadio exceeded the purchase
price the Company paid for its interest in TransRadio, resulting in a bargain
purchase gain of $5.2 million, net of $0.6 million of deferred tax
impact related to the intangible assets). The gain is presented as a separate
caption entitled “gain from bargain purchase” in the consolidated statements of
operations for the year ending December 31, 2009. The bargain purchase reflects
the losses recently incurred due to the difficult global economy coupled with
the need for a strong management team with industry expertise, strong
international and governmental project management and engineering
skills.
In
connection with the acquisition of a controlling interest in TransRadio, the
Company incurred an insignificant amount of acquisition related costs
during 2009. The costs were expensed as incurred on the consolidated
statement of operations. The Company also recorded the initial
consolidation of TransRadio based on 100% of the fair values of TransRadio’s
assets, liabilities and noncontrolling interest. The following table summarizes
the fair values of the identifiable assets acquired, liabilities assumed, and
noncontrolling interest at the acquisition date. The following amounts were
converted from Euro to USD at the December 28, 2009 exchange rate of
1.4393:
Current
assets
|
$ | |||||||
Cash
and cash equivalents
|
152,507 | |||||||
Accounts
receivable (contractual amount due $2,981,156; estimated amount
uncollectible $30,030)
|
2,951,126 | |||||||
Inventories
|
7,631,998 |
30
Other
current assets
|
987,882 | |||
Total
current assets
|
11,723,513 | |||
Tangible
assets
|
409,805 | |||
Intangible
assets:
|
||||
Customer
relationship (10year amortization period)
|
1,563,080 | |||
Tradename
(indefinite lived)
|
936,984 | |||
Customer
backlog (1 year amortization period based on customer
acceptance)
|
292,178 | |||
Total
intangible assets
|
2,792,242 | |||
Other
non-current assets
|
754,224 | |||
Total
assets acquired
|
15,679,784 | |||
Current
liabilities
|
||||
Short
term debt and current maturities of long term debt
|
1,454,273 | |||
Prepayments
received on account of orders
|
1,623,530 | |||
Other
current liabilities
|
2,684,693 | |||
Total
current liabilities
|
5,762,496 | |||
Non-current
liabilities
|
646,944 | |||
Total
liabilities
|
6,409,440 | |||
Noncontrolling
interest
|
1,846,008 |
The fair
value of the following non-financial assets, liabilities and noncontrolling
interests were determined using the following methods resulting in increases to
level 3 valuation amounts:
Description
of non financial asset, liability or noncontrolling
interest
|
Valuation
method and inputs
|
Level
of valuation
|
Amount
|
||||||
Customer
relationship
|
Income
approach – multiple period excess
earnings method
|
3 | 1,563,080 | ||||||
Tradename
|
Relief
from royalty rate method
|
3 | 936,984 | ||||||
Customer
backlog
|
Income
approach – excess earnings method
|
3 | 292,178 |
The $1.8
million fair value of
the noncontrolling interest was determined based on the recent transactions for
noncontrolling shares based on stock trading price Intangible assets identified
in connection with the TransRadio acquisition by major classes are presented
below along with the anticipated amortization period and amortization expense
for the next five years. No significant amortization expense was
incurred during 2009 related to these assets.
Description
of identifiable intangible assets
|
Amortization
period
|
Annual
Amortization Amount 2010
|
Annual
Amortization amount 2010 - 2014
|
||||||
Customer
relationship
|
10
years
|
$ | 156,308 | $ | 156,308 | ||||
Order
backlog
|
1
year
|
$ | 292,178 | N/A | |||||
Total
Amortization for the period
|
$ | 448,486 | $ |
156,308per
year
|
The trade
name is not subject to amortization as it has an indefinite useful
life.
The
unaudited pro forma financial information in the table below summarizes the
combined results of operations of the Company and TransRadio as though
TransRadio had been combined as of the beginning of each of the periods
presented. The unaudited pro forma financial information is presented for
informational purposes only and is not indicative of the results of operations
that would have been achieved if the acquisition had taken place at the
beginning of each period, or that may result in the
future. Furthermore, the bargain purchase gain is not reflected in
the 2009 pro-forma results.
31
For
the Years Ended December 31,
|
||||||||
2009 | (A) | 2008 | (B) | |||||
(unaudited)
|
(unaudited)
|
|||||||
Sales
and revenue, net
|
$ | 33,722,679 | $ | 41,445,510 | ||||
Income
before extraordinary items
|
(573,134 | ) | (6,158,977 | ) | ||||
Pro
forma basic income (loss) before extraordinary items per
share:
|
(0.00 | ) | (0.05 | ) | ||||
Pro
forma diluted income (loss) before extraordinary items per
share:
|
(0.00 | ) | (0.05 | ) | ||||
Net
income (loss)
|
(573,134 | ) | (6,158,977 | ) | ||||
Pro
forma basic earnings (loss) per share:
|
(0.00 | ) | (0.05 | ) | ||||
Pro
forma diluted earnings (loss) per share:
|
(0.00 | ) | (0.05 | ) | ||||
Net
income (loss) attributable to controlling interests
|
(761,410 | ) | (5,819,408 | ) | ||||
Pro
forma basic earnings (loss) attributable to controlling interests per
share:
|
(0.01 | ) | (0.04 | ) | ||||
Pro
forma diluted earnings (loss) attributable to controlling interests per
share:
|
(0.01 | ) | (0.04 | ) |
There are
not significant assets or liabilities that require measurement to fair value on
a recurring basis after the business combination.
TransRadio
tax year’s 2007- 2009 remain subject to examination by the German tax authority.
In addition, in connection with the 2009 acquisition of the controlling interest
inTransRadio, a deferred tax liability of $0.9 million was recorded as an offset
to the $5.8 million gain on the bargain purchase. The deferred tax liability was
recorded at the German tax rate and related to the intangible assets that were
acquired and will be amortized for book purposes but are not deductible for
German tax purposes. No current or deferred tax expense was recorded on
indefinite lived intangible assets acquired (Trade name) or on the gain on the
acquisition of TransRadio under the assumption of permanent
reinvestment.
TransRadio
had two customers that accounted for approximately 64% of TransRadio 2009
revenues. This customer revenue did not impact Pernix Group, Inc. consolidated
earnings for 2009 as the income related to these two customers was recognized by
TransRadio prior to the acquisition date.
The
Company holds certain restricted investments, including asset backed securities
and corporate bonds maintained to fulfill statutory contractual requirements
with certain TransRadio employees. These investments had a fair value
of $160,822 at December 31, 2009, approximating their amortized cost and are
included in prepaid expenses and other current assets ($90,007), non-current
other assets ($9,573), and marketable securities ($61,242) based on the
estimated date of payment to the employees. There were no such investments as of
December 31, 2008.
(4)
|
Marketable
Securities
|
The
company’s investments in marketable securities are categorized at the date of
acquisition as trading, held-to-maturity, or
available-for-sale. Available-for-sale securities are carried at fair
value, with unrealized gains and losses, net of tax, reported in common equity
as a component of accumulated other comprehensive income
(loss). Available-for-sale securities are classified as noncurrent
assets unless the intent is to sell the security within 12 months. As
of December 31, 2009, the Company held available for sale securities that were
purchased in connection with the TransRadio acquisition on December 28, 2009 and
have a fair value of $132,546, approximating the amortized cost of the
investments. The Company had no trading or held to maturity securities as of or
during the years ended December 31, 2009 or 2008. The specific identification
method is used to determine realized gains or losses on the sale of marketable
securities. There were no significant unrealized gains or losses or realized
gains or losses on the sale of marketable securities during 2009 or
2008.
(5)
|
Accounts
Receivable
|
32
Receivables
on construction contracts completed and in progress include amounts billed but
not yet received from contract customers. Trade and other accounts receivable
primarily arise from sales of goods to commercial and governmental customers in
the normal course of business. Accounts receivable consist of the following at
December 31, 2009 and 2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Construction
contracts completed and in progress
|
$ | — | $ | 2,353,408 | ||||
Trade
and Other
|
3,414,808 | 1,088,452 | ||||||
3,414,808 | 3,441,860 | |||||||
Less
allowance for doubtful accounts
|
172,142 | 142,235 | ||||||
Net
accounts receivable
|
$ | 3,242,666 | $ | 3,299,625 |
Allowance
for Doubtful Accounts
An
allowance for doubtful accounts is established through a charge to provision for
uncollectible expense. The allowance is an estimate of the amount required to
absorb probable losses on contract and trade receivables that may become
uncollectible. The receivables are charged off when amounts due are determined
to be uncollectible.
