UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-92445
PERNIX GROUP, INC.
(Exact name of Registrant as specified in its charter)
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Delaware | | 36-4025775 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
151 E. 22nd Street
Lombard, Illinois 60148
(Address of principal executive offices, including zip code)
(630) 620-4787
(Registrant’s telephone number, including area code)
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 $0.01 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 Securities Act. o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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). x Yes o No
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 this 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. (Check one):
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Large accelerated filer o | | Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) | | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
The aggregate market value of registrant’s common stock held by non-affiliates on June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing price of a share of the registrant’s common stock on such date was approximately $23,509,243.
Number of shares of the registrant’s common stock outstanding as of March 18, 2015: 9,403,697
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders held on December 1, 2014 are incorporated by reference into Part III.
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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 “suggests”, “believes,” “plans,” “anticipates,” “will”, “will likely result,” “will continue,” “projects,” “expects,” “should”, “would”, “could”, “forecast”, 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 would 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 of Directors (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 United States (U.S.) Securities and Exchange Commission (SEC).
The Company may, from time to time, post financial or other information on its Internet website, www.pernixgroup.com. The internet address is for informational purposes only and is not intended for use as a hyperlink. The Company is not incorporating any material on its website into this report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
In this report, we use the terms “Pernix Group,” “Pernix,” “the Company,” “we,” “us” and “our” to refer to Pernix Group, Inc. (formerly known as Telesource International, Inc.) and its consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years. We refer to the calendar year ended December 31, 2014 as “2014” and the calendar year ended December 31, 2013, as “2013.”
Overview
Pernix Group is a global company managed from Lombard, Illinois and was originally formed in 1995 as Telesource International, Inc. In 2001, the Company was incorporated in Delaware and became an SEC registrant. As of December 31, 2014, Pernix Group employs 148 people and is 96.6% owned by Ernil Continental, S.A., BVI, Halbarad Group, Ltd., BVI, and Affiliates. The Company conducts its operations through the parent and its fifteen subsidiaries. The Company’s two primary operating business segments are general construction and power generation services. In addition to these two operating segments, the corporate operations are a separately reported segment that provides administrative support to the operating segments and manages the Corporate headquarters building operations.
Pernix has full-scale construction and management capabilities, with subsidiaries in the South Pacific islands of Fiji and Vanuatu, Africa, Azerbaijan, Kurdistan, United Arab Emirates and in the United States. We provide our services in a broad range of end markets, including construction, construction management, power and facility operations and maintenance (O&M) services.
The construction and power segments offer diversified general contracting, design/build and construction management services to public and private agencies. We have provided construction and power services since 1995 and have established a strong reputation within our markets by delivering complex projects and providing innovative facility O&M solutions to clients world-wide with an unwavering commitment to safety, quality, social responsibility and total customer satisfaction. We have established internationally experienced, high-performance management teams with a proven track record of successfully completing complex projects around the globe and in some of the most remote locations on the planet. We have over twenty years of experience providing the majority of our services in international locations. We believe that these attributes are the foundation of Pernix’s success.
We believe the unique collection of resources, experience, operational and financial attributes that Pernix possess properly position the Company for future growth, diversification and financial success. The Company has transformed over the past several years noting the following achievements:
• Earned four consecutive years of pretax income from continuing operations before non-controlling interest allocations
• Significant reduction in leverage, being debt free as of December 31, 2014 and 2013
• Expansion of its customer base including our first domestic project awarded in early 2014
• The Company has reached an inflection point from which growth should be increasingly profitable
• Enhanced ability to form strategic relationships with vendors, subcontractors and project partners
• The Company has $70.4 million of net operating and capital loss carryforwards that may be used to offset future taxable earnings.
Pernix Group provides its customers with solutions that meet their time and budget constraints. In doing so, Pernix Group developed strong partner and customer relationships, which are the drivers behind contracts and sole source awards and related change orders the Company received in 2014 and 2013 totaling over $100 million.
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Business Segments
General Construction Segment
Our general construction segment includes comprehensive pre-construction planning and construction management services. As a general contractor, we have responsibility from award through the successful completion of each project.
We have developed a global network of suppliers and subcontractors. Together with these strategic partners, we utilize niche capabilities and experience that address customer design, budget and schedule requirements. All of our construction management team members have worked on complex international projects. We have the expertise required to successfully conduct full-scale construction projects anywhere in the world. We have demonstrated that we can execute the most technically and geographically challenging projects within time and budget parameters while meeting the exacting quality and safety requirements of the contract, thereby exceeding our clients’ expectations at every opportunity. Pernix Group has the ability to self-perform multiple trades when doing so brings efficiencies and value to a project and our customers.
To minimize overhead costs and maintain a worldwide capacity to handle complex projects, we have adopted a strategy of affiliating ourselves with highly capable subcontractors and business partners strategically located around the world. By working with “best in class” subcontractors and partners, Pernix Group is able to provide the best fit to fulfill our customers’ project requirements. Our various joint venture partners, affiliates and business partners, combined with our own teams and internal resources, provide Pernix Group the ability to offer its customers a best in class solution to their construction needs, worldwide. These strategic partnerships not only assist Pernix Group in winning larger projects, but also mitigate cost, design and other risks, provide experience managing larger projects, expand relations with more subcontractors and vendors, and enhance the number and type of contract opportunities that Pernix can consider, qualify for, bid on and win.
Many of our construction projects are for governmental owners, such as the US Department of State’s Bureau of Overseas Buildings Operations (OBO) as well as select foreign governments. In most instances the bidding process requires an initial pre-qualification stage, followed by a proposal submission stage for qualified contractors. Pernix Group focuses its efforts in areas and on projects where we have a competitive advantage that is within our core competency. We minimize risk and develop winning strategies by thoroughly studying local markets, aligning ourselves with capable local or regional large prime-subcontractors, and establishing purchasing and logistics support locally, or regionally, whenever possible. Our performance history and record of client retention demonstrate the successful formula Pernix and its partners have developed allowing us to grow our business and achieve customer satisfaction, which is evidenced by the stream of awarded contracts from OBO to Pernix and Pernix-Serka Joint Venture (PSJV).
Since 2011, OBO has awarded five projects to Pernix or PSJV, a highly effective venture with Serka Insaat ve Ticaret, A.S. (Serka) that is 52% owned by Pernix and 48% by Serka. PSJV has an office in Vienna, Virginia, in close proximity to U.S. Government agencies in order to closely manage its customer relationships (including OBO) and to provide effective contract execution and oversight for its customers on its mission critical, fast-track work efforts in Iraq, Africa and elsewhere.
In 2014 and 2013, the OBO awarded two projects to PSJV totaling approximately $17.4 million in original contract value. The first award during the two year period was announced on May 30, 2013, when OBO awarded a $6.6 million sole source award to PSJV to construct various security upgrade related structures at the U.S. Embassy in Baku, Azerbaijan (the Baku project). Throughout the Baku project change orders in the amount $1.7 million were received for various additional work to be performed. The Baku project began in mid-2013 and substantial completion was reached in September 2014. The second project award was announced on September 3, 2013, when PSJV was awarded a $10.8 million contract by the OBO for the installation of a rainwater capture and storage system at the U.S. Embassy in Freetown, Sierra Leone (the Freetown project). The Freetown project includes site improvements, rainwater capture and storage systems, conveyance infrastructure, and water treatment for this embassy compound located in West Africa. On December 18, 2013, the Company received the notice to proceed on the Freetown project. As of December 2014 the project has incurred several time delays due to the outbreak of the Ebola virus. Currently the Company is exploring all possible alternatives to complete the project.
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Additionally, PSJV participates in a multi-billion dollar Indefinite Delivery Indefinite Quantity (IDIQ) contract with OBO. The IDIQ provides PSJV with the opportunity to bid on a significant number of task orders for Containerized Housing Units (CHU) and Modular Office Units to be built internationally. The size of each task order is dependent upon the scope of work and there is no guarantee that PSJV will win any particular task order, but the overall IDIQ program is for five years and totals $12.0 billion. The amount of the awards to any one contractor cannot exceed $500 million in one base year or option year and $2.0 billion over the life of the contract should all four option years be exercised. PSJV has actively responded to several Task Order Proposal Requests to bid under this IDIQ contract and has been awarded three contracts with revenue totaling over $230 million under this program since April 2011.
In addition, in November 2013, the OBO exercised Option Year 3 under our base CHU IDIQ contract extending the period within which additional Task Orders can be awarded to PSJV into January 2015.
In the second quarter of 2011, the Company received an award notification from the OBO for an $18.1 million embassy rehabilitation project in Niger, Africa. On August 3, 2011 we received a Limited Notice to Proceed on the procurement and shipping of items that will be required for the project. On August 16, 2011 OBO exercised a bid alternate for this project valued at $6.4 million to renovate additional office spaces, bringing the total contract value for the Niger rehabilitation project including change orders to $24.5 million. Pernix established a limited liability company in Niger in connection with this contract. In July, 2012, Pernix Group, Inc. received the full Notice to Proceed (NTP). Construction activity on this project began during the third quarter of 2012 and is expected to continue into early 2015.
Our recent experiences with the OBO have strategically strengthened our technical and management expertise and developed relationships that enable us to provide our clients with a broad spectrum of services that leverage the expertise and the construction resumes of our staff and our partners to the mutual benefit of all involved. In addition to PSJV, Pernix has also formed several additional strategic alliances with companies who possess niche capabilities in restoration work as well as critical mass that enables Pernix to be part of a consortium of contractors with the intention of bidding and working together on large scale projects which Pernix may not be able to access on a stand-alone basis.
We believe our experience and track record in Fiji and ongoing experience in Niger, Freetown and Baku demonstrate our ability to bid on, obtain and successfully complete additional embassy and/or US Government projects as the Department of State intends to build, rehab or upgrade more than 33 embassy and consulate facilities in the 2015 — 2018 timeframe.
Pernix LTC JV (PLTC) is a joint venture with LTC Corp (LTC) in which Pernix is the majority owner. PLTC was formed to pursue a project on the campus of Texas A&M University in early 2014. PLTC was awarded a project totaling $23.4 million. LTC filed for Chapter 7 bankruptcy protection on May 2, 2014. The LTC bankruptcy filing has not negatively impacted Pernix, the venture or the project, which is approximately 78% complete with anticipated completion to be in early 2015.
During the third quarter of 2012, the Company established an office in Dubai (United Arab Emirates) to secure new and existing customers in light of significant anticipated demand for construction services forecasted in the region over the next decade. In connection with this effort, the Company organized Pernix Technical Works LLC (PTW), a limited liability company which is consolidated by Pernix Group, Inc. as the primary beneficiary of this variable interest entity.
Pernix Fiji Limited (PFL) was awarded a $1.6 million contract to design, procure and install underground cable in the Solomon Islands between Lungga Power Station and Ranadi Sub-station for the Solomon Islands Electricity Authority (SIEA) in late 2012. In early 2014, PFL was awarded a $30.1 million project to build a 36MW expansion to the Kinoya diesel plant in Fiji. The project scope includes expansion design, procurement and installation. PFL also received a FJD 8.4 million ($4.2 million) award in February 2015 for construction of the substation to support the newly expanded diesel power station previously awarded to PFL.
Design Build
Pernix embraces the design/build model to ensure design excellence and successful completion of construction projects from analysis, architecture and permitting, through engineering, construction, completion and customer acceptance. By establishing a singular point of responsibility, we deliver on our promise to fulfill all project requirements and specifications on-time and on-budget.
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We are committed to understanding the unique requirements and specifications of each project to provide a comprehensive single source solution. This value-added partnership leverages our ability to align and manage the best resources for all aspects of the project.
Construction Management
Pernix Group’s nearly two decades of experience has proven that early involvement in a project and its design is one of the keys to its success. Our proven approach works in line with our customers’ needs and expectations to develop a plan and an execution schedule that saves time and money and ensures timely completion of our projects. Our state-of-the-art construction management services provide a systematic project review, including a comprehensive construction and start-up schedule. By establishing a singular point of responsibility, we provide continuous updates on project milestones and ensure the safest working environment while we deliver projects on time and on budget.
Construction Segment Outlook
According to Global Construction 2025, construction in 2013 was an $8.7 trillion market and by 2025, it is estimated construction economic output will have grown by 70% to $15 trillion. Globally, construction in 2025 is forecasted to rise to over 13.5% of world GDP, as growth in construction continues to rise more strongly than GDP. Forecasts show the most dynamic growth for construction over the next decade is expected to come from emerging markets. Population growth will help drive this growth along with cyclical factors. Conversely, construction in most developed countries will be constrained by large public deficits, austerity programs, muted population growth and limited economic expansion.
Construction is expected to outpace world economic growth in the next decade as Asia and India markets continue to develop rapidly and the US / North America will experience the highest developed region growth by registering an upturn in residential and non-residential construction. Qatar is forecasted to have average double-digit growth of 10% per year through 2025. Qatar will benefit from the country’s hosting of the FIFA 2022 World Cup and continuing diversification within its economy. Growth in construction volumes in Qatar is set to slow significantly after 2020. Sub-Saharan Africa is also expected to be a high growth region for construction globally, driven by rising populations, rapid urbanization and much needed development of infrastructure.
As a result of the aforementioned divergence between developed and developing market economies, emerging markets are expected to make up more than half of the global construction market by the end of this decade. In light of its experience, Pernix is uniquely qualified to perform in emerging markets which can be more remote and logistically challenging environments. Furthermore, Pernix has a Middle East presence through PTW in Dubai and is already present and operating in Africa in connection with its embassy upgrade project in Niger and the rainwater recapture project in Sierra Leone.
Power Generation Segment
Although virtually everyone in the world relies on it, the needs and resources required to generate power can vary widely from location to location. From the types of fuels used to the plethora of regulations governing the development, construction and operation of power generation plants, Pernix Group understands the unique needs and requirements of different projects in diverse geographic locations. Pernix focuses on engineering, procurement, and construction (EPC) and O&M for small to mid-size power plants and has the experience to engineer, build, operate, and maintain power plants as well as transmission and distribution grids and underground cable installation. We manage and operate many of the plants that we build. Due to our years of experience, we have developed strong relationships with engine and turbine manufacturers, suppliers of parts for power plants and distribution/ transmission systems, software developers and suppliers for control systems, Customer Information Systems (CIS), and Geographic Information Systems (GIS).
Pernix focuses on operating efficiency and reliability while maintaining safety, security and environmental stewardship. We accomplish this by partnering with our customers throughout all project phases to understand and recognize the unique requirements of each customer and each project phase, and leverage our ability to align and manage the best resources for all aspects of each particular project. The Pernix Group power segment prides itself in being a steward of the environment and the assets entrusted to us by the communities in which our operators work and live. Pernix Group power segment employees are not transient operators but ones who live and work in the community and depend upon the same power being provided to our customers.
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Our power business segment includes plant construction and O&M services. Specifically, Pernix Group provides plant engineering, design, procurement, construction, and operations & maintenance services from the power source through the distribution network on a worldwide basis. We have the capability to address a variety of power generating requirements from initial conceptual design to construction, through operating and maintaining power facilities. Pernix differentiates itself within the power industry as we can scale to various size projects, ranging from small to mid-sized projects on a stand-alone project basis and large projects in association with our strategic partners. This flexibility in the scale of projects on which we work reflects the well thought out design, agility and efficiency in our operations. Pernix also has a wealth of experience in the upgrade of existing facilities to add additional capacity and to achieve operational efficiency improvements by upgrading and replacing outdated equipment while endeavoring to use existing equipment when possible. These upgrade projects typically produce significant cost savings to our customers and can often be carried out while the power plant continues to operate, resulting in even greater cost savings to our customers.
Engineering, Procurement, and Construction (EPC)
Pernix Group relies on our construction capability and strong affiliation with world-class design firms and subcontractors to provide comprehensive global power EPC solutions. We have the resources to properly fit technology with our customers’ special requirements, budget and environmental considerations and constraints. Power plants are a significant investment and become a crucial part of a community’s survival, hence we take great care to understand what our customer requires, and ensure that the end product exceeds their expectations for today and contemplates their needs for the future. As noted in the construction segment discussion above, our state-of-the-art construction management services provide a systematic project review, including a comprehensive construction and start-up schedule. Our power plant construction methodology is not limited to building a facility; we also provide start up and commissioning services to ensure that the equipment is fully integrated with all other operating systems as well the transmission/distribution system and power grid. Furthermore, we provide the appropriate training for startup as well as future operations and maintenance.
Operations and Maintenance (O&M)
Pernix Group’s Power O&M services provide an integrated scope of services to effectively maintain and manage all aspects of power operations. We partner closely with public and private entities to improve plant processes, performance, reliability and customer service. Our focus is on ensuring a safe and efficient working environment while reducing costs as circumstances allow.
Pernix’s O&M services include maintenance & operations, engineering, on-going reliability studies, construction management, recovery/rebuild, specialty services and rehabilitation. We perform an audit of a customer’s operations and provide a comprehensive plan, including timelines for assuming responsibility of the operation, as well as initial and long-term maintenance requirements. Our intense focus on machine performance and OEM maintenance requirements ensures efficient and long term operation of equipment. In all cases, Pernix Group makes every effort to hire and train local staff. This is part of our commitment to bring jobs and add value to the communities where we work and serve.
Build, Own, Operate, Transfer (BOOT)
In addition to our EPC and O&M services, Pernix Group has the ability to implement projects via a BOOT model to help our customers finance and manage their current and potential infrastructure projects. Up-front costs are eliminated and the customer ultimately attains ownership of the final product. This is very similar in concept to a toll road. BOOT makes it easy for the customer to execute critically needed projects now despite budget constraints which would otherwise require deferring such projects well into the future.
Organizations such as the World Bank, US EX-IM Bank and other international finance institutions (IFIs) have a history of lending money to aid customers in improving and privatizing their infrastructure. The BOOT model is another financial tool available to cash or budget constrained customers to achieve their infrastructure improvement goals. BOOT is one of several financing options that the Pernix Group may be able to offer our clients.
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Current Power Operations
Our power projects to date have been primarily international with specific focus in the North and South Pacific. Our Power Generation Services segment currently operates power plants in the Republic of the Fiji Islands (Fiji) and the Republic of Vanuatu (Vanuatu) and it contributed $6.6 million, or 7.7% of our 2014 revenue. Although the revenue from our Power operations represents just 7.7% and 7.9% of consolidated revenue during 2014 and 2013, respectively, it consistently accounts for a significant portion of the Company’s pretax income from continuing operations. In addition to the fees generated through power generation service the power segment sourced two construction projects in Fiji and the Solomon Islands that contributed $23.8 million of revenue in 2014.
Pernix Fiji Limited (f.k.a. Telesource Fiji, Limited)
PFL is a subsidiary of Pernix that conducts power generation activities in Fiji. PFL has a 20 year contract with the Fiji Electricity Authority (FEA) to operate and maintain two separate diesel fired power generation plants and to sell electrical power produced, on a wholesale level, at a contractually determined rate, without risk of fuel price fluctuation. The O&M contracts for these plants expire in May 2023 and include management of a total of 74.3 MW of diesel power generation installed capacity in Fiji. In November 2014, Fijian Holdings Limited (FHL), an unrelated third party, acquired a 25% interest or 249,999 common shares of PFL for $2.3 million. Prior to this transaction, PFL was a wholly-owned subsidiary of Pernix.
The Company operates two power plants in Fiji. The Kinoya Power Plant, situated near Suva, the capital of Fiji, is part of the FEA grid and is the largest diesel fueled power plant in Fiji with an installed capacity of 50.1 MW. The Vuda Power Plant, situated between Nadi and Lautoka is the second largest diesel fueled power plant in Fiji with an installed capacity of 24.2 MW for a total combined installed capacity of 74.3 MW. The Kinoya and Vuda Power Plants are fully compliant with the applicable laws of Fiji relevant to power plant operations such as Labor Industrial Act and Environmental Act, and complies with manufacturers guidelines by applying prudent engineering practice in the operation and maintenance of the power plant in both locations.
In early 2014, PFL was awarded a $30.1 million contract to design, supply, install and commission 36 MW of auxiliary power equipment at the Kinoya Power Station. The contract price being denominated in 11.9 million Fijian Dollars for the onshore work and 16.6 million Euro for offshore work. On March 14, 2014, PFL entered into a 15.8 million Euro supply contract with Wartsila Finland Oy, and Wartsila Australia Pty Ltd, collectively referred to as the supplier, to supply and deliver 4 engines and related equipment (the offshore work) and to provide technical assistance during installation and commissioning of the engines at the Kinoya power station.
Demonstrative of PFL’s outstanding O&M performance record, FEA, has rated the PFL-managed Vuda and Kinoya power stations first and second out of five power stations in Fiji, and the FEA report stated that “it is no coincidence that the two Telesource (Pernix) stations are ranked first and second. They have a dedicated technically based health, safety and environmental officer who is actively involved in carrying out frequent and regular in house risk management checks”. FEA is the regulatory agency that is charged with protecting the long-term interests of consumers with regard to the price, quality, safety, and reliability of regulated services in Fiji and PFL takes pride in the positive recognition from FEA.
Vanuatu Utilities and Infrastructure Limited (VUI)
In late 2010, VUI was selected by the Government of the Republic of Vanuatu to provide O&M services for the Luganville power plant in Vanuatu. VUI earns a monthly fee based on man hours necessary to operate and maintain the facilities. The costs associated with earning the management fee are included in salaries and employee benefits and also in general and administrative expenses in the consolidated statement of operations.
The Utilities Regulatory Authority monitors and reports on the performance of electric utilities in Vanuatu. These reports bring transparency to the performance of the power providers, having recently described how well VUI provided services to its customers since VUI began to manage the power structure on Vanuatu on January 1, 2011. This report found VUI to have performed well in all areas including network performance, safety performance, customer service, reliability and quality of supply, and legislative and regulatory compliance.
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Power Segment Outlook
According to ExxonMobil’s Outlook for Energy, from 2010 to 2040 (the “Outlook period”), the world’s population is projected to grow from 7 billion to nearly 9 billion, and the global economy will more than double. As economies and populations grow, and as living standards improve for billions of people, the need for energy is expected to continue to rise. Even with significant efficiency gains, global energy demand is projected to rise by about 35 percent from 2010 to 2040. In the countries belonging to the Organization for Economic Cooperation and Development (OECD) - including countries in North America and Europe – energy saving practices and technologies are expected to keep power usage relatively flat, even as these countries achieve economic growth and even higher living standards. In contrast, non-OECD power demand is expected to grow by close to 65 percent due to growing prosperity and expanding economies. Billions of people will be working to advance their living standards, thus requiring more power. The need for energy to make electricity is expected to remain the single biggest driver of demand. By 2040, electricity generation is expected to account for almost one half of the increase in global energy demand.
Utilities and other power producers around the world can choose from a variety of fuels to make electricity. They typically seek to use energy sources and technologies that enable reliable and relatively low-cost power generation while meeting environmental standards. Over the outlook period, we anticipate that public policies will continue to evolve to place tighter standards and/or higher costs on emissions while also promoting renewables. As a result, we expect the power sector to adopt combinations of fuels and technologies that reduce emissions but also raise the cost of electricity.
At the same time, the sector will also need to manage reliability challenges associated with increasing penetration of intermittent renewables, like wind and solar. These renewables have a cost, related to reliability for times when the wind is not blowing and the sun is not shining.
Fuel input to power generation is projected to rise by more than 50 percent, faster than any other sector, over the outlook period. In 2010, coal was the world’s number one fuel for power generation, accounting for about 45 percent of fuel demand. Though coal use will likely increase by about 55 percent in developing countries by 2040, it continues to lose ground in developed countries – primarily to natural gas and renewables such as wind and solar. By 2040, demand for natural gas in the power generation sector is expected to rise by close to 80 percent. At that time, natural gas will be approaching coal as the world’s largest energy source for power generation, and coal’s share will have dropped to about 30 percent.
Increased local natural gas production in North America and elsewhere, along with expanded international trade, is expected to supply the gas for power generation. By 2040, we expect that the use of nuclear power will approximately double and renewables will increase by about 150 percent, led by wind and hydroelectric power.
Oil is expected to remain the largest single source of energy to 2040, growing around 25 percent. But the most significant shift in the energy mix occurs as natural gas displaces coal and is expected to become the second-largest fuel by 2025. Gas is expected to grow faster than any other major fuel source, with demand up 65 percent by 2040. An economical and clean fuel source, gas grows in importance as it helps meet rising power generation demand in the future. Because they are abundant in supply and more economical to develop than other fuel sources, oil, natural gas and coal will continue to play a major role in long-term energy supply. Together, these three fuels are expected to provide approximately 80 percent of total global energy by 2040 while nuclear, wind, solar and biomass will round out the balance of the fuel supply.
In recent years, a combination of two technologies in use for decades horizontal drilling and hydraulic fracturing has enabled the energy industry to economically access and produce natural gas and oil found in shale and tight rock. Horizontal drilling allows a well to be drilled horizontally underground for thousands of feet, providing greater access to reservoirs to enhance and maximize productivity and economic resource recovery. This drilling practice also reduces the environmental footprint by enabling the drilling of multiple wells from a single location. In hydraulic fracturing, a solution – primarily water and sand, mixed with a small amount of chemicals – is injected into the rock thousands of feet underground to open very thin cracks, allowing trapped natural gas and oil to migrate to the well. This technology has been used in more than one million wells worldwide for the past six decades.
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Together these two technologies have unlocked vast new supplies of natural gas and oil, which otherwise would not have been commercially viable. The results are changing the landscape of energy supply in North America, particularly in the United States. For example, six years ago, production from North Dakota’s Bakken region registered a 100-fold increase in the last six years. These technologies now present new opportunities for construction of power plants and Pernix Group’s power segment is well positioned to pursue these opportunities.
The need for replacement power for retiring facilities and firming power to offset the growth in intermittent renewable facilities (wind and solar PV) creates significant EPC opportunities. In the near term, new power generation required to fill these needs will likely be natural gas fired gas turbine or reciprocating engine technologies for several reasons.
New power generation in the near term will need to be flexible (ability to mobilize on demand) whether the purpose is to replace aging generation or for transmission system firming. Although this can be accomplished with any non-intermittent power source (conventional steam, simple cycle, combined cycle, nuclear, geothermal, and hydro-electric) gas turbine and/or reciprocating engine technologies are likely to be the first choice due to their relatively low environmental impacts and high operational flexibility. Owner/operators will gravitate toward projects that limit their exposure to environmental regulations with natural gas fired generation and avoiding new coal fired generation.
Gas turbine and reciprocating engine generation offers the low capital cost expenditure relative to other forms of firm generation (like nuclear), can ramp up to full load from a cold start relatively quickly when needed, and have relatively short development-to-operation cycle time frame (unlike hydro, nuclear, geothermal or coal fired generation). New supplies of natural gas from gas fracking are expected to keep gas prices low for the near and intermediate term.
This trend in the domestic U.S. power generation industry toward smaller, more flexible operating facilities fits perfectly with Pernix’s experience and capabilities. With over 100 MW of reciprocating engine capacity installations and O&M contracts, Pernix is well positioned to respond to the industry’s current needs.
As mentioned above, Pernix is among few within the power industry that have constructed and operated power plants in some of the most remote locations in the world and we can readily scale to various size projects ranging from small to mid-sized, on a stand-alone project basis and to large projects in association with our partners. This flexibility in the scale of projects on which we serve reflects the well thought out design, agility and efficiency in our operations.
PFL and VUI provide facility O&M services for diesel power plants under long term contracts or memoranda of understanding. The Company has the capability to provide renewable power, including development, design, construction and facility O&M services for hydroelectric, solar and other green energy sources, and it is actively pursuing those opportunities in Fiji, Vanuatu, the Solomon Islands and other locations. Pernix is seeking stand alone and co-invest opportunities in the domestic and foreign power business with its one-stop shop approach which includes: development, design engineering, construction, commissioning and start-up, O&M and asset management.
Corporate Segment
During the first quarter of 2013, the Company established Pernix RE, LLC, a limited liability company for the purpose of purchasing the land and building in which its corporate headquarters are maintained. The land and building were purchased for $1.1 million from Baron Real Estate Holdings (Baron), a related party. The Company paid cash of $550,000 and obtained seller financing from Baron for $550,000 with interest accruing at a rate of 4.0% per annum. As of December 31, 2013, the note was fully paid. The assets were recorded at the carrying value utilized by Baron (a related party under common control as it is owned by Ernil Continental, S.A., BVI, Halbarad Group, Ltd., BVI, and Affiliates).
Our Business Strategy
Our business strategy as a diversified contractor focuses on expanding our public (government funded or sponsored) as well as private general construction, power construction and facilities O&M service segments. Key elements of our strategy include:
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Expand and foster positive relationships with governments, public agencies and private entities worldwide
We will continue to focus on maintaining and expanding our existing relationships with governments, public agencies and private entities worldwide and diversifying our customer base within these sectors both domestically and internationally. We intend to penetrate these markets through strategic relationships, co-invest opportunities and acquisitions. We believe that to develop new contacts and opportunities we must continue to consistently exceed existing customer expectations; something we strive to do with every opportunity to serve. We will find new opportunities through promoting our Company’s resume and our reputation in the marketplace to targeted customers. These efforts will be supplemented by market intelligence gathering and providing customized solutions based upon an understanding of the specific needs of each governmental agency and each private customer. Upon identifying these opportunities we will continue to expand our network of international contacts and communicate our capabilities which in turn, will further expand our client base, as evidenced by our award in the Solomon Islands.