A
specific reserve is recorded if it is believed that it is warranted based on the
financial strength of the customer, the timeliness of payments, and other
factors as applicable. We calculate a general reserve on the remaining
receivables using loss ratios based on historical loss experience in conjunction
with current receivable trends in delinquencies.
Receivables
totaling $286,988 are greater than ninety days past due.
There
were no direct write-offs of uncollectible accounts in 2009 or
2008.
During
the twelve month period ended December 31, 2009 the accounts receivable
balance of Commonwealth Utilities Corporation (CUC), the major power production
customer of TCNMI, increased $32,227 or 8.0% to $432,586 from
$400,359.
TransRadio’s
receivables amounted to $2,535,559 as of December 31, 2009.
(6) Work
in Process and Inventories
As of
December 31, the components of inventories are as follows:
2009 | 2008 | ||||||||
Work
in process
|
4,036,546 | — | |||||||
Raw
materials
|
3,563,635 | — | |||||||
Supplies
|
1,309,823 | 1,335,387 | |||||||
Inventories
|
$ | 4,873,458 | $ | 1,335,387 |
Work in
Process inventory represent the costs associated with manufacturing the
TransRadio transmitter equipment for signed contracts with customers and
potential customers. Included in these costs are material,
labor and charges associated with certain subassemblies manufactured by third
parties. Raw materials consist of various components that are
sold as spare parts or are incorporated in the manufacture of transmitter
equipment. The supplies inventory represents the value of spare parts
maintained by the company for use in the diesel power generators.
(7)
|
Property,
Plant, and Equipment
|
2009
|
2008
|
|||||||
Buildings/Leasehold
improvements
|
$ | 113,859 | $ | 105,688 | ||||
Transportation
equipment
|
420309 | 342,969 | ||||||
Plant
& construction machinery and equipment
|
829,780 | 147,409 |
33
Office
furniture and equipment
|
521,308 | 494,807 | ||||||
Computer,
software and communication equipment
|
1,072,871 | 104,802 | ||||||
2,958,127 | 1,195,675 | |||||||
Less
accumulated depreciation
|
2,318,399 | 875,412 | ||||||
Net
property, plant, and equipment
|
$ | 639,728 | $ | 320,263 |
Total
depreciation expense was $120,074 and $269,020, in 2009 and 2008, respectively.
Depreciation for construction machinery and equipment is recognized as a project
expense when appropriate.
(8)
|
Investment
in Sales-type Lease
|
The
Company’s contract with Commonwealth Utilities Corporation (CUC) for the
construction and operation of a power plant on the island of Tinian is accounted
for as a sales-type lease. The minimum lease payments due under the agreement
began upon commissioning of the first phase of the power plant and are comprised
of a guaranteed monthly payment of $180,000 for one hundred and twenty (120)
months, and an operation and maintenance fee of $50,000 due monthly for one
hundred and twenty (120) months. These minimum lease payments were discounted at
an interest rate of 6.74%, which was the ten-year U.S. Treasury note rate in
June 1997, the time of contract execution. Amortization of the minimum
lease payments began in March 1999 when the plant was commissioned and the
Company began collecting payments on the promissory notes and service fees for
operating the plant. The Company also receives variable monthly production fee
payments based upon the Kwh produced plus an additional fee for Kwh produced in
excess of the first 5,140,000 Kwh produced each month. The variable payments are
recognized based upon power produced and delivered to the customer as earned
during each accounting period. Service fees earned in 2009 and 2008 were not in
excess of the estimated fair value of the services performed.
The
original net investment in sales-type lease was recognized in June 1997,
the date the contract was executed. The components of the net investment in
sales-type lease are as follows:
December 31
|
June 20,
1997
|
|||||||||||
2009
|
2008
|
inception
|
||||||||||
Guaranteed
monthly payment
|
$ | — | $ | 360,000 | $ | 21,600,000 | ||||||
Minimum
operation and maintenance fee
|
— | 100,000 | 6,000,000 | |||||||||
Total
minimum lease payments receivable
|
— | 460,000 | 27,600,000 | |||||||||
Less
unearned income
|
— | 5,349 | 9,750,000 | |||||||||
Net
investment in sales-type lease
|
$ | — | $ | 454,651 | $ | 17,850,000 | ||||||
Current
portion
|
$ | — | $ | 454,651 | ||||||||
Long-term
portion
|
— | — | ||||||||||
$ | — | $ | 454,651 |
The lease
payments have been made in full as of February 2009.
Phase I
of the power plant was commissioned in March of 1999. Phase II was
commissioned in March of 2000. The Company recognized power generation
revenues from billings on the Tinian power plant of $1,739,295 and $897,610 for
the years ended December 31, 2009 and 2008, respectively.
(9)
|
Billings
in Excess of Cost on Uncompleted
Contracts
|
Long-term
construction contracts in progress are accounted for using the
percentage-of-completion method. In 2009 and 2008, respectively, balances for
billings in excess of cost and estimated earnings were $529,995 and $4,629,941,
respectively. Total billings for the project in 2009 and 2008 totaled $5,376,198
and $27,464,421 respectively.
(10) Prepayments
Related to Sales Contracts
Revenue
on TransRadio contracts is generally recorded when the customer acceptance
provisions of the agreements are met. Certain contracts require the customer to
make advance payments to TransRadio to cover costs related to the design and /
or procurement of the equipment. As of December 31, 2009, the amount
recorded as advanced payments received on account of orders is $1,616,612
reflecting the fair value of the obligation as of the acquisition
date.
34
(11) Short-Term
Borrowings
During
November 2006, the Company revised its credit facility agreement with
Australia and New Zealand Banking Group Limited (“ANZBGL”). The revised credit
facility is in the amount of FJD $200,000 for the purchase or leasing of
vehicles. The company had three leases for motor vehicles each running 36 months
from November 22, 2006 through October 31, 2009. The three leases were
paid in full in September 2008. In October of 2009, the
company terminated its credit facility with ANZBGL.
The
Company’s subsidiary, TransRadio, has a €500,000 (approximately $716,650 at
December 31, 2009) bank credit agreement with a German bank, which renews
annually. Borrowings under the credit agreement are unsecured. Interest is
charged at the rate of 8.5% per annum. As of December 31, 2009,
$276,343 under the credit line has been drawn.
TransRadio
has outstanding short term debt at December 31, 2009 with Bent Marketing Ltd
amounting to $429,990 and Fedor Commercial Corporate Loans amounting to
$1,018,220. These loans are due in full at June 30, 2010
and have an interest rate of 5%. Both loans are secured through the
assignment of the Qatar contract payments.
|
(12)
|
401K
Plan
|
The
Company has a 401K non-matching retirement plan named Pernix Group, Inc.
Retirement Plan (“Plan”). The Plan allows employees who elect to participate, to
contribute up to the allowable maximum amount into a fund managed by Paychex.
There was $101K in employee contributions to this plan in 2009 and $104K in
2008.
(13)
|
Stockholder’s
Equity
|
Preferred
Stock
The
Company has 50 million shares of Series A Cumulative Convertible Preferred
Stock (The Preferred Shares) authorized. None of these Preferred Shares are
issued nor outstanding as of December 31, 2009 or 2008. Holders of the
Preferred Shares are entitled to receive cumulative cash dividends at the annual
rate of 6.5%. The Preferred Shares have no voting rights and rank senior as to
dividends and upon liquidation to the common stock.
Common
Stock Offerings
As of
December 31, 2009, 139,574,567 shares of the Company’s common stock were
issued and outstanding compared to 136,640,567 shares at December 31,
2008.
During
2009 Pernix Group issued 2,934,000 Common Shares to SHBC and
Affiliates at a price of $0.75 per share totaling $2,200,500.
(14)
|
Earnings
Per Share
|
In
accordance with the disclosure requirements of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS
128), a reconciliation of the numerator and denominator of basic and diluted
earnings per share is provided as follows:
2009
|
2008
|
||||||
Numerator
—Net income/(loss)
|
$
|
4,632,983
|
$
|
(4,834,143
|
)
|
||
Less:
Preferred stock dividends
|
—
|
—
|
|||||
Basic
and diluted net income/(loss) available to common
stockholders
|
$
|
5,609,358
|
$
|
(4,834,143
|
)
|
||
Denominator
— weighted average common shares outstanding
|
136,712,912
|
131,360,809
|
|||||
Basic
and diluted earnings per share
|
$
|
.03
|
$
|
(0.04
|
)
|
Fully-vested
options to purchase 180,000 shares of common stock were granted under the 2000
non-employee director stock option plan. These options were not included in the
computation of diluted earnings per share as the effect of the conversion of
these instruments would be anti-dilutive (i.e. reduce the loss per
share).