Capitalize on opportunities in challenging geographic locations
Pernix has built its reputation on completing difficult projects in the most remote areas of the globe. For example, the Company’s resume’ includes constructing a broadcasting station on the remote island of Tinian; managing the global logistics necessary to construct or modify the US Embassies in Suva, Fiji, Baku, Azerbaijan, Freetown, Sierra Leone and Niamey, Niger; managing logistics and construction of the containerized housing projects in Iraq, and finding and training a local workforce to bring electricity to regions in Vanuatu that had never had electric service before. Pernix possesses the ability to help our clients understand, define and complete extraordinary projects of varying scale. Pernix Group understands what is required to execute and complete the most challenging projects regardless of whether the challenge is geographical, political, mechanical, or any combination of` the above. While many of our competitors are not equipped nor experienced to manage technically challenging projects in remote geographic locations, Pernix Group specializes in and thrives on such challenges.
We intend to leverage our leading positions in the general construction, power construction and facilities O&M capabilities to continue to expand our services and revenue. We believe that the need for infrastructure upgrades, governmental facilities as well as diesel-fired, hydroelectric, biomass, natural gas fueled combined cycle and solar power will result in continued opportunities in our core markets. All of our business segments have unique integration opportunities particularly in the construction and O&M markets. With our ability to manage projects internationally, successful track record and our global resources, we believe we are well-positioned to compete for projects in these global markets.
Utilize our long-standing relationships with industry specialists
We have long-standing relationships with a number of industry specialists worldwide. These relationships have been established to enhance our ability to satisfy our clients and deliver comprehensive solutions for customer needs. By collaboratively consolidating knowledge bases, skill sets, resources and contacts, we believe we have the ability to efficiently export our leading edge technical skills to any region in the world in which our clients may need them. We also continually develop new relationships that provide us with the necessary agility and expertise to meet design, construction and operating needs of new and existing customers as their needs evolve.
Continue to pursue our acquisition strategy
We intend to consider acquisitions and co-investment opportunities to grow our general construction, power construction, and facilities O&M businesses. The Pernix Group management team has defined what it considers to be desired potential target characteristics including: companies of a scale and scope that will provide manageable growth that can be readily integrated, will be accretive to earnings, and will facilitate new client relationships. Ideal targets will also expand Pernix Group’s domestic presence and diversify and balance the Company’s profile, credit risk and provide more consistency to Pernix Group’s revenue and earnings streams. We will search for other successful companies whose growth can be enhanced through a synergistic combination of respective resources. This approach will expand, strengthen and diversify our market leadership positions geographically and technically across end markets. We believe that the trend towards consolidation in the industries in which we operate will produce candidates that align with our acquisition strategy.
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Strengthen and support human capital
Our customers benefit from the extensive experience of the Pernix team members; we have engineers at Pernix with project experience in multitude of different countries. The management team in the Finance and Administration areas has significant prior public accounting and Fortune 100 finance experience. During 2013, the Company significantly enhanced its business development and operations managers in the construction segment. A large percentage of our employees have technical and professional backgrounds, as well as undergraduate and advanced degrees.
We will continue to focus on providing our personnel with training and other personal and professional growth opportunities, performance-based incentives, opportunities for stock ownership and other competitive benefits in order to strengthen and support our human capital base. The Company has three equity incentive plans and the Company has broadened participation in the equity plans based on performance.
The Company also invests in key leadership positions at the highest levels in the organization, including the Board of Directors. This experience and leadership expertise ensures alignment of business strategy objectives and corporate governance within the organization. Specifically, effective December 31, 2013, Mr. Don J. Gunther assumed the role of Chairman of the Board. Mr. Gunther has served on the Company’s Board of Directors and on the Compensation Committee since December 2012 and brings a wealth of construction and energy knowledge to the Board. Mr. Gunther was President, Vice Chairman and Director of the Bechtel Group, where he had responsibility for all of the global industry units and all corporate functions, including project management, engineering, procurement, construction, information services, information technology and contracts.
Our Business Segments
The following table sets forth the revenue attributable to our business segments for the periods indicated (1):
| | | | | |
| Year End December 31, |
| | 2014 | | | 2013 |
General Construction | $ | 78,573,035 | | $ | 67,776,314 |
Power Generation Services | | 6,583,394 | | | 5,810,652 |
Corporate | | 144,310 | | | 175,182 |
Total Revenue | $ | 85,300,739 | | $ | 73,762,148 |
| | | | | |
(1)For additional financial information including net income by segment, see Note 18 in the notes to our consolidated financial statements.
Our Clients by Segment
In 2014 the general construction segment has three major customers, the U.S. Department of State, FEA, and ERB Partners. The loss of these customers would have a material adverse impact on the Company’s consolidated financial performance. These customers represent 88% of the consolidated total revenues of $85.3 million. The loss or reduction of business from these customers could materially and negatively impact the Company’s net income, cash flows and financial condition.
As of December 31, 2014, the power generation services segment has three primary customers: the FEA, the Government of Vanuatu and Solomon Islands Electric Authority (SIEA). In 2014, none of these customers individually account for more than 10% of the consolidated total revenues. However, FEA and the Government of Vanuatu account for $1.6 million and $1.1 million of the Company’s 2014 pre-tax income, respectively. The loss of either of these customers could materially and negatively impact the Company’s net income, cash flows and financial condition.
The Corporate revenue consists of rental income received from third parties for space leased in the corporate office headquarters in Lombard, Illinois. The Corporate segment does not have any major customers in 2014.
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Joint Ventures and Other Arrangements
Some of our larger contracts may operate under joint ventures or other arrangements under which we team with other reputable companies, typically companies with which we have worked for many years. This is often done where the scale of the project dictates such an arrangement or when we the parties want to strengthen either its combined market position or technical skills. Several such joint ventures and strategic alliances have been established in the past several years and we continue to develop more strategic relationships.
Competition
The professional, technical and management support services markets we serve are highly fragmented and we compete with a large number of regional, national and international companies. Certain of these competitors have greater financial and other resources than we do. Others are smaller, more specialized, and concentrate their resources in particular areas of expertise. The extent of our competition varies according to the particular markets and geographic area. The degree and type of competition we face is also influenced by the type and scope of a particular project. Our clients make competitive determinations based upon qualifications, experience, performance, reputation, technology, customer relationships and ability to provide the relevant services in a timely, safe and cost-efficient manner. Pernix Group utilizes partnerships and other key strategic relationships to obtain an advantage with regard to niche specialization, to obtain flexibility with regard to scale and scope of projects it may be involved with, thereby enhancing the combined resumes of Pernix and its partners. Pernix Group will continue to focus on providing the “best in class” procurement and contract execution processes as well as world class customer service in an agile fashion.
Insurance and Risk Management
We maintain insurance covering professional liability and claims involving bodily injury and property damage. We consider our present limits of coverage, deductibles, and reserves to be adequate. Wherever possible, we endeavor to eliminate or reduce the risk of loss on a project through the use of quality assurance/control, risk management, workplace safety and similar methods. Risk management is an integral part of our project management approach and our project execution process.
Regulation
We are regulated in a number of fields in which we operate. In the United States, we primarily deal with the United States Department of State to bid and execute on the construction of U.S. embassies, containerized housing unit task orders and other projects. When working with this agency, we must comply with laws and regulations relating to the formation, administration and performance of contracts. These laws and regulations, among other things:
• require certification and disclosure of all cost or pricing data in connection with various contract negotiations;
• impose procurement regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-based U.S. government contracts; and
• restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
We are also subject to various government laws, regulations and/or applicable laws pertaining to the protection of the environment, primarily in the areas of water and air pollution, i.e. Council on Environmental Quality, the Environmental Protection Agency (EPA) and FEA. These laws and regulations in many cases require a lengthy and complex process of obtaining and maintaining licenses, permits and approvals from local agencies. As regulations
are enacted or adopted in any of these jurisdictions, we cannot predict the effect of compliance therewith on our business. Our failure to comply with any applicable requirements could result in delays in proceeding with any projects under development or require modifications to operating facilities. During periods of non-compliance, our 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. We are responsible for ensuring compliance of facilities with applicable requirements and, accordingly, we attempt to minimize these risks by dealing with reputable contractors and using appropriate technology to measure compliance with the applicable standards.
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Presently, neither the Customer Choice Act nor other similar proposed legislation dealing with U.S. power policies directly impact us because the legislation and restructuring plan pertain to the retail market or new contracts in wholesale markets. However, we could be impacted in the future by, among other things, increases in competition as a result of deregulation. Compliance with federal, state, local and foreign laws enacted for the protection of the environment have had no significant effect on our capital expenditures, earnings, or competitive position to date. We are actively monitoring these developments in power proceedings in order to evaluate the impact on existing projects, and also to evaluate new business opportunities created by the restructuring of the electric utility industry and technological developments therein.
Contract Backlog
Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted construction contracts in progress at December 31, 2014, and from construction contractual agreements on which work has not yet begun. The following summarizes changes in backlog on construction contracts during the fiscal year ended December 31, 2014:
| | | | |
Balance at December 31, 2013 | $ | | 37,125,652 | |
New construction contracts / amendments to contracts in 2014 | | 62,949,355 | |
Less: construction revenue earned as of December 31, 2014 | | (78,573,035) | |
Balance at December 31, 2014 | $ | | 21,501,972 | |
Management anticipates that the full backlog of $21.5 million as of December 31, 2014, will be recognized as revenue during 2015. The table above does not include new contract awards totaling $15.8 million with Pernix Kaseman JV (a newly formed Limited Liability Company in which the Company owns 51%) in January 2015 to construct a communication center special area on Camp Humphrey in South Korea and PFL for the construction of a 33MW substation related to the Kinoya Expansion project. Finally, the table does not include revenue associated with our long term contract or memo of understanding for power operating and maintenance services or construction segment stipend income. The stipend income is related to contracts that were not ultimately awarded to the Company as they are not directly related to core construction work.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our corporate offices are located in Lombard, Illinois. We leased the office space until March 4, 2013, when we purchased the office building in which our corporate offices are located. In order to support our relationship with the U.S. Department of State and OBO, as well as to facilitate contract execution that exceeds our customers’ expectations, PSJV has leased space in Vienna, Virginia. The lease term is for a period of 48 months beginning in January of 2012. In Fiji, our power generation subsidiary leased office space for a two year term that ended on June 30, 2014 and has continued on a month to month basis. In December 2013, we entered into a one year non-cancelable lease agreement effective beginning in February 2014 in Colorado to house a regional administrative office. During October 2014, we renewed a non-cancelable lease agreement effective on November 15, 2014 which includes a term of twelve months to house our United Arab Emirates regional office in Dubai. We believe our current properties are adequate for our business operations and are not currently underutilized. We may add additional facilities from time to time in the future as the need arises. In addition to corporate offices, we provide housing for several employees located in remote locations for construction and power facilities O&M work. These leases are not individually significant and are generally living expenses that are considered in the cost and pricing of the related contracts and in some cases are billed to the joint venture under which the related contract work is being performed.
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ITEM 3. LEGAL PROCEEDINGS
As a government contractor, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. Intense government scrutiny of contractors’ compliance with those laws and regulations through audits and investigations is inherent in government contracting, and, from time to time, we receive inquiries, subpoenas, and similar demands related to our ongoing business with government entities. Violations can result in civil or criminal liability as well as suspension or debarment from eligibility for awards of new government contracts or option renewals.
During 2014 and 2013, no claims have been filed against the Company. The Company may from, time to time, be involved in legal proceedings arising in the ordinary course of business. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, except for the matter discussed below, in the opinion of our management, based upon current information and discussions with counsel, none of the investigations, claims and lawsuits in which we are involved is expected to have a material adverse effect on our consolidated financial position, results of operations, cash flows, or our ability to conduct business. From time to time, we establish reserves for litigation when we consider it probable that a loss will occur.
In late 2010, VUI was selected by the Government of the Republic of Vanuatu to provide O&M services for a power plant in Vanuatu. In 2011, UNELCO, the former concessionaire, brought a case against the Republic of Vanuatu seeking judicial review in relation to the awarding of the electricity concession to VUI. This matter is described as Case No. 101 of 2011. The Republic of Vanuatu is the first defendant and VUI elected to join the suit as a second defendant in order to best preserve its interests. There are currently no claims in relation to damages or otherwise directed at VUI in the proceedings. Therefore, as of December 31, 2014 there are no potential VUI losses that are probable and no accrual is deemed necessary.
In February 2014, during hearings in the Supreme Court of the Republic of Vanuatu (the Court), the Government of Vanuatu proposed a settlement with UNELCO that would leave VUI without a claim to defend pertaining to the concession and would effectively end the litigation in UNELCO’s favor. The proposed settlement called for a re-tender of the concession and required that any company who participates in the retender must waive any outstanding claims against the Government of Vanuatu. VUI in response presented its position to the court arguing that VUI should have an opportunity to be heard and that the Court should not accept the proposed settlement. On October 16, 2014 the Court issued its decision in favor of UNELCO and the government has issued a new agreement to VUI to continue to operate the plant under the MOU terms until the retender process is completed. As of the date of this report, VUI continues to operate and maintain the Luganville plant under the same terms and conditions.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES
Our common stock is traded in the Over-the-Counter Quotation Board (OTCQB) under the symbol “PRXG.” As of December 31, 2014, there were approximately 197 shareholders of record in which four own over 96% of the outstanding shares. The following table sets forth the low and high closing sales prices of a share of our common stock during each of the fiscal quarters presented, based upon quotations on the OTCQB reporting system.
| | | | | |
| | High Sales
Price ($) | | Low Sales
Price ($) | |
Fiscal 2014: | | | | | |
First quarter | | 8.00 | | 2.45 | |
Second quarter | | 50.00 | | 4.00 | |
Third quarter | | 9.50 | | 5.11 | |
Fourth quarter | | 5.11 | | 3.50 | |
| | | | | |
| | High Sales
Price ($) | | Low Sales
Price ($) | |
Fiscal 2013: | | | | | |
First quarter | | 2.75 | | 2.75 | |
Second quarter | | 5.00 | | 2.49 | |
Third quarter | | 2.50 | | 2.50 | |
Fourth quarter | | 2.69 | | 2.50 | |
We have not paid a cash dividend on common stock since our inception and we currently have no plans to pay cash dividends on common stock in the foreseeable future.
The Company implemented an incentive stock option plan for employees (ISOP) in December 2011, a long term incentive plan (LTIP) for non-employee directors and consultants in late 2012 and an equity incentive plan (EIP) for employees and directors in late 2013. As of December 31, 2014 and 2013, there were 283,500 and 379,000 option awards outstanding under the ISOP, respectively. There were 78,500 option awards outstanding as of December 31, 2014 and 2013 under the LTIP plan. There were 1,395,000 and zero option awards outstanding as of December 31, 2014 and 2013, respectively, under the EIP plan.