35
Warrants
of zero and 500,000 were outstanding at December 31, 2009 and 2008 respectively.
In 2008, these warrants were not included in the computation of diluted earnings
per share as the effect of the conversion of these instruments would be
anti-dilutive.
These warrants were issued at various
dates during 2003 and 2004, of which 2,499,999 expired in 2008 and the remaining
500,000 warrants expired in 2009.
.
(15)
|
Stock
Option Plans
|
|
2000
Non-Employee Director’s Stock Option
Plan
|
In
January 2001, the Company’s board of directors adopted the 2000
Non-Employee Director’s Stock Option Plan that provides for the issuance of
nonqualified stock options to outside directors. Under the terms of this plan,
under which 285,000 shares of common stock were reserved for issuance, options
to purchase common stock are granted at not less than fair market value, become
exercisable over a 3 year period from the anniversay of the date of grant
(vesting occurs annually on the grant date at 33.3% of the grant), and expire 10
years from the date of grant.
Changes
in options outstanding are summarized as follows:
December 31,
2009
|
December 31,
2008
|
||||||||||
Weighted
average
shares
|
Exercise
price
|
Weighted
average
shares
|
Exercise
price
|
||||||||
Options
outstanding at January 1
|
180,000
|
$
|
1.25
|
180,000
|
$
|
1.25
|
|||||
Granted
|
—
|
—
|
|||||||||
Exercised
|
—
|
—
|
|||||||||
Cancelled
|
—
|
—
|
|||||||||
Options
outstanding at December 31
|
180,000
|
1.25
|
180,000
|
1.25
|
|||||||
Options
exercisable at December 31
|
180,000
|
1.25
|
180,000
|
1.25
|
|||||||
Shares
available for future grant at December 31
|
105,000
|
105,000
|
Participants
of this plan have 90 days to exercise their options after separation of
service.
|
2000
Incentive Stock Option Plan
|
In
January 2001, the Company’s board of directors adopted the 2000 Incentive
Stock Option Plan that provides for the issuance of qualified stock options to
employees. Under the terms of this plan, under which 888,000 shares of common
stock were reserved for issuance, options to purchase common stock are granted
at not less than fair market value, become exercisable over a 3 year period from
the anniversary of the date of grant (vesting occurs annually on the grant
date at 33.3% of the grant), and expire 10 years from the date of grant. As of
December 31, 2009, no options had been awarded under this
plan.
|
2000
Non-Qualified Stock Option Plan
|
In
January 2001, the Company’s board of directors adopted the 2000
Non-Qualified Stock Option Plan that provides for the issuance of nonqualified
stock options to employees. Under the terms of this plan, under which 27,000
shares of common stock were reserved for issuance, options to purchase common
stock are granted at less than fair market value, become exercisable immediately
on the date of grant, and expire 10 years from the date of grant. As of
December 31, 2009, no options had been awarded under this
plan.
(16)
|
Financial
Instruments With Off-Balance Sheet Risk and Concentrations of Credit
Risk
|
Pernix
Group utilized foreign exchange contracts to reduce exposure to foreign exchange
risks associated with payments for services and products related to the U.S.
embassy construction project in Fiji and receipts for the transmitter project in
Qatar. At December, 31, 2009, all of the foreign currency
forward exchange contracts related to Fiji had expired and the Qatar contracts
remain outstanding at December 31, 2009 with a receivable balance of $171,735
reflecting the fair value of the asset.
36
As of December 31, 2008, the Company had entered into foreign exchange
contracts in Fijian dollars amounting to $10.6 million and in U.S. dollars in
the amount of $6.7 million. These contracts were for a delivery of
Fijian dollars over a period of five months. The Company recorded
$697K of foreign exchange losses in its consolidated statement of operations as
of December 31, 2008 relating to the net present value of these contracts.
The Company had standby letters of credit and financial
guarantees. Pernix/SHBC JV was required to obtain two stand-by
letters of credit representing performance and payment bonds on its most recent
construction project, the United States Embassy in Fiji. The Company was able to
obtain these stand-by letters of credit with Al Ahli Bank of Kuwait and
confirmed by the Bank of New York Mellon. These stand-by letters of credit
expired on October 15, 2009 and were not renewed as they were no longer
required by the client.
(17)
|
Related-party Transactions —
Not described elsewhere The Company’s shareholders include SHBC,
which holds less than 6% of Pernix Group’s stock at December 31, 2009.
SHBC is a civil, electrical and mechanical engineering firm and
construction contractor with 1,750 employees and over fifty
(50) years’ experience.
|
Furthermore,
as noted earlier, SHBC and Pernix Group have formed a joint venture (Pernix/SHBC
JV). This joint venture currently has a contract to construct the new U.S.
Embassy in Fiji. SHBC has an agreement with the joint venture to provide
consulting services for $25,000 per month through January 2009 of the U.S.
Embassy project. The joint venture limited partnership agreement between SHBC
and Pernix Group also requires a payment to SHBC of 6.5% per annum of the
unreturned capital.
The
following table provides a summary of financial information related to all
services provided to SHBC by the Company:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Sales
|
$ | 11,767 | $ | 36,571 | ||||
The
following table summarizes all balances related to transactions with SHBC as of
December 31, 2009 and 2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Accounts
payable to SHBC
|
$ | — | $ | 12,000 |
The
following table provides a summary of expense related to all services provided
by SHBC to the Company:
Twelve
Months Ended
December 31,
2009
|
Twelve
Months Ended
December 31,
2008
|
||||||
Consulting
Fees
|
$
|
25,000
|
$
|
300,000
|
|||
Costs
on standby letters of credit
|
113,041
|
12,000
|
|||||
Interest
(on unreturned capital)
|
75,384
|
73,764
|
|||||
Total
|
$
|
213,425
|
$
|
385,764
|
The
Company shares office space, certain office services, maintenance fee for
ViewWise software as well as personnel in support of their operations with
Computhink. The Company paid Computhink, Inc. a total of $84,660
in 2009 and $69,626 in 2008. The Company incurred expenses from
Computhink, Inc. of $113K in 2009 and $108K in 2008 for office rent and
related costs. In addition, the Company also incurred expenses from
Computhink, Inc. of $47K in 2009 and $45K in 2008 for personnel
services. In turn, the Company has received credits against the
billings from Computhink in the amount of $72K in 2009 and $90K in 2008 for
personnel consulting services and other incidental expenses. The
Company owed Computhink $6,218 and $2,530, respectively, at December 31,
2009 and 2008.
In
December of 2009 the Company agreed to loan Computhink $180,000 at an interest
rate of 5.5%. The loan was paid in full by Computhink in February of
2010.
The
Company also utilizes office space, land, and receives other services from Retsa
in Saipan and Tinian. Effective as of
37
January 1, 2009, the Company is no longer charged for the office space
or land. Retsa is an affiliated company of SHBC. The Company paid Retsa zero and
$73,905 in 2009 and 2008, respectively. The following table summarizes balances
payable to Retsa as of December 31, 2009 and 2008:
December 31,
|
|||||||
2009
|
2008
|
||||||
Accounts
payable to Retsa
|
$
|
977
|
$
|
—
|
Total
related party accounts payable are summarized as follows:
December 31
|
|||||||
2009
|
2008
|
||||||
Accounts
payable to SHBC
|
$
|
—
|
$
|
12,000
|
|||
Accounts
payable to Computhink
|
6,218
|
2,530
|
|||||
Accounts
payable to Retsa
|
—
|
—
|
|||||
$
|
6,218
|
$
|
14,530
|
(18) Income
Taxes
The
company's major tax jurisdictions include the United States, Illinois, the
Commonwealth of the Northern Mariana Islands, Fiji and Germany. The related tax
returns are examined by the Internal Revenue Service, Illinois Department of
Revenue, the Division of Revenue and Taxation of the Commonwealth of the
Northern Mariana Islands, the Fiji Islands Revenue and Customs Authority and the
Federal Central Tax Office, respectively. For TransRadio the years
of 2007 through 2009 remain subject to examination.
Income
tax expense (benefit) consists of:
Current
|
Deferred
|
Total
|
||||||||
Year
ended December 31, 2009:
|
||||||||||
U.S.
Federal
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
State
and local
|
—
|
—
|
—
|
|||||||
U.S.
possession
|
—
|
—
|
—
|
|||||||
Foreign
|
281,039
|
281,039
|
||||||||
281,039
|
281,039
|
|||||||||
Year
ended December 31, 2008:
|
||||||||||
U.S.
Federal
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
State
and local
|
—
|
—
|
—
|
|||||||
U.S.
possession
|
—
|
—
|
—
|
|||||||
Foreign
|
614,942
|
—
|
614,942
|
|||||||
$
|
614,942
|
$
|
—
|
$
|
614,942
|
Current
Tax Expense
In 2009,
the Company had taxable losses and therefore, no current U.S. income tax expense
has been reflected in the accompanying consolidated statements of operations.
Foreign tax expense (benefit) of $284,536 was incurred in connection with the
Company’s operations in Fiji and is based upon earnings (loss) within Fiji. The
average tax rate for Fiji was 29%. The power generation business in Fiji had
pre-tax income of $963,205 in 2009, while the construction business had pre-tax
income of $13,139. TransRadio operations produced a foreign income
tax (benefit) of ($3,497).German taxes are typically comprised of three
components including a corporate income tax, a trade tax and a solidarity tax.
No current tax expense was incurred related to German operations (TransRadio) as
the company was not acquired until December 28, 2009.
In 2008
the Company recorded a loss for financial reporting purposes as well as a loss
for income tax reporting purposes and, therefore, no current U.S. income tax
expense has been reflected in the accompanying consolidated statements of
operations. The Company recorded 2008 foreign tax expense related to the
Company’s operations in Fiji. The average tax rate for Fiji was 31%
in 2008. The power generation business in Fiji had pre-tax income of
$1,285,252 in 2008, while the construction business had pre-tax income of
$566,635.
Deferred
Tax (Expense or Benefit)
In 2009,
the Company had income for financial reporting purposes that was primarily
caused by the bargain purchase gain on the acquisition of TransRadio. No
deferred tax expense was recorded on the bargain purchase gain related to the
acquisition of TransRadio as the Company intends to maintain and permanently
reinvest in TransRadio for the foreseeable
38
future. Had the Company recorded the deferred tax liability on
this gain it would have amounted to approximately $1.7 million at a 40% U.S. tax
rate.. The Company also did not book a deferred tax liability on the
trademark intangible asset recorded in connection with the TransRadio
acquisition because the asset is indefinite lived and therefore is not amortized
for book purposes nor are they deductible under German tax code.
The customer backlog asset will be amortized for book purposes in 2010
based on customer acceptance, while the customer relationship intangible asset
which will be amortized for book purposes in 2010 – 2019 in the amounts of $0.2
million in 2010 and $0.2 million per year, respectively. These amounts are not
deductible under the German tax code. Therefore, a deferred tax liability of
$0.6 million was recorded, and the amount was determined by applying the German
tax rate of 31% to the intangible asset values totaling $1.8 million. No 2008
deferred tax expense or benefit was recorded.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2009and 2008 are presented below:
2009
|
2008
|
||||||
Deferred
tax assets:
|
|||||||
Net
operating loss carry forwards
|
$
|
20,800,000
|
$
|
22,600,000
|
|||
Accrued
expenses
|
265,000
|
190,000
|
|||||
Total
gross deferred tax assets
|
21,065,000
|
22,790,000
|
|||||
Less
valuation allowance
|
21,065,000
|
22,790,000
|
|||||
Net
deferred tax asset
|
$
|
—
|
$
|
—
|
The
valuation allowance for deferred tax assets as of December 31, 2009 and
2008 was $21,065,000 and $22,790,000, respectively. The net change in the total
valuation allowance for the years ended December 31, 2009 and 2008 was a
decrease of $1,725,000 and an increase of $2,390,000, respectively, aligning
with the change in the amount of the underlying deferred tax assets thereby
maintaining a 100% valuation allowance against the asset. In assessing whether
the deferred tax asset is realizable, 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
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management believes that the valuation
allowance reduces the recognition of deferred tax assets to a level that
reflects the amount that is more likely than not to be realized, considering the
tax planning strategies available to the Company.
At
December 31, 2009, the Company has total net operating loss carry forwards
from U.S. operations of approximately $12.3 million and approximately $47.1
million from its operations in the Commonwealth of Northern Mariana Islands. The
net operating loss carry forwards expire in the years 2017 through 2028. Certain
of these net operating losses may be subject to a limitation on future
utilization due to ownership changes or foreign tax laws.
A
reconciliation of the differences between income taxes computed at the U.S.
federal statutory rate of 34%, the Fiji tax rate of 29%, and the Company’s
reported provision for income taxes is as follows:
Year
Ended December 31,
|
|||||||
2009
|
2008
|
||||||
Income
tax (benefit) at statutory rate
|
$
|
1,665,452
|
$
|
(1,441,630
|
)
|
||
Difference
between U.S. tax rate and Fiji tax rate
|
(48,817
|
)
|
(55,554
|
)
|
|||
Change
in prior year’s deferred tax estimate
|
(308,496
|
)
|
(318,759
|
)
|
|||
Other
|
(2,100
|
)
|
40,885
|
||||
Provision/(benefit)
not recognized due to valuation allowance
|
—
|
|
2,390,000
|
||||
Income not subject to tax gain on bargain purchase |
(1,025,000
|
) | |||||
Provision
(benefit) for income taxes
|
$
|
281,039
|
$
|
614,942
|
As of
January 1, 2007, the Company adopted FASB guidance pertaining to accounting
for uncertainty in Income Taxes, which clarifies the accounting and disclosure
for uncertainty in tax positions, as defined. Pursuant to the guidance, the
Company has analyzed filing positions in all of the federal, foreign and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The only periods subject to examination
for the Company’s U.S. tax returns are the 2004 through 2008 tax years. The
Company believes that its income tax filing positions and deductions would be
sustained on audit and does not anticipate any adjustments that would result in
a material change to its financial position. Therefore, no reserves for
uncertain income tax positions have been recorded pursuant to the
guidance.
(19) Commitments
and Contingencies
39
Minimum
rental commitments under all noncancelable-operating leases, primarily related
to property, vehicles, and construction equipment, in effect at
December 31, 2009 are:
Years
ending December 31,
|
||||
2010
|
641,189
|
|||
2011
|
255,507
|
|||
2012
|
133,552
|
|||
2013
|
4,414
|
|||
2014
|
736
|
|||
TOTAL
|
$
|
1,035,398
|
Lease
expense was $120,599 and $192,142 for the years ended December 31, 2009 and
2008, respectively.
On
April 1, 2007 the Company entered into a sublease with Computhink, a
related party, for a term of four years from May 1, 2007 through
April 30, 2011. The sublease calls for a base rental payment of
$6,791 per month in the first year with a 3.0% escalation in the monthly rate in
each of the three subsequent years. The base monthly amount includes
rent and reception services.
Future
minimum lease payments at December 31, 2009, for those leases having an
initial or remaining non-cancelable lease term in excess of one, are included in
the table above.
We lease
certain buildings, cars and equipment in Germany under non-cancelable operating
leases. The building and car leases expire in 2012 and equipment leases expire
in 2010. The leases include provisions for rent escalation to recognize
increased operating costs or require us to pay certain maintenance and utility
costs. TransRadio’s expense for the years ended December 31,
2009 was $522,219. There was no rental income from
subleases during this period.
The
Company is involved in various litigation proceedings arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company’s financial
position, results of operations, or liquidity.
In 1999,
Telesource CNMI was awarded a contract to build 45 housing units for the
Northern Marina Housing Agency, a government unit. The houses were built and
subsequently occupied. The Northern Marianas Housing Corporation has filed a
lawsuit against Telesource CNMI and two other parties for $3.0 million in
damages related to this project. These claims involve allegations of various
construction defects. The Company estimates that, if the plaintiff is
successful, the Company may have an estimated liability in the range of $500,000
to $1,200,000. The Company accrued a $300,000 estimated loss in 2004, $200,000
in 2006 and an additional $609,000 during 2007. In 2007, the Company
paid $139,000 to claimants resulting in an accrual of $970,000 at
December 31, 2007. In 2008, the Company paid $92,817 to
claimants resulting in an accrual of $877,183 at December 31,
2008. No incremental accruals or payments were made during of
2009. These amounts are reflected under accrued expenses as of
December 31, 2009. The Company has denied any liability
and will aggressively defend itself to mitigate and/or dismiss these
claims.
Pernix
Group’s power generation activities involve significant risks of environmental
damage, equipment damage and failures, personal injury and fines and costs
imposed by regulatory agencies. Though management believes its insurance
programs are adequate, if a liability claim is made against it, or if there is
an extended outage or equipment failure or damage at a Company power plant for
which it is inadequately insured or subject to a coverage exclusion, and Pernix
Group is unable to defend against these claims successfully or obtain
indemnification or warranty recoveries, Pernix Group may be required
to pay substantial amounts, which could have a materially adverse effect on its
financial condition. Although the equipment is covered under its insurance, the
Company is liable for the deductible of 1,250,000 FJD (which may range up to
approximately $650,000USD at December 31, 2009).