Unregistered Sales of Equity Securities and Use of Proceeds
In December 2013, the Company entered into Preferred Stock Purchase Agreements (SPAs) with each of Ernil Continental S.A., BVI (“Ernil”) and Halbarad, Ltd., BVI (“Halbarad”). Pursuant to the terms of the SPAs, Ernil and Halbarad made investments of $2,750,000 and $2,250,000, respectively, in the Company in the form of 550,000 shares and 450,000 shares, respectively, of Series A Cumulative Convertible Preferred Stock. The SPA transactions were closed on December 30, 2013 at which time the preferred stock certificates were issued and cash was received by the Company. No other unregistered securities have been issued since 2010. Previously issued unregistered securities were disclosed in prior periodic filings on Forms 10-Q and 10-K for those periods.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You are cautioned that this Annual Report on Form 10-K and, in particular, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements concerning future operations and performance of the Company within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue influence on these forward-looking statements. Forward-looking statements are subject to market, operating and economic risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. Factors that may cause such differences include, among others: increased competition, increased costs, changes in general market conditions, changes in the regulatory environment, changes in anticipated levels of government spending on infrastructure, and changes in loan relationships or sources of financing, political instability or violence. Such forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
In this report, we use the terms “Pernix Group”, “Pernix”, “PGI”, “the Company”, ‘we”, “us”, and “our” to refer to Pernix Group, Inc. and its consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years.
Executive Summary
The Executive Summary in this section is intended to highlight significant information and to provide context within which to consider the Company’s results of operations. During 2014 and 2013, the Company earned revenues of $85.3 million and $73.8 million, representing a revenue growth of 16%. This growth reflects the commitment to win new projects and grow the overall business.
Total Consolidated Revenue by year for 2010 through 2014 (in millions):
| 2010 | | 2011 | | 2012 | | 2013 | | 2014 |
$ | 26.2 | $ | 58.0 | $ | 120.0 | $ | 73.8 | $ | 85.3 |
Management believes the 2014 revenue increase is due to the overall growth of our construction business through new business additions. During 2014 the Company had 10 ongoing construction projects as compared to 6 during 2013. In early 2015, the Company won contracts totaling over $15.8 million, resulting from the Company’s Pernix-Kaseman JV award in South Korea and PFL for the substation construction project.
The Company’s consolidated pretax (loss) income from operations attributable to Pernix shareholders was $(1.4) million and $0.4 million during 2014 and 2013, respectively. The decrease in pretax income attributable to Pernix shareholders in 2014 from 2013 was most significantly caused by the increase in non-controlling interest share of project operations. Through the Company’s various joint ventures the Company has successfully created new opportunities and allowed the Company to carry out its construction projects in a timely and efficient manner.
Net (loss) attributable to Pernix common shareholders was ($1.8) million and ($4.7) million in 2014 and 2013, respectively. This decrease in net losses for the year were driven by the increased margin on its construction project activities for the year as well as decreased income tax expense which were offset partially by increased earnings attributable to non-controlling interests. Included in the 2013 net loss results is a $4.9 million deferred income tax expense related to an increase in the valuation allowance on deferred tax assets. This expense is a non-cash expense and has no impact on the Company’s liquidity, cash flows, or on its ability to execute projects or conduct ongoing operations.
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We use pretax income from continuing operations attributable to Pernix Group, Inc. to evaluate our performance, both internally and as compared with our peers, because this measure excludes certain income tax items (primarily pertaining to changes in the valuation allowance) and discontinued operations that may not be indicative of our core operating results, as well as items that can vary widely across different industries or among companies within the same industry. Additionally, these measures provide a baseline for analyzing trends in our underlying business. We believe this non-U.S. GAAP financial measure provides meaningful information and helps investors understand our financial results and assess our prospects for future performance. Because non-U.S. GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-U.S. GAAP financial measures having the same or similar names. This financial measure should not be considered in isolation from, as substitutes for, or alternative measures of, reported net income from continuing operations, diluted earnings per share from continuing operations and net cash provided by operating activities, and should be viewed in conjunction with the most comparable GAAP financial measures and the provided reconciliations thereto. We believe these non-U.S. GAAP financial measures, when viewed with our U.S. GAAP results and the related reconciliations, provide a more complete understanding of our business. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not rely on any single financial measure.
The following table presents a reconciliation of net income attributable to Common Stockholders of Pernix Group, Inc. to non-GAAP pretax income from continuing operations and non-GAAP basic earnings per share from continuing operations attributable to Common Stockholders of Pernix Group, Inc.:
Non-GAAP net income (loss) and basic earnings per share attributable to Pernix Group, Inc. Common Stockholders reconciliation:
| | | | | | |
(in thousands, except per share data) | | | For the Year Ended December 31, 2014 | | | For the Year Ended December 31, 2013 |
| | | | | | |
Net loss attributable to Common Stockholders of Pernix Group, Inc. | | $ | (1,840) | | $ | (4,680) |
Less: | | | | | | |
Net impact of income tax expense (benefit) | | | 482 | | | 5,042 |
Non-GAAP Pretax Income (Loss) from continuing operations attributable to Common Stockholders of Pernix Group, Inc. | | $ | (1,358) | | $ | 362 |
| | | | | | |
Non-GAAP Basic and Diluted earnings (loss) per share attributable to Pernix Group, Inc. | | $ | (0.14) | | $ | 0.04 |
Basic and diluted weighted shares outstanding | | | 9,403,697 | | | 9,403,697 |
Management is keenly focused on bidding on and winning new contracts on a stand-alone basis as well as with our strategic partners. In early 2015, the Company has entered into new contract awards totaling over $15.8 million thereby restoring the backlog that existed as of December 31, 2013. Pernix will also continue to explore acquisition and co-investment opportunities in both business segments to obtain additional backlog, expand our customer base and optimize the use of our tax loss carryforwards.
Although the revenue from our Power generation segment represents just 7.7% and 7.9% of consolidated revenue, in 2014 and 2013, respectively, it consistently accounts for a significant portion of the Company’s pretax income from continuing operations.
There are three significant recent developments in the power segment that significantly impact its future performance. First, as noted above, the partial sale of a 25% interest in PFL to FHL. Second, PFL received a FJD 8.3 million ($4.2 million) award in December 2014 for construction of the substation to support the expanded diesel power station currently in execution. PFL has accounted for $1.1 million and $0.8 million of Pernix consolidated pretax income during 2014 and 2013, respectively.
Lastly, VUI has received a decision by the Vanuatu judiciary regarding a retender of the long term concession deed to operate and maintain the diesel and hydro power operations in Vanuatu. The government has issued a new agreement to VUI to continue to operate the plant under the MOU terms until the retender process is completed. As of the date of this report, VUI continues to operate and maintain the system. Once a retender is completed and if VUI is not awarded the concession deed or if the VUI is unable to sufficiently reduce operating costs under the new tariff ruling, it could have a material and negative impact on the Company’s income, cash flows and financial condition.
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VUI accounted for $1.0 million of Pernix consolidated pretax income in 2014 and 2013. VUI has received high ratings from the Utilities Regulatory Authority of Vanuatu for work performed under the MOU to date but the Company does not know the likelihood of a successful retender bid by VUI or the financial impact of the new tariff ruling.
Industry experts predict that construction in emerging markets will make up more than half of the global construction market by the end of this decade. In light of its experience, Pernix is uniquely qualified to perform in emerging markets which can be more remote and logistically challenging environments. The combination of growing demand to supplement or replace aging power generation equipment, growing demand for power in non-OECD countries and demand to improve power efficiency through the use of new power technologies presenting a wealth of opportunities for construction and distribution of power. Pernix Group’s power segment is well positioned to pursue these opportunities which are expected to be smaller in size and fit well with our agile organizational structure.
Our revenue is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, align with strategic partners, secure new contracts
and renew existing client agreements among other factors. Moreover, as a professional services company, maintaining the high quality of the work generated by our employees is integral to our revenue generation.
Our costs consist primarily of the compensation we pay to our employees, including salaries, fringe benefits, the costs of hiring subcontractors and other project-related expenses, the costs associated with maintaining and operating diesel power plants (fuel related costs) and sales, general and administrative costs.
Critical Accounting Policies and Estimates
Our financial statements are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). Highlighted below are the accounting policies that management considers significant to understanding the operations of our business.
Basis of Presentation
The consolidated financial statements include the accounts of all majority-owned subsidiaries in which control does not rest with other entities, as well as joint ventures which are determined to be variable interest entities and in which the Company is the primary beneficiary. During 2014 and 2013, the variable interest entities and related financial results are not material. All inter-company accounts have been eliminated in consolidation. The Company effected an elective accounting quasi-reorganization as of September 30, 2012, which eliminated its accumulated deficit in retained earnings and accumulated other comprehensive income (loss) against additional paid-in-capital. The consolidated financial statements as of December 31, 2014 and 2013 reflect the adjustments to fair value of assets and liabilities that were recorded in connection with the implementation of the quasi-reorganization and subsequent amortization thereof. See Note 2 in our notes to our consolidated financial statements.
Revenue Recognition
We offer our services through two operating business segments: General Construction and Power Generation Services which are supported by the Corporate segment. Revenue recognition for each of the non-corporate segments is described by segment below.
General Construction Revenue. Revenue from construction contracts is recognized using the percentage-of-completion method of accounting based upon costs incurred and estimated total projected costs. Our current projects with the United States Government are design/build and design/bid/build contracts with fixed contract prices and include 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. Contracts on our domestic projects can vary depending on the customer’s need. Currently on our domestic work we have active contracts on the lump sum and the cost plus fee basis.
Revenues recognized under the percentage-of-completion method require applying a percentage (actual costs incurred through the reporting date divided by the total estimated costs to complete the project) to the fixed contract price. 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
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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 its 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. Our estimates, assumptions and judgments are continually evaluated based on known information and experience. However, the actual amounts could be significantly different from our estimates. Costs and estimated earnings in excess of amounts billed to customers are recognized as an asset. Amounts billed in excess of costs and estimated earnings are recognized as a liability. The Company will record a provision for losses when estimated costs exceed estimated revenues. To mitigate risks associated with cost overruns, the Company may employ fixed price contracts with subcontractors.
Costs in excess of billings are assets that represent the contract revenue recognized to date using the percentage-of-completion accounting method but not yet invoiced to the client due to contract terms or the timing of the accounting invoicing cycle. Billings in excess of costs on uncompleted contracts represent the billings to date, as allowed under the terms of a contract, but not yet recognized as contract revenue using the percentage-of-completion accounting method.
Cost of Construction Revenue. Cost of construction revenue consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct and certain indirect overhead costs, equipment expense (primarily depreciation, maintenance, and repairs), 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. 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.
Power Generation Service Revenue. The Company receives a combination of fixed and 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.
Claims Recognition
Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. The Company records contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such cases, the Company records revenue only to the extent that contract costs relating to the claim have been incurred. The amounts recorded, if material, are disclosed in the notes to the financial statements. Costs attributable to claims are treated as costs of contract performance as incurred.
Stock Based Compensation
We recognize the expense associated with stock option awards over the period during which an employee, director or consultant is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The related option awards for employees and directors are classified as equity and as such are valued at the grant date and are not subject to remeasurement thereafter. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. The option valuations are performed using a fair value Black Scholes model. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions can materially affect fair value estimates.
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See Note 15 in the notes to our consolidated financial statements for additional information pertaining to the stock based compensation plans.
Income Taxes
Valuation Allowance. Deferred income taxes are recorded using the asset and liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities, as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment of such changes to laws and rates. In accordance with the quasi-reorganization requirements tax benefits that existed at the date of the quasi-reorganization but that were not recognized at the date of the quasi-reorganization will be recorded directly to equity.
Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Whether a deferred tax asset may be realized requires considerable judgment. In considering the need for a valuation allowance, we consider a number of factors including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry-back years if carry-back is permitted under tax law, and prudent and feasible tax planning strategies that would normally be taken by management, in the absence of the desire to realize the deferred tax asset. Whether a deferred tax asset will ultimately be realized is also dependent on varying factors, including, but not limited to, changes in tax laws and audits by tax jurisdictions in which we operate.
We review the need for a valuation allowance at least quarterly. If we determine we will not realize all or part of our deferred tax asset in the future, we will record an additional valuation allowance. Conversely, if a valuation allowance exists and we determine that all or part of the net deferred tax asset is more likely than not to be realized, then the amount of the valuation allowance will be reduced. This adjustment will increase or decrease income tax expense in the period of such determination.
Undistributed Non-U.S. Earnings. The results of our operations outside of the United States are consolidated for financial reporting; however, earnings from investments in non-U.S. operations are included in domestic U.S. taxable income only when actually or constructively received. No U.S. Federal or State deferred taxes have been provided on the undistributed earnings of non-U.S. operations of approximately $3.6 million and $3.2 million for the period January 1, 2014 through September 30, 2014 and for the year ended December 31, 2013, respectively because we made the election to permanently reinvest these earnings overseas to fund growth and operations. The Company determined that we will no longer permanently reinvest its PFL earnings overseas effective October 1, 2014 in conjunction with its partial sale of PFL to Fijian Holdings Limited (FHL) for a 25% interest. Upon repatriation of these earnings, those earnings would be included in taxable income at that time. However, these additional U.S. income taxes may be offset in part by the use of foreign tax credits. U.S. income tax liabilities are recorded from our earnings due to operations in Vanuatu as there are no income taxes in Vanuatu and Pernix Group repatriates these earnings on a monthly basis.
Foreign Currency Translation
The functional currency of the Company’s foreign operations is the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet asset and liability 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 reflected as a separate component of stockholders’ equity captioned accumulated other comprehensive income (loss). The assets and liabilities of the entity that are denominated in currencies other than the Company’s functional currency, are re-measured into the Company’s functional currency using end of period or historical exchange rates. Gains and (losses) associated to these re-measurements are included in other income (expense), net in the consolidated statement of operations.
From time to time, the Company is exposed to foreign currency exchange risk on various foreign transactions and 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, 2014 and 2013, the foreign currency risk is not material and there were no foreign exchange contracts outstanding. The Company historically has not applied hedge accounting treatment to its forward exchange contracts.
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Results of Operations
Results of Operations for the year ended December 31, 2014 compared to the year ended December 31, 2013
Revenues
Total revenues increased $11.5 million or 16% to $85.3 million in 2014 compared to $73.8 million for 2013. This increase is comprised of a $10.8 million increase in construction revenue and a $0.7 million increase in power generation and other revenue. The construction revenue increase was driven by the timing of new projects, including projects that significantly ramped up in 2014 and the substantial completion of a large project in January 2014. The power generation revenue increase was driven by higher than normal power demand due to lower water levels in Fiji resulting in reduced hydro generation power.
General Construction - Construction revenues are recorded using the percentage of completion method and in 2014 relate to ten construction contracts for six customers while construction revenue related to six contracts for two customers in 2013. Construction revenue increased $10.8 million or 15.9% to $78.6 million in 2014, from $67.8 million in 2013. The increase was primarily attributable to $46.1 million of revenue increases associated with three new contracts awarded in 2014. The scope of these projects involves design and construction of a 36 MW expansion of the Kinoya power generation facility, a nanotechnology laboratory and other classrooms at Texas A&M University. The 2014 revenue generated from these projects was $23.5 million, $19.7 million, and $2.9 million, respectively. The increase in revenue related to these projects was partially offset primarily by a $39.4 million reduction in revenue reflecting the substantial completion of the Sather CHU in January 2014.