Pernix
Group offers warranties on its construction services and power generating
plants. Pernix Group does not maintain any material warranty reserves because
these warranties are usually backed by warranties from its vendors. Should
Pernix Group be required to cover the cost of repairs not covered by the
warranties of Pernix Group’s vendors or should one of Pernix Groups major
vendors be unable to cover future warranty claims, Pernix Group could be
required to outlay substantial funds, which could harm its financial
condition.
The
Company assumed the warranty obligations of TransRadio in connection with the
acquisition in December, 2009. As of December 31, 2009, the accrued warranty
obligation of TransRadio amounts to $178,303. The warranty accruals each period
approximate 0.06% of TransRadio sales based on historical
experience.
40
The Company has an agreement with the Commonwealth of the Northern Mariana
Islands to manage one of their power plants. In accordance with Change Order
No. 3 of this agreement, the Company is required to upgrade the power
distribution system in certain areas of the Tinian Island. The Company is
responsible for the costs of the upgrade which include labor and material. The
Company incurred approximately $1,250,176 in costs associated with this upgrade
through December 31, 2008. The Company will be seeking a final
certification for the upgrade from the client. Such certification includes
certain negotiating issues that may have a minor effect on the remaining cost to
complete the upgrade. Generally, TCNMI has been diligent in completing work
outlined in the specifications on a line-by-line basis and has received
acceptance from CUC for on-going work in the same manner. The Company
completed the upgrade in 2007 however some minor additional costs in the range
of $15,000 not to exceed $25,000 may be incurred.
During November 2006, the Company revised its credit facility
agreement with Australia and New Zealand Banking Group Limited (“ANZBGL”). The
revised credit facility is in the amount of FJD $200,000 for the purchase or
leasing of vehicles. The company had three leases for motor vehicles each
running 36 months from November 22, 2006 through October 31, 2009. The
three leases were paid in full in September 2008. In
October of 2009, the company terminated its credit facility with
ANZBGL.
During October of 2004, TransRadio received a credit facility with the
Berliner Bank in Germany. The credit facility is in the amount of
€500,000 EURO (approximately $716,650 USD at December 31,
2009). Interest will be charged at the rate of 8.5% per
annum. As of December 31, 2009, TransRadio has drawn up on the
facility in the amount of $192,801 EURO (approximately $276,343 USD at December
31, 2009).
The Company operates a power plant on the island of Tinian. The power plant
requires a permit with the Department of Environmental Quality. The Company
currently has a temporary permit and expects to receive a permanent permit.
However, substantial consequences could occur if the Company does not receive a
permanent permit.
(20) Business
Segment Information
Pernix
Group Inc. has selected to organize its segment information around its products
and services. Pernix Group Inc. has three operating segments: power
generation and construction of power plants, construction services and
transmitter design and installation. The power generation and construction of
power plants segment includes sales-type lease revenues. There were
no material amounts of transfers between segments. Any inter segment revenues
have been eliminated. The following table sets forth certain segment information
for the periods indicated:
December
21, 2009
|
||||||||||
Power
generation
and
construction of power plants
|
Construction
|
Transmitter manufacturing and
installation
|
Total
|
|||||||
Revenue
|
$
|
5,333,985
|
$
|
9,476,144
|
$
|
|
$
|
14,810,102
|
||
Interest
expense (income), net
|
(16,985)
|
43,859
|
10,761
|
37,635
|
||||||
Depreciation
and amortization
|
95,291 | 23,266 |
1,517
|
120,074 | ||||||
Income tax expense (benefit)
|
282,002 | 2,534 |
(3,497)
|
281,039
|
||||||
Net income (loss) to the stockholders of Pernix Group, Inc. and
subsidiaries
|
(1,449,129) | 877,310 |
5,204,802
|
4,632,983
|
||||||
Total capital expenditures | 56,418 | — |
—
|
56,418 | ||||||
Total assets | 3,752,230 | 1,708,430 |
15,322,367
|
20,783,027 |
December
21, 2008
|
||||||||||
Power
generation
and
construction of power plants
|
Construction
|
Transmitter
manufacturing and installation
|
Total
|
|||||||
Revenue
|
$
|
4,921,975
|
$
|
24,159,865
|
$
|
—
|
$
|
29,081,840
|
||
Interest
expense
|
216,577
|
73,764
|
—
|
290,341
|
||||||
Interest
(income)
|
(14,996)
|
(51,393)
|
—
|
(66,389)
|
||||||
Depreciation
and amortization
|
134,773
|
134,247
|
—
|
269,020
|
||||||
Income
tax expense (benefit)
|
403,225
|
211,717
|
—
|
614,942
|
||||||
Net income (loss) to the stockholders of Pernix Group, Inc. and subsidiaries | (2,766,300) | (2,067,843) |
—
|
(4,834,143) | ||||||
Total capital expenditures | 86,546 | 11,091 |
—
|
97,637 | ||||||
Total assets | 4,438,893 | 7,975,051 |
—
|
12,413,944 |
41
Geographical
Information
|
||||||||||||||||
Total
Revenue
|
Fixed
Assets - Net
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
United
States
|
$ | 9,487,911 | $ | 24,196,436 | $ | 11,491 | $ | 56,770 | ||||||||
Commonwealth
of Northern Mariana Islands
|
1,744,644 | 1,074,301 | 9,706 | 16,910 | ||||||||||||
Fiji
|
3,577,547 | 3,811,103 | 211,947 | 246,583 | ||||||||||||
Germany
|
- | - | 406,584 | - | ||||||||||||
$ | 14,810,102 | $ | 29,081,840 | $ | 233,144 | $ | 320,263 |
The basis used to attribute revenues to individual countries is based upon the country associated with the contract. (E.g. contract is with a U.S. entity then the revenues are attributed to the U.S.)
The
Company has a concentration of risk with two significant customers. The Company
was contracted by the Commonwealth Utilities Corporation (CUC) to construct and
operate a power generation facility. In March 1999, the power generation
plant became operational. Power revenues from this plant began in
March 1999 and are earned under the terms of a long-term power energy
conversion agreement with this customer. Revenues from the CUC were
approximately $1.7 million and $0.9 million for 2009 and 2008.
Upon
commissioning of the Company’s power plant on the island of Tinian for Phase I
in March 1999, the Company received 120 promissory notes each in the amount
of $180,000 representing the guaranteed payment due from CUC over the term of
the agreement. The par value balance of promissory notes outstanding was zero
and $0.4 million as of December 31, 2009 and 2008, respectively. The
discounted value of the promissory notes was zero and $0.4 million at
December 31, 2009 and 2008, respectively. Under the agreement the Company
also receives a monthly operation and maintenance fee of $50,000 for 120 months.
The discounted value of the operation and maintenance fee was zero and $0.1
million at December 31, 2009 and 2008, respectively. The promissory notes
have been included in the original net investment in sales-type lease as
discussed in note 6. Revenues from the Tinian power plant were 11.7% and
3.1% of the Company’s revenues for 2009 and 2008, respectively. Gross
receivables for the investment in sales-type lease were zero and $0.5 million at
December 31, 2009 and 2008, respectively.
The
second significant customer is the Fiji Electric Authority (FEA). The Company
signed a 20-year operations and maintenance agreement with the FEA in
April 2003 and recognized revenues under the contract of $3.6 million and
$3.7 million in 2009 and 2008, respectively. Revenues from FEA were 24.2% and
13% of the Company’s total revenues for 2009 and 2008,
respectively.
The
Company previously had several construction contracts for projects that were
completed in Saipan, Tinian, Palau and Guam. These projects have all been
completed and the Company began to bid on new contracts under the Pernix/SHBC JV
during 2006. As noted earlier, the Company was awarded a $42.6 million contract
with subsequent change orders of $3.6 million to build a United States Embassy
in Suva, Fiji. This project began in 2007. Revenue from this customer totaled
$9.5 million and $24.2 million in 2009 and 2008, respectively.
Revenues
from the Company’s related party, SHBC, were $11,767 and $36,571 for 2009 and
2008, respectively.
Fixed
assets located at TFL in Fiji were $211,947 and $246,583 as of December 31,
2009 and 2008, respectively.
In
addition to the aforementioned customer concentrations, although TransRadio was
not acquired until December 2009 and no significant revenue has been reflected
in Pernix consolidated financial statements pertaining to these contracts,
TransRadio had two customers that accounted for approximately 64% of TransRadio
2009 revenues. For the four day period from the acquisition date of December 28,
2009 through December 31, 2009, no significant revenue was recorded pertaining
to these TransRadio contracts. .