Service fees— Total Power Generation revenue increased $0.8 million, or 13.3% to $6.6 million in 2014 compared to $5.8 million in the prior year. The increase primarily reflects the higher use of PFL Kinoya plant generated diesel power in Fiji due to lower water power, which is an alternate power source in Fiji. VUI revenue also decreased $0.1 million from $1.5 million in 2013 to $1.4 million in 2014.
Costs and Expenses
General Construction Costs — including Construction Costs — Related Party. Total construction costs increased $4.1 million from 2013 to $68.0 million for 2014, primarily reflecting the additional costs associated with three additional projects. These additional costs of approximately $46.0 million were offset by the $44.0 million decrease in costs associated with the substantial completion of the CHU project in 2013.
Operations and Maintenance Costs — Power Generation Plant. Operations and maintenance costs — power generation plant increased $0.7 million (27.1%) to $3.4 million in 2014 from $2.7 million in 2013, primarily reflecting higher major planned maintenance at Kinoya versus the comparable prior year period when no major planned maintenance occurred.
Gross Profit
Gross profit increased by $6.7 million (93.3%) to $13.9 million for 2014 as compared to $7.2 million for the prior year, due primarily to improved results through project cost savings in the construction segment. The increase in the construction segment gross profit reflects the substantial completion of the Sather and Baku projects which are 99% and 89.5% complete, coupled with higher margin projects that were awarded at the end of 2013. Power segment margin was slightly lower reflecting higher planned maintenance expenses that more than offset higher power generation fees for 2014 compared to 2013.
Operating Expenses
Salaries and Employee Benefits. Salaries and employee benefits increased $3.0 million (107%) to $5.9 million for 2014 from $2.9 million for 2013. The increase was partially due to salaries and benefits for key hires into new positions including the construction business development and estimating, power business development, procurement and accounting personnel necessary to continue growing our power and construction businesses. Additionally, there were no indirect project management office (PMO) and Lombard office project support cost allocation to projects in 2014 as compared to $1.6 million allocated to projects in 2013.
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General and Administrative and Other Operating Expenses. General and administrative expenses totaled $1.9 million and were $0.7 million higher in 2014 compared to 2013, primarily due to higher power and construction business development consulting and travel expense coupled with an increase in professional fees associated with transition from our predecessor accounting firm, as well as investment banking and marketing fees associated with the Company’s efforts to expand the customer base and financing sources. Finally, higher costs of owning the corporate headquarters building for the full twelve months in 2014 compared to six months during 2013 also contributed to the increase in general and administrative expenses.
Total Other Income (Expense)
Total other expense, net was stable at less than $0.1 million for the years ended December 31, 2014 and 2013.
Income Tax Benefit (Expense)
The income tax expense decreased by $4.5 million during 2014 to $0.5 million, from a 2013 income tax expense of $5.0 million. The decrease primarily reflects the deferred income tax expense of $4.9 million for 2013, which consists of $4.1 million of federal deferred expense and $0.8 million of deferred state expense resulting from an increase in the valuation allowance on deferred tax assets. This expense was a non-cash expense and had no impact on the Company's liquidity, cash flows, or its ability to execute projects or conduct ongoing operations. As a result of the increase in the valuation allowance, the deferred tax assets were fully reserved as of December 31, 2013, and remain fully reserved at December 31, 2014. U.S. net operating and capital loss carryforwards totaling approximately $70.4 million are available to Pernix Group, Inc. as of December 31, 2014.
Consolidated Net Loss Attributable to Common Shareholders
Net loss attributable to Pernix common shareholders was ($1.8) million and ($4.7) million in 2014 and 2013, respectively. The decrease in net loss most significantly relates to the $4.9 million deferred income tax expense related to management’s third quarter 2013 decision to record an increase in the valuation allowance on deferred tax assets. In 2014 the increase in gross profit as discussed above was offset by the increase in operating expenses due to the Company trying to grow and expand its business operations through new contract awards and potential acquisitions.
Liquidity and Capital Resources
| | December 31, 2014 | | December 31, 2013 |
Cash and cash equivalents | $ | 11,169,169 | $ | 19,497,840 |
| | | | |
| | December 31, 2014 | | December 31, 2013 |
Cash (used in) provided by operating activities | $ | (4,650,272) | $ | 3,996,884 |
Cash used in investing activities | | (1,271,553) | | (1,487,604) |
Cash used in financing activities | | (2,232,481) | | (4,242,754) |
Effect of exchange rates on cash | | (174,365) | | (175,584) |
Decrease in cash and cash equivalents | $ | (8,328,671) | $ | (1,909,058) |
Cash Requirements
We generate cash flows primarily from serving as the general contractor on construction projects for the U.S. Government and various domestic customers, through the operation and maintenance of power generation plants, from financing obtained from third party banks and affiliated parties and through sales of common and preferred stock. In November 2014, PGI and Pernix RE, LLC entered into a loan and security agreement with Barrington Bank & Trust Company to establish a revolving line of credit facility and a letter of credit facility. The revolving credit facility provides a borrowing capacity of $5 million and the letter of credit facility provides up to $10 million in aggregate standby or trade letters of credit. The facilities require the Company to comply with various covenants including, among others, to maintain minimum liquidity of up to the amount outstanding on the borrowing capacity. The Company’s primary uses of the revolving credit facility are to fund potential working capital needs.
In December 2013, the Company repaid the remaining $2.3 million of debt to a related party resulting in a debt free balance sheet as of December 31, 2013. The Company also sold Series A Preferred Stock to its majority shareholders in late December 2013, resulting in an inflow of $5.0 million of proceeds available to the Company for
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future acquisitions and operations as needed. On May 12, 2014, the Company’s current Registration Statement became effective with the SEC thereby registering 5,000,000 shares of previously unissued stock in a primary fixed price offering and 6,236,185 shares on behalf of selling stockholders under a secondary offering. The Company anticipates this registration will augment our current sources of capital. Beyond the cash expected to be generated by operations, from third party banks and the issuance of additional shares, the Company may seek debt financing or equity based support from its principal stockholders, Ernil and Halbarad, on an as-needed basis only.
We also believe that collections on the outstanding receivables which are primarily U.S. Government or a major public university based receivables with a timely payment history as well as funds available from various funding sources will permit the construction operations to meet the payment obligations to vendors and subcontractors. Distribution of the PSJV accumulated earnings are made on a quarterly basis and all such distributions have been made to Serka as of December 31, 2014. It is our opinion that, in the absence of significant unanticipated cash demands, current and forecasted cash flow from our operations, combined with equity and debt financing capacity, will provide sufficient funds to meet anticipated operating requirements, capital expenditures, equity investments, and strategic acquisitions.
The Company has significant operating loss carryforwards that it may utilize in the future that could be used to offset future taxable income.
As of December 31, 2014, the Company’s total assets exceeded total liabilities by $12.0 million. This remained fairly consistent between 2014 and 2013. The biggest driver of the excess in 2014 was the cost in excess of project billings incurred on the Niger and Kinoya Expansion projects. These costs will be recaptured in 2015 which will also increase the cash and cash equivalents balance.
The $8.3 million decrease in cash during 2014 includes cash used in operating activities of $4.7 million which is a result of costs in excess of billings of $7.7 million as of December 31, 2014. Management believes these negative cash flows will be short term as the costs incurred on projects will be recaptured in the short term once billings to customers are made. Additionally, the decrease in total cash was a result of cash used in financing activities of $2.2 million which was primarily a result of non-controlling interest payments to JV partners of $4.1 million. These payments were partially offset by $2.3 million of cash proceeds received on the sale of a partial interest in PFL.
The Company does not currently have material commitments for capital expenditures as of December 31, 2014.
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-05, ‘‘Service Concession Arrangements.’’ This ASU clarifies that, unless certain circumstances are met, operating entities should not account for certain concession arrangements with public-sector entities as leases and should not recognize the related infrastructure as property, plant and equipment. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. For the year ended December 31, 2014, Management has elected to early adopt the standard making it effect for the full year 2014. The Company has completed its evaluation of this pronouncement and has determined that the Company’s current accounting method for its concession agreements is proper and should not account for them as leases.
In May 2014, the FASB issued ASU 2014-09, ‘‘Revenue from Contracts with Customers.’’ The amendments in this update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU is effective for annual reporting periods beginning after December 15, 2016 for publicly traded companies. Management is in the process of determining the impact, if any, on the Company’s financial position, results of operations and cash flows.
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In June 2014, the FASB issued ASU 2014-12 “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. For all entities, the amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Management does not anticipate a material impact, if any, on the company’s financial position, results of operations or cash flows related to implementation of this guidance.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Management is in the process of determining the impact, if any, on the Company’s financial position, results of operations and cash flows.
In January 2015, the FASB issued ASU 2015-01, "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items." Under this ASU, an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. ASU 2015-01 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. Upon adoption, the company may elect prospective or retrospective application. Management does not expect the adoption of ASU 2015-01 to have a material impact on the company's financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation — Amendments to the Consolidation Analysis.” ASU No. 2015-02 eliminates the deferral of the requirements of ASU No. 2009-17, “Consolidations — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” for certain interests in investment funds and provides a scope exception from Topic 810 for certain investments in money market funds. The ASU also makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management does not expect the adoption of ASU 2015-02 to have a material impact on the company's financial position, results of operations or cash flows.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as defined by Regulation S-K 303. However, 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.
From time to time, the Company is required to utilize standby letters of credit or similar financial guarantees in the normal course of its business, and this is a typical practice for the industry segments in which the Company operates. The amount, duration, and structure of such standby letters of credit or similar financial instruments varies depending on the nature and scope of the project involved. As of December 31, 2014 the Company had a FJD 4.0 million ($2.0 million USD) financial guarantee of PFL’s line of credit with ANZ. No amounts are drawn under the
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ANZ line of credit and the Company does not anticipate any payment risk under this guarantee as of December 31, 2014. No such guarantees were outstanding as of December 31, 2013. In December 2012, the Company was awarded a $1.6 million project to install 33MW cable in the Solomon Islands and began the execution of this project in 2013. In connection with this award, a performance guarantee was established with ANZ Bank. The project is substantially complete as the 33MW cable has been installed but not yet commissioned as of December 31, 2014.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PERNIX GROUP, INC.
Index to Consolidated Financial Statements
December 31, 2014 and 2013
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders’
Pernix Group, Inc.
Lombard, Illinois
We have audited the accompanying consolidated balance sheets of Pernix Group, Inc. as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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 audits 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pernix Group, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Chicago, Illinois
March 20, 2015
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| | | | |
PERNIX GROUP, INC. |
AND SUBSIDIARIES |
Consolidated Balance Sheets |
|
| As of December 31, |
Assets | | 2014 | | 2013 |
Current assets: | | | | |
Cash and cash equivalents | $ | 11,169,169 | $ | 19,497,840 |
Restricted cash | | 1,181,735 | | 458,919 |
Accounts receivable, net | | 7,014,352 | | 9,223,230 |
Inventories | | 1,592,430 | | 1,626,003 |
Cost and estimated earnings in excess billings | | 7,539,080 | | 56,679 |
Prepaid expenses and other current assets | | 1,718,569 | | 1,066,747 |
Total current assets | | 30,215,335 | | 31,929,418 |
Property and equipment, net | | 1,678,438 | | 1,282,899 |
Other assets | | 57,741 | | 260,712 |
Intangible assets, net | | 81,651 | | 157,934 |
Total assets | $ | 32,033,165 | $ | 33,630,963 |
Liabilities and Stockholders’ Equity | | | | |
Current liabilities: | | | | |
Accounts payable | $ | 12,890,164 | $ | 7,143,870 |
Accrued employee compensation and benefits | | 958,596 | | 1,453,967 |
Accrued unbilled job costs | | 685,196 | | 4,183,244 |
Accrued expenses - related party | | 612,569 | | 529,466 |
Billings in excess of costs and estimated earnings | | 3,787,661 | | 8,407,187 |
Dividend payable | | 241,387 | | 186,137 |
Other current liabilities | | 666,977 | | 475,159 |
Total current liabilities | | 19,842,550 | | 22,379,030 |
| | | | |
Commitments and contingencies | | | | |
Stockholders' Equity: | | | | |
Pernix Group, Inc. and Subsidiaries Stockholders' equity | | | | |
Series A convertible senior preferred stock, $0.01 par value. Authorized 1,000,000 shares, $5,000,000 liquidation preference, 1,000,000 shares issued and outstanding at December 31, 2014 and 2013 | | 10,000 | | 10,000 |
Series B convertible senior preferred stock, $0.01 par value. Authorized 400,000 Shares, $850,000 involuntary liquidation preference, 170,000 shares issued and outstanding at December 31, 2014 and 2013 | | 1,700 | | 1,700 |
Common stock, $0.01 par value. Authorized 20,000,000 shares, 9,403,697 issued and outstanding | | 94,037 | | 94,037 |
Additional paid-in capital | | 16,137,313 | | 14,324,683 |
Retained deficit - since September 30, 2012 | | (5,581,731) | | (3,741,433) |
Accumulated comprehensive income (loss) - since September 30, 2012 | | (455,624) | | (222,469) |
Total Pernix Group, Inc. and Subsidiaries Stockholders' equity | | 10,205,695 | | 10,466,518 |
Non-controlling interest | | 1,984,920 | | 785,415 |
Total Stockholders' equity | | 12,190,615 | | 11,251,933 |
Total liabilities and Stockholders' equity | $ | 32,033,165 | $ | 33,630,963 |
See accompanying notes to consolidated financial statements.
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| | | | |
PERNIX GROUP, INC. |
AND SUBSIDIARIES |
Consolidated Statements of Operations |
| | | | |
| Years Ended December 31, |
| |
2014
| |
2013
|
Revenues: | | | | |
Construction revenue | $ | 78,573,035 | $ | 67,776,314 |
Service fees – power generation plant | | 6,583,394 | | 5,810,652 |
Other income – related party | | 4,860 | | 33,344 |
Other revenue | | 139,450 | | 141,838 |
Gross revenues | | 85,300,739 | | 73,762,148 |
Costs and expenses: | | | | |
Construction costs | | 68,010,862 | | 63,904,627 |
Operation and maintenance costs - power generation plant | | 3,389,160 | | 2,665,869 |
Cost of revenues | | 71,400,022 | | 66,570,496 |
Gross profit | | 13,900,717 | | 7,191,652 |
Operating expenses: | | | | |
Salaries and employee benefits | | 5,904,756 | | 2,854,889 |
Professional fees | | 1,377,296 | | 598,545 |
Travel and entertainment | | 833,748 | | 526,365 |
General and administrative | | 1,882,986 | | 1,203,090 |
Total operating expenses | | 9,998,786 | | 5,182,889 |
Operating income | | 3,901,931 | | 2,008,763 |
| | | | |
Other income (expense): | | | | |
Interest income (expense), net | | 3,243 | | (69) |
Other expense - related party | | (83,103) | | (136,589) |
Foreign currency exchange loss | | (128,039) | | (16,639) |
Other income, net | | 117,254 | | 70,239 |
Total other income (expense) | | (90,645) | | (83,058) |
| | | | |
Consolidated income before income taxes | | 3,811,286 | | 1,925,705 |
| | | | |
Income tax expense | | (481,638) | | (5,041,514) |
| | | | |
Consolidated net income (loss) | | 3,329,648 | | (3,115,809) |
| | | | |
Less: Net income attributable to non-controlling interest | | 4,712,504 | | 1,509,184 |
| | | | |
Consolidated net loss attributable to the stockholders of Pernix Group, Inc. and Subsidiaries | | (1,382,856) | | (4,624,993) |
| | | | |
Less: Preferred stock dividends | | 457,442 | | 55,250 |
| | | | |
Consolidated net loss attributable to the common stockholders of Pernix Group Inc. and Subsidiaries | $ | (1,840,298) | $ | (4,680,243) |
| | | | |
EPS attributable to the stockholders of Pernix Group, Inc. and Subsidiaries: | | | | |
Basic and diluted net loss per share | $ | (0.20) | $ | (0.50) |
Weighted average shares outstanding – basic and diluted | | 9,403,697 | | 9,403,697 |
See accompanying notes to consolidated financial statements.
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| | | | | | | |
| | PERNIX GROUP, INC |
| | AND SUBSIDIARIES |
| | Consolidated Statements of Comprehensive Income (Loss) |
| | | | |
| Years Ended December 31, |
| | 2014 | | 2013 |
| | | | |
Consolidated net income (loss) | $ | 3,329,648 | $ | (3,115,809) |
Other comprehensive income (loss): | | | | |
Foreign currency translation adjustment | | (199,946) | | (262,806) |
| | | | |
Total comprehensive income (loss) | $ | 3,129,702 | $ | (3,378,615) |
Net income attributable to non-controlling interests | $ | 4,712,504 | $ | 1,509,184 |
Foreign currency translation attributable to non-controlling interests | | 33,209 | | (28,154) |
Total comprehensive income attributable to non-controlling interest | $ | 4,745,713 | $ | 1,481,030 |
Total comprehensive loss attributable to the stockholders of Pernix Group, Inc. and Subsidiaries | $ | (1,616,011) | $ | (4,859,645) |
See accompanying notes to consolidated financial statements.
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
PERNIX GROUP, INC. |
AND SUBSIDIARIES |
Consolidated Statements of Changes in Stockholders' Equity |
| | | | | | | | | | | | | | |
| | Total | | Retained Earnings / (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Common Stock | | Preferred Stock | | Additional Paid-In Capital | | Non-controlling Interest |
Balance at December 31, 2012 | $ | 16,038,414 | $ | 938,810 | $ | 12,183 | $ | 94,037 | $ | 1,700 | $ | 9,148,757 | $ | 5,842,927 |
| | | | | | | | | | | | | | |
Net income (loss) | | (3,115,809) | | (4,624,993) | | — | | — | | — | | — | | 1,509,184 |
Foreign currency translation adjustment | | (262,806) | | — | | (234,652) | | — | | — | | — | | (28,154) |
Preferred stock dividends | | (55,250) | | (55,250) | | — | | — | | — | | — | | — |
Preferred stock sale | | 5,000,000 | | — | | — | | — | | 10,000 | | 4,990,000 | | — |
Additional paid in capital from: | | | | | | | | | | | | | | |
Stock compensation expense | | 185,926 | | — | | — | | — | | — | | 185,926 | | — |
Distribution to non-controlling interest holders | | (6,538,542) | | — | | — | | — | | — | | — | | (6,538,542) |
Balance at December 31, 2013 | $ | 11,251,933 | $ | (3,741,433) | $ | (222,469) | $ | 94,037 | $ | 11,700 | $ | 14,324,683 | $ | 785,415 |
| | | | | | | | | | | | | | |
Net income (loss) | | 3,329,648 | | (1,382,856) | | — | | — | | — | | — | | 4,712,504 |
Foreign currency translation adjustment | | (199,946) | | — | | (233,155) | | — | | — | | — | | 33,209 |
Preferred stock dividends | | (457,442) | | (457,442) | | — | | — | | — | | — | | — |
Additional paid in capital from: | | | | | | | | | | | | | | |
Stock compensation expense | | 216,630 | | — | | — | | — | | — | | 216,630 | | — |
Partial sale of non-controlling interest in subsidiary | | 2,254,605 | | — | | — | | — | | — | | 1,596,000 | | 658,605 |
Distribution to non-controlling interest holders | | (4,204,813) | | — | | — | | — | | — | | — | | (4,204,813) |
Balance at December 31, 2014 | $ | 12,190,615 | $ | (5,581,731) | $ | (455,624) | $ | 94,037 | $ | 11,700 | $ | 16,137,313 | $ | 1,984,920 |
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
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| | | | |
PERNIX GROUP, INC |
AND SUBSIDIARIES |
Consolidated Statements of Cash Flows |
| | | | |
| Years Ended December 31, |
| | 2014 | | 2013 |
Cash flows from operating activities: | | | | |
Consolidated net income (loss) | $ | 3,329,648 | $ | (3,115,809) |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | |
Depreciation | | 191,606 | | 241,874 |
Quasi-Reorganization adjustments | | 150,738 | | (194,579) |
Stock compensation expense | | 216,630 | | 185,926 |
Deferred income tax assets and liabilities, net of valuation allowance | | — | | 4,883,935 |
Changes in assets and liabilities: | | | | |
Accounts receivable | | 2,171,527 | | (827,575) |
Inventories | | (83,981) | | 82,063 |
Cost in excess of billings | | (7,650,057) | | (56,679) |
Prepaid and other current assets | | (503,794) | | (299,876) |
Accounts payable and accrued expenses | | 2,146,927 | | 3,607,800 |
Billings in excess of cost and estimated earnings | | (4,619,516) | | (510,196) |
Net cash (used in) provided by operating activities | | (4,650,272) | | 3,996,884 |
Cash flows used in investing activities: | | | | |
Capital expenditures | | (548,737) | | (1,028,685) |
Restricted cash | | (722,816) | | (458,919) |
Net cash used in investing activities | | (1,271,553) | | (1,487,604) |
Cash flows used in financing activities: | | | | |
Payments on borrowings - related party | | — | | (2,664,552) |
Proceeds from preferred stock sale | | — | | 5,000,000 |
Proceeds from partial sale of subsidiary | | 2,254,605 | | — |
Repayment of borrowings - bank vehicle loan | | — | | (39,660) |
Dividends paid | | (402,192) | | — |
Distribution to non-controlling interest holders | | (4,084,894) | | (6,538,542) |
Net cash used in financing activities | | (2,232,481) | | (4,242,754) |
| | | | |
Effect of exchange rate changes on cash and cash equivalents | | (174,365) | | (175,584) |
Net decrease in cash and cash equivalents | | (8,328,671) | | (1,909,058) |
Cash and cash equivalents at beginning of year | | 19,497,840 | | 21,406,898 |
Cash and cash equivalents at end of year | $ | 11,169,169 | $ | 19,497,840 |
Cash paid during the period for interest | $ | — | $ | 196,437 |
Cash paid during the period for interest - related party | $ | — | $ | 192,946 |
Cash paid during the period for income taxes | $ | 514,149 | $ | 102,144 |
Supplemental disclosure of non-cash investing and financing transactions: | | | | |
Preferred stock dividends | $ | 55,250 | $ | 55,250 |
Unpaid equity distributions | $ | 119,918 | $ | — |
See accompanying notes to consolidated financial statements.
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Pernix Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background
Pernix Group, Inc. (the “Company”, “Pernix Group” or “Pernix”) is a global company managed from Lombard, Illinois and was originally formed in 1995 as Telesource International, Inc. In 2001, the Company was incorporated in Delaware and became an SEC registrant. As of December 31, 2014 and 2013, Pernix Group is over 96.0% owned by Ernil Continental, S.A., BVI. (Ernil), Halbarad Group, Ltd., BVI, (Halbarad) and Affiliates. The Company conducts its operations through the parent and its fifteen subsidiaries.
Pernix is a diversified contractor that is engaged in two primary operating business segments: Construction Services as a design-build general contractor in the public and private markets and Power Generation Services as a builder, manager and investor in power projects as an independent power producer and as a general contractor. Pernix has full-scale construction and management capabilities, with subsidiaries in the South Pacific islands of Fiji and Vanuatu, in Niger, in United Arab Emirates, in Azerbaijan, in Sierra Leone and in the U.S. We provide our services in a broad range of end markets, including construction, construction management, power and facility operations and maintenance services. In addition to these two operating segments, the Corporate operations are a separately reported segment.
The Company’s subsidiaries and consolidated joint ventures, which include Pernix-Serka Joint Venture (PSJV), Pernix/SHBC Joint Venture (SHBC), Pernix Niger LLC (Niger), Pernix Kurdistan, LLC, Pernix –Serka Azerbaijan, LLC, Pernix-Serka LLC, Sierra Leone, Pernix LTC JV (PLTC), Pernix Fiji, Ltd. (PFL), Vanuatu Utilities and Infrastructure (VUI), Pernix Guam LLC, Pernix Real Estate, LLC, Pernix DCK, LLC (inactive), Pernix Solomon Island Limited, Pernix Tishman LLC, (inactive) and Pernix Technical Works Co., LLC (PTW) located in Dubai, also bid on and /or execute construction projects with support from the Pernix corporate office. PTW is a variable interest entity for which the Company is the primary beneficiary. The related financial results of PTW are not material.
PSJV has been awarded four significant projects from its primary customer and has funded its operations since its inception. Cash of PSJV is not available for other purposes unless distributions are made to the partners. As of December 31, 2014 and 2013, PSJV has $4.0 million and $10.1 million in cash, $0.6 million and $6.5 million in other assets, $3.1 million and $8.3 million billings in excess of cost and $0.7 million and $8.8 million of other liabilities, respectively.
Pernix has two power segment subsidiaries that manage the construction and facilities operations and management activities in Fiji and Vanuatu, respectively. VUI is wholly-owned and PFL is majority-owned since November 25, 2014, when PFL sold 249,999 of its common shares to Fijian Holdings Limited (Fijian Holdings a.k.a. FHL) for a 25% non-controlling interest for FJD 4.35 million ($2.3 million USD). The transaction resulted in approximately $0.1 million and $1.6 million recorded in non-controlling interest and additional paid-in capital as of December 31, 2014. Prior to November 25, 2014, PFL was wholly-owned.
The Company generates cash flows primarily from serving as the general contractor on construction projects for the United States of America (U.S.) Government and various domestic customers, through the operation and maintenance of power generation plants, from financing obtained from third party banks and affiliated parties and through sales of common and preferred stock. The Company anticipates its open registration statements, as it relates to primary fixed price offerings, will augment our current sources of capital. Beyond the cash expected to be generated by operations, from third party banks, and the issuance of additional shares, the Company may seek debt financing or equity based support from its principal stockholders, Ernil and Halbarad, on an as-needed basis only.
2. Quasi-Reorganization
In accordance with quasi-reorganization requirements, the Company elected to effect a quasi-reorganization after assessing as of September 30, 2012, that it had reached a turning point in its operations and future profitable operations were reasonably assured. The management team transformed the Company through the 2012 disposition
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of unprofitable business entities and through implementation of efforts to become leaner in terms of leverage and stronger in formation of strategic relationships with customers, vendors and key government agencies. Since 2005 management has significantly reduced debt, significantly increased equity, improved the profitability of its continuing operations, built its contract backlog and expanded its customer base.
In connection with the application of quasi-reorganization accounting, the Company applied Accounting Standard Codification (ASC) 805, Business Combinations, to restate assets and liabilities at fair value. The Company with the assistance of a third-party valuation firm performed the fair value assessment and computed the estimated fair value of the business enterprise as of September 30, 2012 based on the market and income approaches, the results of which approximated one another. In applying quasi-reorganization accounting as of September 30, 2012, the Company obtained approval from its shareholders and its Board of Directors to implement a quasi-reorganization.
The impact on earnings, accumulated deficit and accumulated other comprehensive income (loss) was as follows:
•The Company’s accumulated deficit and accumulated other comprehensive income (loss) accounts of $68.6 million and ($0.1) million, respectively, as of September 30, 2012 were eliminated, with a commensurate reduction in additional paid-in capital.
•The Company’s earnings and accumulated other comprehensive income (loss) subsequent to September 30, 2012 are separately presented as “Retained (Deficit) - since September 30, 2012” on the face of the consolidated balance sheets and this presentation will be carried forward for ten years until 2022.
3. Significant Accounting Policies
Principles of Consolidation and Presentation—The consolidated financial statements include the accounts of all majority-owned subsidiaries over which the Company exercises control and joint ventures when determined to be variable interest entities in which the Company is the primary beneficiary. During 2014 and 2013, the variable interest entities and related financial results are not material. All inter-company accounts have been eliminated in consolidation. The 2014 and 2013 consolidated financial statements of the Company reflect the impact of quasi-reorganization accounting. See Notes 1 and 2 in the notes to our consolidated financial statements for more information regarding joint ventures and the quasi-reorganization.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) 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. The more significant estimates affecting amounts reported in the consolidated financial statements relate to revenues under long-term contracts, including estimates of costs to complete projects and provisions for contract losses, valuation of options in connection with various share-based compensation plans, insurance accruals, and the valuation allowance against deferred tax assets. Accordingly, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized. Actual results could vary materially.
Reclassification— Certain reclassifications were made to prior years’ amounts to conform to the 2014 presentation.
Revenue Recognition— Pernix offers our services through two operating business segments: General Construction and Power Generation Services which are supported by the Corporate segment. Revenue recognition for each of the non-corporate segments is described by segment below.
General Construction Revenue. Revenue from construction contracts is recognized using the percentage-of-completion method of accounting based upon costs incurred and estimated total projected costs. Our current projects with the U.S. Government are design/build and design/bid/build contracts with fixed contract prices and include 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. Our design/build capacity expansion project for Fiji Electricity Authority (FEA) and our greenhouse project at the Texas A&M University are also fixed price contracts while our design / build contract pertaining to the nanotechnology lab at Texas A&M University is a cost plus fee contract.
The Company only uses approved contract changes in its revenue recognition calculation. This method of revenue recognition requires that the Company estimate future costs to complete a project based upon the knowledge and experience of the Company’s engineers, project managers and finance professionals. Estimating future costs requires
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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. Amounts billed in excess of costs and estimated earnings are recognized as a liability. The Company will record a provision for losses when estimated costs exceed estimated revenues. Contracts are generally completed in approximately 18 months from the date on which the Company is ordered to proceed with substantial work. In situations where the Company is responsible for procurement of construction materials, shipping and handling expenses are included in the contract costs of revenue and in revenue to the extent the contract is complete.
Power Generation Services 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. The Company also received fixed payments in connection with the long term concession deed for Operations and Maintenance (O&M) services in Fiji.
Cost of Construction Revenue. 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), interest associated with construction projects, and insurance costs. The Company records a portion of depreciation and indirect overhead in cost of construction revenue dependent on the nature of charges and the related project agreements. If not chargeable to individual projects, overhead costs are expensed in the period incurred. Contracts frequently extend over a period of more than one year. 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.