42
(21)
|
Change
in Accounting Estimate
|
During
the second quarter of 2009, the Company concluded negotiations with the primary
subcontractor on the Embassy project which converted the subcontract to a lump
sum agreement. During the third quarter the company received a
contract amendment increasing the contract value by $1.2 million. As a
result of the revised agreement, the new contract amendment and improved cost
control measures, the Company revised its estimated cost to complete for the
Project.
In
accordance with the FASB guidance pertaining to accounting for a change in an
accounting estimate, the Company accounted for the change in estimated cost by
applying the cumulative catch-up method. Such application of this method
resulted in a recognized profit of $1,294,722 for the project in
2009. The impact of this cumulative catch up adjustment on 2009
earnings per share was $.01. The impact of the change in
accounting estimate is expected to result in operating income of $22,626 in
2010.
The
Company became aware of several revisions to the estimated cost to complete the
Embassy project. During 2008, the Company identified these changes and developed
a revised estimated cost to complete the Embassy project. These revisions were
primarily due to changes in costs attributed to the primary subcontractor who is
performing the work on the Embassy project.
In
accordance with FASB guidance pertaining to accounting changes and error
corrections, the Company accounted for the change in estimated cost by applying
the cumulative catch-up method. Such application of this method resulted in a
decrease of revenues recognized for the Embassy project by approximately $3.5
million through December 31, 2008. This change also decreased the
cumulative profit recognized on the project which has been reflected in the
December 31, 2008 financial statements.
(22) SUBSEQUENT
EVENTS
On March
5, 2010, the Company received a contract change order on the U.S. Embassy
project in the amount of $651,640 for additional interior work and exterior
finishes work.
On March
7, 2010, the Company received the Certificate of Site Acceptance on the Qatar
project.
On March
23, 2010 we issued 1,306,668 shares of common stock for $980,001.
On March
25, 2010 the Company acquired an additional 23.6% of TransRadio common voting
shares for $950,154, bringing the Company’s ownership to a total of 78%. The
Company retained control of TransRadio and as such recorded the acquisition as a
transaction resulting in no gain or loss.
We have
evaluated subsequent events and transactions for potential recognition or
disclosure in the consolidated financial statements through March 31, 2010, the
day that the consolidated financial statements were issued.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
ITEM
9A (T). Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
43
The
Company carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the Company’s most recent fiscal year.
Based upon this evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2009.
Management’s
Annual Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). The Company’s management conducted an evaluation of the effectiveness
of the Company’s internal control over financial reporting based on the
framework in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
the Company’s management concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2009.
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report on Form 10-K.
Under the
direction of the Company’s Chief Executive Officer and Chief Financial Officer,
management has assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2009. The Company’s evaluation of
internal control over financial reporting did not include the internal controls
of the entity (see note 3) that was acquired during the fourth quarter of fiscal
2009, which is included in the 2009 consolidated financial statements and which
constituted approximately 70% of total assets as of December 31, 2009 and 0% of
gross profit for the year then ended. In making this assessment, management used
the criteria set forth in the Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO)."
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the fiscal quarter ended December 31, 2009 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
ITEM
9B.
|
OTHER
INFORMATION
|
On
or about March 25, 2010 the Company acquired approximately an additional 23.6%
of TransRadio common voting shares for $950,154, bringing the Company’s
ownership to a total of 78%.
44
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors
are elected for one-year terms and are elected at each annual meeting of
stockholders. As of the date of this report Pernix Group’s Board of Directors
and executive officers are:
Name
and Age;
Years
Served as Director
|
Principal
Occupation for Past Five Years; Other Directorships
|
|
Ralph
Beck
Age
70
Chairman
of the Board
Director
since 1999
|
Mr. Beck
was a principal of Global Construction Solutions, L.L.C. From 1994 to
1998, Mr. Beck served as the President of Kajima Construction
Services, Inc., the North American the general building construction
subsidiary of Kajima Corporation a Japanese global engineering and
construction firm. From 1965 to 1994, Mr. Beck was with the Turner
Corporation, an international engineering and construction firm.
Mr. Beck served as the chairman of the board for Turner Steiner
International from 1987 to 1994, and as a senior vice president for Turner
Corporation.
|
|
Nidal
Zayed
Age
48
Director
Since 1998
Chief
Executive Officer since 2005
|
Nidal
Zayed, President & Chief Executive Officer, joined Pernix Group
in January 1996. He is also engaged in the practice of law. He
received a law degree from Loyola University School of Law in 1985 and a
B.A. in Accounting from Loyola University of Chicago in
1982.
|
|
Jeffery
Adams
Age
66
Director
Since 1999
|
Mr. Adams
is an Electrical Engineer trained in the United Kingdom. From 1978 to
1986, Mr. Adams served as the marketing director of Babcock
Industries and Electrical Group of Companies. In 1986, Mr. Adams
became an independent international sales marketing consultant. From 1987
to present, Mr. Adams is the general manager for Trafex Ltd., an
engineering supplies company serving the Middle East.
|
|
Max
Engler
Age
60
Director
Since 1997
|
From
1988 to present Mr. Engler has been an independent Financial
Consultant and is also on the Board of Directors of various companies in
Switzerland and abroad. From 1984 to 1988 Mr. Engler headed the
Private Banking desk (Middle East and Far East) of Bank Leu as Vice
President. He is a director of Computhink Incorporated, Belmoral S.A.,
Computhink Ltd., Telesource CNMI Inc., Retsa Development Inc., FSD
Holdings PLC, Litra Holdings AG, Linos Consulting AG, Trafex Ltd., R.C.W.
Enterprises S.A., and TransRadio SenderSysteme Berlin
AG.
|
|
Ibrahim
M. Ibrahim
Age
67
Director
Since 1999
|
Mr. Ibrahim
is now with the Al Ahli Bank of Kuwait in the commercial lending area
since 2002 and has been Head of International Banking for Commercial Bank
of Kuwait from 2001 through 2002 and the Head of International Banking for
The Gulf Bank K.S.C. in Kuwait from 1986 to 2001. Mr. Ibrahim served
as the Vice President and Head of Credit and Marketing for the First
National Bank of Chicago for the Middle East region from 1984 to 1986 and
he also served as the Vice President and General Manager of Continental
Illinois Bahrain Branch from 1969 to 1984. Mr. Ibrahim received his
M.B.A. in International Business from De Paul University, his M.S. in
Taxation and Islamic Law from the University of Alexandria and his B.A. in
Accounting from the University of Alexandria.
|
|
Trudy
Clark
Age
59
Director
Since 2007
|
General
Clark has over twenty years of experience in innovative delivery of
support services at worldwide locations in units of 60-2000 members and
budgets from $1M-2.9B. General Clark is an experienced leader with
exceptional organizational and facilities management skills; she has
served as the Deputy Director for the Defense Threat Reduction Agency,
working to direct approximately 4,000 government and contractor personnel
at 30 locations worldwide and conducting international and homeland
security exercises for the Department of Defense. Additionally while
serving as the Chief Information Officer and Director for Command,
Control, Communications and Computers, US Strategic Command, General Clark
supported the Government and Contractors to develop software, lifecycle
management and strategic planning for modernization of over $5B of nuclear
decision support systems. General Clark has a Masters in Guidance and
Counseling from Troy State University in
Alabama.
|
45
Carl
Smith
Age
61
Director
Since 2007
|
Mr. Smith,
a graduate of the University of Hawaii obtained his Juris Doctorate at
University of California Law School and has over thirty years of
experience in government contracting, defense acquisition, international
agreements, telecommunication regulations, information security and is an
expert when it comes to Cyber Law/Information Assurance, Fiscal Law, FOIA,
Privacy Act and Ethics in Government Act. Mr. Smith served as the
General Counsel for the Defense Information Systems Agency, offering
advice and guidance to the Agency Director and the Senior Executive Team
on a full spectrum of legal issues, including government contracting.
While serving as the Chief Regulatory Counsel-Telecommunications for the
Department of Defense, Mr. Smith was responsible for advising the
Office of Science and Technology Policy and the Assistant Secretary of
Defense in Telecommunication Regulatory matters that affected national
security, emergency preparedness as well as the Department of Defense’s
commercial interests. He is a member of the Hawaiian and D.C. Bar
Association.
|
|
Greg
Grosvenor
Age
58
Chief
Financial Officer Since August, 2005
|
Mr.
Grosvenor has been Pernix Group’s Vice President and Chief Financial
Officer since August 2005. Mr. Grosvenor is responsible for all SEC
reporting, tax compliance, strategic financial planning and human
resources at its corporate headquarters. He is also responsible for all
financial operations including reporting and tax matters in the company’s
international subsidiaries. Mr. Grosvenor has more than sixteen years of
CFO experience with include both private and publicly traded companies.