Contract Claims— 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 records contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated. In such cases, the Company records revenue only to the extent that contract costs relating to the claim have been incurred. As of December 31, 2014 and 2013, the Company had no significant receivables related to contract claims.
Cash and Cash Equivalents—The Company’s cash equivalents include highly liquid investments which have an initial maturity of three months or less. See Note 12 to the consolidated financial statements.
Restricted cash— The Company’s restricted cash represents required cash balances maintained in conjunction with PFL’s financing agreements related to ongoing constructions projects.
Inventory — The inventory represents the value of spare parts which the Company is required to maintain for use in the diesel power generators. Inventories are valued at the lower of cost or market, generally using the first-in, first-out method, and are primarily homogenous in nature. As of December 31, 2014 and 2013, the inventories consists of spare parts used for the diesel power generators of $1.5 million and $1.6 million, respectively
Property and Equipment - Property and equipment are initially recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are expensed as incurred. Typically, estimated useful lives range from three to ten years for equipment, furniture and fixtures and 39 years for buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining terms of the underlying lease agreement.
Long-lived assets to be held and used are reviewed for impairment whenever events or circumstances indicate that the assets may be impaired. For assets to be held and used, impairment losses are recognized based upon the excess of the asset’s carrying amount over the fair value of the asset. For long-lived assets to be disposed, impairment losses are recognized at the lower of the carrying amount or fair value less cost to sell. There was no such impairment for the years ended December 31, 2014 and 2013.
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Construction and power contract intangibles – In connection with the quasi-reorganization asset valuations, $0.3 million of contracts were recognized as intangible assets and will be amortized in proportion to the anticipated completion of the contracts. As of December 31, 2014 the remaining weighted average life on contract intangible assets is 9 years. Amortization expense of the contract intangible assets was less than $0.1 million for the years ended December 31, 2014 and 2013 and the remaining balance as of December 31, 2014 was $0.1 million. In response to the retendering of the operation and maintenance of the Vanuatu power operations the Company has accelerated the amortization period of the related power contract.
Income Taxes—Pernix Group, Inc. is a U.S. corporation that files a separate U.S. corporate income tax return, which includes its respective share of earnings from its U.S. subsidiaries. PFL 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 the deferred tax benefit if management has determined it is more likely than not that the deferred tax assets will not be realized. The need for a valuation allowance is assessed each quarter.
At the date of the quasi-reorganization, deferred taxes were reported in conformity with applicable income tax accounting standards, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities. In accordance with the quasi-reorganization requirements, tax benefits realized in periods after the quasi-reorganization that were not recognized at the date of the quasi-reorganization will be recorded directly to equity.
Allowance for Doubtful Accounts—The Company records its accounts receivable net of an allowance for doubtful accounts. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its clients. The factors considered by the Company in its contract evaluations include, but are not limited to; client type—domestic and foreign federal, state and local government or commercial client, historical contract performance, historical collection and delinquency trends, client credit worthiness and
general economic conditions.
During 2014 and 2013, there were no bad debt write-offs of accounts receivable. As of December, 31, 2014 and 2013, there was no allowance for doubtful accounts deemed necessary.
Fair Value of Financial Instruments—The Company determines the fair values of its financial instruments, including short-term investments, debt instruments and derivative instruments based on inputs or assumptions that market participants would use in pricing an asset or a liability. The Company categorizes its instruments using a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and the debt agreements approximate fair value because of the short maturities of these instruments.
The Company’s fair value measurement methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methodologies or assumptions to determine fair value could result in a different fair value measurement at the reporting date.
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From time to time, the Company holds financial instruments such as marketable securities, receivables related to sales-type leases, and foreign currency contracts. As of December 31, 2014 and 2013, the Company did not hold any such financial instruments.
Foreign Currency Translation—The functional currency of the Company’s foreign operations is the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet asset and liability 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 reflected as a separate component of stockholders’ equity captioned accumulated other comprehensive income (loss). The assets and liabilities of the entity are denominated in currencies other than the Company’s functional currency, are re-measured into the Company’s functional currency using end of period or historical exchange rates. Gains and (losses) associated to these re-measurements are included in other income (expense), net in the consolidated statement of operations.
From time to time, the Company is exposed to foreign currency exchange risk on various foreign transactions and 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, 2014 and 2013, the foreign currency risk is not material and there were no foreign exchange contracts outstanding. The Company historically has not applied hedge accounting treatment to its forward exchange contracts.
Stock-Based Compensation—Principle awards issued under the Company’s stock-based compensation plans include qualified stock options to employees, non-qualified stock options and awards, restricted stock units and other types of awards.
The Company recognizes the expense associated with stock option awards over the period during which an employee, director or consultant is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
Stock option awards for employees and directors are classified as equity instruments and are valued at the grant date and are not subject to remeasurement. The option valuation is performed using a fair value Black Scholes model. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions can materially affect fair value estimates. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. During 2014 and 2013 the compensation expense related to the stock options was approximately $0.2 million each year.
4. Recent Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-05, ‘‘Service Concession Arrangements.’’ This ASU clarifies that, unless certain circumstances are met, operating entities should not account for certain concession arrangements with public-sector entities as leases and should not recognize the related infrastructure as property, plant and equipment. This ASU is effective for interim and annual reporting periods beginning after December 15, 2014. For the year ended December 31, 2014, Management has elected to early adopt the standard making it effect for the full year 2014. The Company has completed its evaluation of this pronouncement and has determined that the Company’s current accounting method for its concession agreements is proper and should not account for them as leases.
In May 2014, the FASB issued ASU 2014-09, ‘‘Revenue from Contracts with Customers.’’ The amendments in this update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU is effective for annual reporting periods beginning after December 15, 2016 for publicly traded companies. Management is in the process of determining the impact, if any, on the Company’s financial position, results of operations and cash flows.
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In June 2014, the FASB issued ASU 2014-12 “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest
and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. The stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. For all entities, the amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Management does not anticipate a material impact, if any, on the company’s financial position, results of operations or cash flows related to implementation of this guidance.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Management is in the process of determining the impact, if any, on the Company’s financial position, results of operations and cash flows.
In January 2015, the FASB issued ASU 2015-01, "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items." Under this ASU, an entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. ASU 2015-01 is effective for interim and annual reporting periods beginning after December 15, 2015 with early adoption permitted. Upon adoption, the company may elect prospective or retrospective application. Management does not expect the adoption of ASU 2015-01 to have a material impact on the company's financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation — Amendments to the Consolidation Analysis.” ASU No. 2015-02 eliminates the deferral of the requirements of ASU No. 2009-17, “Consolidations — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” for certain interests in investment funds and provides a scope exception from Topic 810 for certain investments in money market funds. The ASU also makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Management does not expect the adoption of ASU 2015-02 to have a material impact on the company's financial position, results of operations or cash flows.
Other pronouncements issued recently are not expected to have a material impact on the company’s financial position, results of operations or cash flows.
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5. Contract Backlog
Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted construction contracts in progress at December 31, 2014 and 2013 and from construction contractual agreements on which work has not yet begun. The following summarizes changes in backlog on construction contracts during the years ended December 31, 2014 and 2013:
Contract Backlog Schedule
| | | |
Balance at December 31, 2012 | $ | 67,901,575 |
New Construction Contracts / Amendments to contracts in 2013 | | 37,000,391 |
Less: Construction contract revenue earned as of December 31, 2013 | | (67,776,314) |
Balance at December 31, 2013 | $ | 37,125,652 |
| | |
| | |
Balance at December 31, 2013 | $ | 37,125,652 |
New Construction Contracts / Amendments to contracts in 2014 | | 62,949,355 |
Less: Construction contract revenue earned as of December 31, 2014 | | (78,573,035) |
Balance at December 31, 2014 | $ | 21,501,972 |
Management anticipates that the full backlog of $21.5 million as of December 31, 2014 will be recognized as revenue during 2015. The table does not include $15.8 million of new awards and modifications received in early 2015. The new awards include the $11.6 million contract awarded to Pernix Kaseman JV in January 2015 to construct a communication center special area on Camp Humphrey in South Korea and a $4.2 million contract for the construction of a 33 MW substation related to the Kinoya Expansion project. The table also does not include revenue associated with our long term contract or memo of understanding for power operating and maintenance services or construction segment stipend income that is related to contracts that were not ultimately awarded to the Company as they are not directly related to core construction work. The table includes the fees associated with contracts under the cost plus fee contractual arrangement.
In February 2014, a “Certificate of Substantial Completion” effective January 14, 2014 was received related to the Sather project and approximately $1.5 million remains in the backlog as of December 31, 2014 and is related to estimated close out and project management work through January 2015 when the warranty period expires. Additionally, a “Certificate of Substantial Completion” was received in September 2014 related to the Baku project and approximately $0.9 million remains in the backlog as of December 31, 2014 related to the estimated close out costs on the project. The Company has recorded a provision for losses of approximately $1.0 million on one of its projects as of December 31, 2014 based on estimated costs in excess of contract revenue. The project is expected to be completed by April 2015.
6. Accounts Receivable—Net
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 construction contract related sales to commercial and governmental customers in the normal course of business. Accounts receivable consist of the following at December 31, 2014 and 2013:
Gross Trade Receivable by Major Customers | | December 31, 2014 | | | December 31, 2013 | |
OBO | $ | 638,919 | | $ | 8,255,970 | |
Government of Vanuatu (VUI) | | 202,854 | | | 266,258 | |
Fiji Electricity Authority (FEA) | | 1,406,653 | | | 374,591 | |
All others | | 3,436,396 | | | 575 | |
Total | | 5,684,822 | | | 8,897,394 | |
Less: Allowance for doubtful accounts | | — | | | — | |
Total accounts receivable trade, net | $ | 5,684,822 | | $ | 8,897,394 | |
Retainage receivables | | 1,149,632 | | | 200,000 | (1) |
Accounts receivable - related party | | 68,463 | | | 39,447 | |
Other receivables | | 111,435 | | | 86,389 | |
Total accounts receivable - net | $ | 7,014,352 | | $ | 9,223,230 | |
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| | December 31, 2014 | | | December 31, 2013 | |
Trade construction contracts completed and in progress | $ | 5,047,888 | | $ | 8,255,970 |
Trade other (Power Generation receivables) | | 636,934 | | | 641,424 |
Less: allowance for doubtful accounts | | — | | | — |
Total accounts receivable trade, net | $ | 5,684,822 | | $ | 8,897,394 |
(1) Includes $200,000 retainage receivable from US Department of State’s Bureau of Overseas Buildings Operations (OBO) that the Company received in early 2014 upon the final Shield project close-out.
7. Cost and Estimated Earnings on Uncompleted Contracts
Long-term construction contracts in progress are accounted for using the percentage-of-completion method. Billings, costs incurred, and estimated earnings on uncompleted contracts as of December 31, 2014 and 2013 are as follows:
Cost and Estimating Earnings on Uncompleted Contracts | | December 31, 2014 | | | December 31, 2013 |
Cost incurred on uncompleted contracts | $ | 188,834,649 | | $ | 211,750,908 |
Estimated earnings | | 18,548,783 | | | 18,207,952 |
Total cost and estimated earnings | | 207,383,432 | | | 229,958,860 |
Less: Billings to date | | 203,632,013 | | | 238,309,368 |
Net | $ | 3,751,419 | | $ | (8,350,508) |
| | | | | |
These amounts are included in the accompanying consolidated balance sheets under the following captions: |
| | | | | |
Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 7,539,080 | | $ | 56,679 |
Billings in excess of costs and estimated earnings on uncompleted contracts | | (3,787,661) | | | (8,407,187) |
| $ | 3,751,419 | | $ | (8,350,508) |
8. Property and Equipment
During the first quarter of 2013, the Company purchased the building and land on which its corporate headquarters are now located for $1.1 million from Baron Real Estate Holdings, Inc. (“Baron”), a related party. Prior to the purchase Pernix leased its corporate headquarters from Baron. In accordance with the applicable accounting rules for such a transaction between related parties with the same parent, the assets acquired were recorded at the carrying value utilized by Baron at the date of the acquisition, which approximated the amount paid by Pernix for the assets.
The property and equipment as of December 31, 2014 and 2013 is as follows:
| | | | | | | |
| | December 31, 2014 | | | December 31, 2013 |
Building/leasehold improvements | $ | 770,456 | | $ | 785,240 |
Land | | 420,000 | | | 420,000 |
Construction equipment | | 273,172 | | | — |
Office furniture and equipment | | 305,233 | | | 121,693 |
Computer, software and communication equipment | | 89,928 | | | 8,920 |
| | 1,858,789 | | | 1,335,853 |
Less accumulated depreciation | | (180,351) | | | (52,954) |
Net property and equipment | $ | 1,678,438 | | $ | 1,282,899 |
Total depreciation expense was $191,606 for 2014 ($127,397 after the quasi-reorganization impact) and $241,874 for 2013 ($49,138 after the quasi-reorganization impact). Depreciation for construction machinery and equipment is recognized as a project expense when appropriate.
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9. Short-term and long-term borrowings
Pernix Group, Inc. debt agreements
As of December 31, 2013 short-term and long-term debt agreement with Bent Marketing Ltd., a related party, were fully repaid. The interest expense during 2013 amounted to approximately $43,000.
In connection with the purchase of the land and building for the Company’s corporate headquarters during March 2013, Pernix borrowed $0.5 million under an agreement with Baron, a related party, with interest accruing at a rate of 4.0% per annum. The note was payable in twelve monthly installments beginning in March 2013. On December 23, 2013 the outstanding balance of the note was fully repaid with accrued interest.
On November 14, 2014, PGI and Pernix RE, LLC entered into loan and security agreement with Barrington Bank & Trust Company, National Association to establish a revolving credit facility and a letter of credit facility, each expiring on November 10, 2016, with an option to extend the term of the agreement. The revolving credit facility provides a borrowing capacity of $5.0 million. Loans under the revolving credit facility will bear interest at the LIBOR rate determined on periodic reset dates, plus an applicable margin ranging from 1.6% to 2.75% based on the Company’s liquidity, as defined. The letter of credit provides up to $10.0 million in aggregate of standby or trade letters of credit which accrue interest at a rate of Prime plus 4% for standby letters of credit and Prime plus 0.75% for trade letters of credit. Interest for each facility is payable on the periodic reset dates and borrowings are payable by the maturity of the agreement. Borrowings under each facility are secured by all real and personal property of PGI and Pernix RE, LLC. The agreement requires the Company to pay a facility fee of 1.6% per annum of the then outstanding undrawn letter of credit and imposes various restrictions on the Company, such as, among other things, the requirement of the Company to maintain minimum net income of $1.00 and minimum liquidity equal to the amount outstanding on the credit facility, as defined. The Company was in compliance with all covenants as of December 31, 2014, and therefore, the full amount of borrowing capacity was available to be drawn upon. No amounts were outstanding under the revolving credit facility or line of credit facility as of December 31, 2014. The Company’s primary uses of the revolving credit facility are to fund potential working capital needs.