Mr. Grosvenor has worked with investment firms such as William Blair
Capital to restructure and sell one of their portfolio companies. In
addition, he completed debt restructuring and funding in the hundredS of
millions of dollars for the Metropolitan Pier and Exposition Authority. He
also worked at the parent holding company of Hyatt Corporation for six
years where he was responsible for the reporting of multiple companies. He
was a member of the team that spun off Galileo from United Airlines and
worked at Anixter Bros. in various financial and accounting roles. He
began his career working with the international audit firm of
PriceWaterhouse Coopers. He obtained his CPA in Illinois and graduated
from Loyola University in Chicago.
|
Code of
Ethics
Our Code of Ethics sets a
high standard for honesty and ethical behavior by every employee, including our
principal executive officer, principal financial officer, controller and
principal accounting officer. The Code is posted on our website at
http://www.pernixgroup.com/ethics-compliance.asp and is incorporated by
reference as Exhibit 14 to this form 10-K. To obtain a copy of the
Code at no charge, submit a written request to the Corporate Secretary at 860
Parkview Blvd., Lombard, Illinois 60148. We will post on our website
any required amendments to or waivers granted under our Code pursuant to SEC
rules.
SUMMARY
COMPENSATION TABLE
Name
and
Principal
Position
|
Year
|
Salary
(1)
|
Bonus
|
All
Other Annual
Compensation(2)
|
|||||||||
Nidal
Zayed
|
2009
|
$ | 275,000 | $ | — | $ | 24,622 | ||||||
Chief
Executive Officer
|
2008
|
$ | 275,000 | $ | — | $ | 24,756 | ||||||
Greg
Grosvenor
|
2009
|
$ | 170,000 | $ | — | $ | 18,963 | ||||||
Chief
Financial Officer
|
2008
|
170,000 | — | $ | 19,307 |
|
(1)
|
Includes
salary paid by Pernix Group, before any salary reduction for contributions
to Pernix Group’s 401(k) Savings
Plan.
|
(2)
|
Pernix
Group provided a vehicle to Mr. Zayed at a cost of $11,502 in 2009
and in 2008. Pernix Group provided Mr. Zayed with health insurance
for him and his family at a cost of $13,120 in 2009 and $13,254 in 2008.
The Company provided health insurance to Mr. Grosvenor and his family
of $18,963 in 2009 and $19,307 in
2008.
|
46
|
Stock
Options
|
As of
December 31, 2009 there were no stock options outstanding to any persons
other than nonemployee directors.
Directors
Compensation
The
Company paid an annual fee to each Director (except for Nidal Zayed) in the
amount of $20,000 in both 2009 and 2008,
respectively. Ralph Beck, Trudy Clark, and Carl
Smith each receive an additional $1,500 for their participation in the
Government Security Committee. Such fees are paid in
cash.
2009 Director's Fee |
2009 Other Compensation |
2008 Director's Fee |
2008 Other Compensation |
|||||||||||||
Directors
|
||||||||||||||||
Max
Engler
|
$ | 20,000.00 | $ | - | $ | 20,000.00 | $ | - | ||||||||
Ibrahim
Ibrahim
|
$ | 20,000.00 | $ | - | $ | 20,000.00 | $ | - | ||||||||
Jeff
Adams
|
$ | 20,000.00 | $ | - | $ | 20,000.00 | $ | - | ||||||||
Ralph
Beck
|
$ | 20,000.00 | $ | 1,500.00 | $ | 20,000.00 | $ | 1,500.00 | ||||||||
Trudy
Clark
|
$ | 20,000.00 | $ | 1,500.00 | $ | 20,000.00 | $ | 1,500.00 | ||||||||
Carl
Smith
|
$ | 20,000.00 | $ | 1,500.00 | $ | 20,000.00 | $ | 1,500.00 | ||||||||
TOTAL
|
$ | 120,000.00 | $ | 4,500.00 | $ | 120,000.00 | $ | 4,500.00 |
The
following table contains information as of December 31, 2009 regarding the
ownership of the Common Stock of the Company by: (i) all persons who, to
the knowledge of the Company, were the beneficial owners of 5% or more of the
outstanding shares of Common Stock of the Company, (ii) each director and
director nominee of the Company, (iii) the Chief Executive Officer and the
two other most highly compensated executive officers of the Company whose salary
and bonus for the fiscal year ended December 31, 2009 exceeded $100,000,
and (iv) all executive officers and directors of the Company as a
group:
Name
|
Amount
and
Nature
of
Beneficial
Ownership
(1)
|
Percent
of
Common
Stock
Outstanding
(2)
|
||||||
SHBC and Affiliated | ||||||||
Max
Engler(3)
|
95,000 | * | ||||||
Ibrahim
Ibrahim
|
55,000 | * | ||||||
Jeff
Adams
|
46,000 | * | ||||||
Ralph
Beck
|
45,000 | * | ||||||
Trudy
Clark
|
— | * | ||||||
Carl
Smith
|
— | * | ||||||
Nidal
Z. Zayed
|
— | * | ||||||
Greg
Grosvenor
|
— | * | ||||||
All
Executive Officers and Directors as a Group (8 Persons)
|
241,000 | 0.2 | % |
|
*
|
Less
than 1%
|
(1)
|
Except
as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community
property laws where applicable. Amounts include 45,000 options held by
each non-employee director.
|
(2)
|
Calculated
on the basis of 139,574,567 shares of Common Stock outstanding as of
December 31, 2009. Excludes 45,000 options that were
exercisable within 60 days of December 31, 2006 held by each
non-employee director, for a total of 180,000 options. None of the options
were exercised and the Company did not incur any expenses associated with
these options.
|
47
(3)
|
Max
Engler serves as a director for Litra Holding AG. Litra Holding AG owns
directly 495,000 shares of Pernix Group’s common stock. Based upon
information provided to Pernix Group, Pernix Group does not consider these
shares to be beneficially owned by
Mr. Engler.
|
Shown
below is information as of December 31, 2009 with respect to the shares of
Common Stock that may be issued under Pernix Group’s equity compensation
plans.
Number
of shares to be
issued
upon exercise
of
outstanding options
|
Weighted
average
exercise
price of
outstanding
options
|
Number
of shares
remaining
available
for
future issuance
under
equity
compensation
plans
|
||||||||||||||||||
Equity
compensation plans approved by shareholders
|
180,000 | (1) | 1.25 | 975,000 | (2) |
|
(1)
|
Includes
the number of shares that may be issued upon the exercise of outstanding
options to purchase shares of Pernix Group Common Stock under Pernix
Group’s stock option plans.
|
(2)
|
Includes
shares available for future issuance under Pernix Group’s stock option
plans, excluding shares quantified under Column
1.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS
INDEPENDENCE
|
Certain
of the Company’s executive officers, directors, and major stockholders are also
owners, officers, and/or directors of SHBC located in Kuwait. SHBC is a civil,
electrical, and mechanical engineering firm and construction contractor with
approximately 1750 employees and over 50 years of experience. SHBC and
affiliated companies hold 96.9% of the common stock outstanding. SHBC
and Pernix Group bid and compete within the same industries; however, SHBC has
agreed, in writing, not to bid on projects within the United States and its
possessions.
Additionally,
from time to time the Company may hire, on a part time or temporary basis,
individuals employed by SHBC to provide assistance to Pernix Group on certain
projects in the Northern Mariana Islands.
The
Company paid Computhink, Inc. $84,660 in 2009 for rent, and certain office
services. The Company shares office space with Computhink in its
Lombard office. Director Max Engler is also a director of
Computhink.
Director
Independence
The
Company is a “Controlled Company” as that term is defined by the Listing
Requirements of NASDAQ. As such, if the Company were a company listed on the
NASDAQ trading market, it would not be required to comply with the director
independence guidelines established thereby.
The Audit
Committee pre-approves all audit services and permitted non-audit services
(including the fees and terms thereof) to be performed for the Corporation by
its independent registered accountants, Reznick Group P.C. Reznick
Group P.C. became the new independent registered accountants in April of 2009.
The following table presents fees for professional services rendered by LJ
Soldinger Associates LLC, the former independent registered accountants and by
Reznick Group P.C. for the respective periods indicated:
SERVICES PERFORMED
|
2009
|
2008
|
||||||
Audit
Fees (Note 1)
|
$ | 183,000 | $ | 235,000 | ||||
Audit-Related
Fees (Note 2)
|
32,138 | 5,000 | ||||||
Tax
Fees (Note 3)
|
19,000 | 17,000 | ||||||
All
Other Fees
|
0 | 0 | ||||||
Total
Fees
|
$ | 234,138 | $ | 257,000 |
NOTES TO
PRECEDING TABLE
|
1.
|
Audit
fees represent fees billed for professional services provided in
connection with the audit of our annual financial statements, reviews of
our quarterly financial statements, audit services provided in connection
with statutory and
|
48
|
regulatory
filings for those years and audit services provided in connection with
securities registration and/or other issues resulting from that
process.
|
|
2.
|
Audit-related
fees represent fees billed primarily for assurance and related services
reasonably related to the performance of the audit or reviews of our
financial statements.
|
|
3.
|
Tax
fees principally represent fees billed for tax
preparation.
|
See the
audited financial statements for the year ended December 31, 2009,
presented in Item 8 above.
EXHIBIT
NUMBER
|
EXHIBIT
DESCRIPTION
|
|
2.01
|
Amended
and Restated Agreement and Plan of Merger and Plan of Reorganization among
Sixth Business Service Group and Pernix Group , Inc. Appendix A
(Incorporated by reference from Exhibit 2.01 to the Form S-4 filed on
12/9/1999)
|
|
3.01
|
Certificate
of Incorporation of Pernix Group (Incorporated by reference
from Exhibit 3.01 to the Form S-4 filed on 7/2/2001)
|
|
3.02
|
By-laws
of Pernix Group (Incorporated by reference from Exhibit 3.02 to
the Form S-4 filed on 7/2/2001)
|
|
3.03
|
Amendment
to Certificate of Incorporation (Incorporated by reference from Exhibit
3.03 to the Form 10KSB filed on 4/2/2007)
|
|
10.01
|
Agreement
for Design, Supply of Plant and Equipment, Private Construction,
Maintenance and Operation, and Transfer of Ownership dated June 10,
1997 (Incorporated by reference from Exhibit 10.01 to the Form S-4 filed
on 12/9/1999)
|
|
10.02
|
Agreement
for Design, Supply of Plant and Equipment, Private Construction,
Maintenance and Operation, and Transfer of Ownership, Change Order Number
1, dated November 30, 1998 (Incorporated by reference from Exhibit
10.02 to the Form S-4 filed on 12/9/1999)
|
|
10.03
|
Agreement
for Design, Supply of Plant and Equipment, Private Construction,
Maintenance and Operation, and Transfer of Ownership, Change Order Number
2, dated November 30, 1998 (Incorporated by reference from Exhibit
10.03 to the Form S-4 filed on 12/9/1999)
|
|
10.04
|
Agreement
and Contract for Construction of Koblerville Expansion Project between the
Northern Mariana Islands and Pernix Group dated July 28,
1998 (Incorporated by reference from Exhibit 10.04 to the Form S-4 filed
on 12/9/1999)
|
|
10.05
|
Memorandum
of Understanding between Sayed Hamid Behbehani & Sons, Co. W.L.L.
and Pernix Group , Inc. regarding right of first refusal for certain
areas (Incorporated by reference from Exhibit 10.08 to the Form S-4 filed
on 12/9/1999)
|
|
10.06
|
Memorandum
of Understanding between Sayed Hamid Behbehani & Sons, Co. W.L.L.
and Pernix Group , Inc. regarding commission fees (Incorporated by
reference from Exhibit 10.09 to the Form S-4 filed on
12/9/1999)
|
|
10.07
|
Note
Agreement between the Commercial Bank of Kuwait, New York Branch, and
Telesource CNMI, Inc. dated August 20, 1998 (Incorporated
by reference from Exhibit 10.12 to the Form S-4 filed on
12/9/1999)
|
|
10.08
|
Note
Agreement between the Commercial Bank of Kuwait, New York Branch, and
Telesource CNMI, Inc. dated December 11, 2001 (Incorporated by
reference from Exhibit 10.08 to the Form ARS filed on
6/29/2009)
|
|
10.09
|
Term
Loan Agreement between the Kuwait Real Estate Bank and Telesource
CNMI, Inc. dated May 2, 1999 (Incorporated by reference from
Exhibit 10.11 to the Form S-4 filed on 8/2/2001)
|
|
10.10
|
Line
of Credit Agreement between the Bank of Hawaii and Telesource
CNMI, Inc. (Incorporated by reference from Exhibit 10.12 to the Form
S-4 filed on 7)
|
49
10.11
|
Lease
of Tinian Land between the Commonwealth Utilities Corporation and
Telesource International CNMI, Inc. (Incorporated by reference from
Exhibit 10.15 to the Form S-4 filed on 12/9/1999)
|
|
10.12
|
Loan
Facility Agreement between Arab Banking Corporation and Telesource
International Inc. dated March 22, 2005 (Incorporated by reference
from Exhibit 10.12 to the Form 10KSB filed on 4/2/2007)
|
|
10.13
|
Pernix
Group , Inc. 2000 Incentive Stock Option Plan (Incorporated by
reference from Exhibit 10.19 to the Form S-4 filed on
7/2/2001)*
|
|
10.14
|
Pernix
Group , Inc. 2000 Non-Qualified Stock Options Plan (Incorporated by
reference from Exhibit 10.20 to the Form S-4 filed on
7/2/2001)*
|
|
10.15
|
Pernix
Group , Inc. 2000 Non-Employee Director Stock Option Plan
(Incorporated by reference from Exhibit 10.21 to the Form S-4 filed on
7/2/2001)*
|
|
10.16
|
Warrant
to Purchase 1,000,000 Shares of Common Stock between SHBC and Pernix Group
, Inc. (Incorporated by reference from Exhibit 10.23 to the Form 10-K
filed on 4/16/2002)
|
|
10.17
|
Pernix
Group , Inc. Sayed Hamid Behbehani & Sons Co., Joint
Venture, L.P. Agreement (Incorporated by reference from Exhibit 10.17 to
the Form 10KSB filed on 4/2/2007)
|
10.18
|
Common
Stock Purchase Agreement between Pernix Group , Inc. and Ernil
Continental S.A., BVI dated February 26, 2007. (Incorporated by
reference from Exhibit 10.18 to the Form 10KSB filed on
4/2/2007)
|
|
10.19
|
Common
Stock Purchase Agreement between Pernix Group , Inc. and Halbarad
Group, LTD., BVI dated February 26, 2007 (Incorporated by reference
from Exhibit 10.19 to the Form 10KSB filed on 4/2/2007)
|
|
10.20
|
Common
Stock Purchase Agreement between Pernix Group , Inc and Ernil Continental
S.A., BVI dated January 4, 2008 (Incorporated by reference from
Exhibit 10.20 to the Form ARS filed on 6/29/2009)
|
|
10.21
|
Common
Stock Purchase Agreement between Pernix Group , Inc and Halbarad Group,
LTD., BVI dated January 4, 2008 (Incorporated by reference from
Exhibit 10.21 to the Form ARS filed on 6/29/2009)
|
|
14.0
|
Code
of Ethics (Incorporated by reference from Exhibit 99.1 to the Form 10KSB
filed on 7/31/2006)
|
|
21
|
List
of Subsidiaries and their jurisdictions
|
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certification
of CEO **
|
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification
of CFO**
|
|
32.1
|
Section 1350
Certification — Chief Executive Officer**
|
|
32.2
|
Section 1350
Certification Chief Financial Officer**
|
|
|
*
|
Management
contracts and compensatory plans and arrangements required to be filed as
exhibits pursuant to item 15(b) of this
report.
|
**
|
Filed
herewith
|
50
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.
PERNIX
GROUP, INC.
(Registrant)
Dated:
March 31, 2010
|
/s/
Nidal Zayed
|
Nidal
Zayed
|
|
President
and Chief Executive Officer
|
PURSUANT
TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES INDICATED ON March 27, 2010.
/s/
Ralph Beck
|
Chairman
of the Board of Directors
|
|
Ralph
Beck
|
||
/s/
Nidal Z. Zayed
|
Director
and Chief Executive Officer
|
|
Nidal
Z. Zayed
|
||
/s/
Max Engler
|
Director
|
|
Max
Engler
|
||
/s/
Jeffery Adams
|
Director
|
|
Jeffery
Adams
|
||
/s/
Trudy Clark
|
Director
|
|
Trudy
Clark
|
||
/s/
Carl Smith
|
Director
|
|
Carl
Smith
|
||
/s/
Ibrahim Ibrahim
|
Director
|
|
Ibrahim
Ibrahim
|
||
/s/
Greg Grosvenor
|
Chief
Financial Officer
|
|
Greg
Grosvenor
|
51