PFL debt agreements
As of December 31, 2013, PFL had a line of credit agreement with Australia and New Zealand Banking Group Limited (ANZ) which provided borrowing capacity up to FJD 2 million. On March 12, 2014, PFL modified its line of credit agreement with ANZ to increase the available line to FJD 6.9 million and an additional Euro 17.3 million to facilitate the Kinoya plant expansion project financing needs. The line of credit was further modified on May 6, 2014 to reduce their FJD facility limit to FJD 5.0 million ($2.5 million USD as of December 31, 2014), increase their Euro facility limit to Euro 17.7 million ($21.5 million USD as of December 31, 2014) and to extend the maturity date to July 21, 2015.
The agreement is secured by all real and personal property of PFL up to FJD 1.0 million ($0.5 million USD as of December 31, 2014), a corporate guarantee of FJD 4.0 million ($2.0 million USD as of December 31, 2014) issued by Pernix to ANZ, an Unconditional, Irrevocable and On Demand Stand by Letter of Credit given by Wartsila and Fiji Electricity Authority to ANZ, and a restricted cash term deposit of FJD 2.3 million ($1.2 million USD as of December 31, 2014). The remaining terms and conditions of the line of credit agreement remain substantially the same after the amendment.
The Company paid a FJD 100,000 ($0.05 million USD) loan approval fee for the increase in the borrowing capacity under the line of credit as well as a commitment fee of 1% per annum when the line of credit is not fully drawn within three months of acceptance of the line of credit offer. The interest rate applicable to the line of credit is the Bank's published Index Rate minus a margin of 3.70% (Interest rate of 6.25% per annum at December 31, 2014).
As of December 31, 2014, FJD 5.0 million ($2.5 million USD) and Euro 17.7 million ($21.5 million USD) of the line of credit was allocated to facilitate the performance security, advance payment guarantee, lease finance facility for motor vehicles, visa credit card facility and documentary letter of credit. PFL allocated Euro 11.6 million ($13.1 million USD as of December 31, 2014) and FJD 3.6 million ($1.8 million USD as of December 31, 2014) from the line of credit to facilitate the issuance of the performance and advance payment guarantees to Fiji Electricity Authority for the design, build, supply and install of 35MW Heavy Fuel Oil Wartsila Diesel Engines. An establishment fee of 0.9% of the guarantee amount was charged followed by a semi-annual fee of 0.9%. For each
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bank guarantee, the fee is payable on the date of the drawdown and afterwards semi-annually. Furthermore, PFL allocated Euro 6.1 million ($6.94 million USD as of December 31, 2014) in a documentary letter of Credit to Wartsila Finland OY to facilitate the supply of four new Heavy Fuel generator plants of 35 MW to Fiji Electricity Authority, Kinoya Power Station. The fee charged by ANZ was 0.5% of the Letter of credit value. The balance of the credit facility was allocated towards the finance operating lease facility and credit card facility. There were no amounts drawn on the line of credit as of December 31, 2014.
In connection with the line of credit, PFL is subject to a “gearing ratio” covenant that limits net total liabilities less non-current subordinated debt to 2.1 times effective equity, as well as other customary covenants. As of December 31, 2014, the PFL gearing ratio is 2.01 and PFL is in compliance with all covenants.
10. Fair Value Measurements
The Company adopted the fair value measurement guidance for all nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. These assets and liabilities include items such as customer relationships and trademarks and long lived assets that are measured at fair value resulting from impairment, if deemed necessary. Management reviews the recoverability of the assessed value of the intangibles, for impairment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When the recovery is reviewed, if the carrying amounts of the assets are determined to be unrecoverable, an impairment loss would be recorded. The Company does not have any nonfinancial assets and liabilities recognized or disclosed at fair value on a non-recurring basis as of December 31, 2014.
11. Leases
The Company and its subsidiaries are lessees in non-cancelable leasing agreements for office buildings, equipment and vehicles which expire at various dates. The related lease payments are expensed on a straight-line basis over the lease term, including, as applicable, any free-rent period during which the Company has the right to use the asset. For leases with renewal options where the renewal is reasonably assured, the lease term, including the renewal period is used to determine the appropriate lease classification and to compute periodic rental expense. None of the Company’s current lease agreements have been determined to be capital leases.
In April 2011, Pernix leased its corporate headquarters at 151 E. 22nd Street in Lombard, Illinois under a five year operating lease with Baron, a related party, commencing May 1, 2011 and expiring on April 30, 2016. In the first quarter of 2013, the Company purchased the land and building in which the corporate headquarters are located and in connection with this purchase the lease was terminated and no further commitment exists.
Future minimum lease payments at December 31, 2014 for all leases having an initial or remaining non-cancelable lease term in excess of one year, are as follows:
| | | | |
Year Ending December 31, |
2015 | $ | | 301,194 | |
2016 | | 128,148 | |
2017 | | 35,347 | |
2018 | | 4,802 | |
2019 | | 2,401 | |
| $ | | 471,892 | |
Lease expense was approximately $0.4 million and $0.3 million for the years ended December 31, 2014 and 2013, respectively.
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12. Financial Instruments with Off-Balance Sheet Risk and Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of restricted cash term deposits, trade receivables and financial guarantees.
If the Company extends a significant portion of its credit to clients in a specific geographic area or industry, the Company may experience disproportionately high levels of default if those clients are adversely affected by factors particular to their geographic area or industry. The Company’s customer base includes governments, government agencies and quasi-government organizations, which are dispersed across many different industries and geographic locations. See Note 6 in the notes to our consolidated financial statements.
From time to time, Pernix Group utilizes foreign exchange contracts to reduce exposure to foreign exchange risks associated with payments for services and products related to the various construction and other projects. No such contracts were employed during 2014 or 2013.
From time to time, the Company is required to utilize standby letters of credit or similar financial guarantees in the normal course of its business, and this is a typical practice for the industry segments in which the Company operates. The amount, duration, and structure of such standby letters of credit or similar financial instruments varies depending on the nature and scope of the project involved. As of December 31, 2014 the Company had a FJD 4.0 million ($2.0 million USD) financial guarantee of PFL’s line of credit with ANZ. No amounts are outstanding under the ANZ line of credit and the Company does not anticipate any payment risk under this guarantee as of December 31, 2014. No such guarantees were outstanding as of December 31, 2013. In December 2012, the Company was awarded a $1.6 million project to install 33MW cable in the Solomon Islands and begun the execution in 2013. In connection with this award, a performance guarantee was established with ANZ Bank. The project is substantially complete as the 33MW cable has been installed but not yet commissioned as of December 31, 2014 and the Company does not anticipate any payment risk under this guarantee as of December 31, 2014.
The Company’s cash balances and short-term investments are maintained in accounts held by major banks and financial institutions located primarily in the U.S., Niger, Azerbaijan, Sierra Leone, Fiji and Vanuatu as of December 31, 2014 and 2013. The Company maintains its cash accounts at numerous financial institutions. Certain accounts covered by the Federal Deposit Insurance Corporation (FDIC) are insured up to $250,000 per institution. As of December 31, 2014 and 2013, the amount of domestic bank deposits that exceeded or are not covered by the FDIC insurance was $8.6 million and $17.9 million, respectively. Certain financial institutions are located in foreign countries which do not have FDIC insurance and, as of December 31, 2014 and 2013, the amount of bank deposits in these financial institutions was $2.3 million and $1.4 million, respectively.
13. Stockholders’ Equity
Certificate of Amendment of the Corporation’s Restated Certificate of Incorporation - In connection with the Series A Preferred Stock sale that was effective on December 30, 2013, the Company amended its Restated Certificate of Incorporation and its Certificate of Designation for Series A Preferred Stock to increase the total number of shares of stock which the Company shall have authority to issue to 25,500,000, consisting of 20,000,000 shares of Common Stock, par value $.01 per share (“Common Stock”), and 5,500,000 shares of Preferred Stock, par value $.01 per share (“Preferred Stock”).
Preferred Stock—The Company has 5,500,000 shares of authorized Preferred Stock. 1,000,000 of these shares have been designated as Series A Cumulative Convertible Preferred Stock (Series A Preferred Stock) and 400,000 shares were designated as Series B Cumulative Convertible Preferred Stock (Series B Preferred Stock). During the third quarter of 2014, the Company’s Board of Directors corrected a clerical error in the Series A and Series B Preferred Stock certificates to reflect the originally intended liquidation preferences of $5.00 per share, which has always been used by the Company in the consolidated financial statements when recording related transactions, such as dividend payments and the repurchase of the related preferred stock.
On December 30, 2013 the Company sold 550,000 and 450,000 shares of Series A Preferred Stock to Ernil and Halbarad, respectively for $5.00 per share, resulting in proceeds received by the Company of $5.0 million. Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at the annual rate of 8%, payable quarterly, have no voting rights and rank senior to common stock. As of December 31, 2014, 1,000,000 shares of the Series A Preferred Stock were issued and outstanding. The Series A Preferred Stock is convertible into
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1,428,572 shares of Pernix common stock computed by multiplying the number of shares to be converted by the purchase price of $5.00 per share and dividing the result by the conversion price of $3.50, which was in excess of the fair value of the Company’s common stock. As of December 31, 2014 and 2013, no dividends related to the Series A were accrued and the dividends incurred and paid for the year ended December 31, 2014 and 2013 were $402,192 and $0, respectively.
As of December 31, 2014 and 2013, 170,000 shares of the Series B Preferred Stock were issued and outstanding and are convertible into 11,334 shares of common stock. Holders of Series B Preferred Stock are entitled to receive cumulative dividends at an annual rate of $0.325 per share, have no voting rights, and rank senior to common stock and are on parity with Series A Preferred Stock with respect to dividends and upon liquidation. During 2014 and 2013, the Company issued no Series B Preferred Stock. As of December 31, 2014 and 2013, preferred stock dividends of $241,387 and $186,137, respectively, were accrued. The dividends for the years ended December 31, 2014 and 2013 were $55,250, respectively. No dividends were paid during 2014 and 2013, respectively.
Common Stock —As of December 31, 2014 and 2013, 9,403,697 shares of the Company’s common stock were issued and outstanding and over 96.0% of those shares were owned by Ernil, Halbarad and affiliated companies.
14. Earnings per share
A reconciliation of the numerator and denominator of basic and diluted earnings per share is provided as follows:
| | | | | |
| | | | |
| | December 31, 2014 | | December 31, 2013 |
Numerator — Net loss | $ | (1,382,856) | $ | (4,624,993) |
Less: Preferred stock dividends | | 457,442 | | 55,250 |
Basic net loss from continuing operations available to common stockholders | | (1,840,298) | | (4,680,243) |
| | | | |
Denominator | | | | |
Weighted average common shares outstanding: | | | | |
Basic and diluted | | 9,403,697 | | 9,403,697 |
| | | | |
Basic and diluted net loss per share | $ | (0.20) | $ | (0.50) |
Basic and diluted net loss per common share have been computed using the weighted-average number of shares of common stock outstanding during the periods. Diluted earnings per share is computed by dividing earnings by the number of fully diluted shares, which includes the effect of dilutive potential issuances of common shares as determined using earnings from continuing operations. The impact of the potential issuances of common stock related to the Company’s convertible preferred stock and outstanding stock options has been excluded from earnings per share for the years ended December 31, 2014 and 2013, since inclusion would be anti-dilutive. See Note 15 to the notes to our consolidated financial statements for discussion of stock option plans.
15. Stock Compensation Plans
2014 Equity Incentive Plan- In late 2013, the Company’s shareholders and board of directors adopted the 2014 Equity Incentive Plan that provides for the issuance of a variety of equity awards to employees, non-employee directors and consultants. The options expire 10 years from the grant date or upon plan expiration in late 2023, whichever is earlier. Under the terms of this plan, 1.8 million shares, which were previously allocated for issuance under the LTIP and ISOP, are reserved for issuance under the EIP. On February 8, 2014, 375,000 options were granted and an additional 1,050,000 options were granted in September 2014, all with a three year vesting schedule. As of December 31, 2014, a total of 1,395,000 options remain outstanding.
2013 Long Term Incentive Plan- During late 2012 the Company’s shareholders approved the Long-Term Incentive Plan. The LTIP is a non-employee Director and Consultant compensation plan. Awards may include stock options, stock awards, restricted stock, restricted stock units, and other stock or cash awards. The options expire 10 years from the grant date or upon plan expiration in late 2022, whichever is earlier. 785,000 shares were allocated in total
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to cover any and all award types under the LTIP. On February 8, 2013, 78,500 options were granted to six non-employee directors with a three year vesting schedule. As of December 31, 2013, the vesting of 13,500 options was accelerated in connection with the retirement of a board member. The remaining 706,500 shares were transferred to the EIP as described above during late 2013. No additional shares are anticipated to be awarded under the LTIP.
2012 Employee Incentive Stock Option Plan — In late 2011, the Company’s shareholders and board of directors adopted the 2012 Incentive Stock Option Plan that provides for the issuance of qualified stock options to employees. Under the terms of this plan, 1.5 million shares were reserved for issuance. The options expire 10 years from the grant date or upon plan expiration in late 2021, whichever is earlier. As of December 31, 2014, a total of 283,500 options were outstanding under this plan. The remaining 1,121,000 shares available to be awarded were transferred to the EIP as described above during late 2013. No additional shares are anticipated to be awarded under the ISOP.
Option awards to employees and directors under the Company’s stock compensation plans are classified as equity instruments and are valued at the grant date using the Black Scholes fair value model. The options vest ratably on the anniversary of the grant date over a three to five year period. Pernix recognizes the cost over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Cash flows resulting from the exercise of related options are included in financing cash flows. There were no options exercised during 2014 or 2013. The Company will issue new shares of common stock upon exercise of the options.
The following summarizes stock option activity for the years ended December 31:
| | 2014 | | 2013 |
EIP | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| | | | | | | | |
Options outstanding, at beginning of year | | — | $ | N/A | | — | $ | N/A |
Granted | | 1,425,000 | | 1.56 | | — | | N/A |
Exercised | | — | | N/A | | — | | N/A |
Forfeited / expired | | 30,000 | | 2.07 | | — | | N/A |
Options outstanding, at December 31 | | 1,395,000 | | 1.55 | | — | | N/A |
Options exercisable, at December 31 | | 50,000 | $ | 2.07 | | — | $ | N/A |
| | 2014 | | 2013 |
LTIP | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| | | | | | | | |
Options outstanding, at beginning of year | | 78,500 | $ | 2.09 | | — | $ | N/A |
Granted | | — | | N/A | | 78,500 | | 2.09 |
Exercised | | — | | N/A | | — | | N/A |
Forfeited / expired | | — | | N/A | | — | | N/A |
Options outstanding, at December 31 | | 78,500 | | 2.09 | | 78,500 | | 2.09 |
Options exercisable, at December 31 | | 35,166 | $ | 2.09 | | 13,500 | $ | 2.09 |
| | 2014 | | 2013 |
ISOP | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| | | | | | | | |
Options outstanding, at beginning of year | | 379,000 | $ | 2.09 | | 152,500 | $ | 2.09 |
Granted | | — | | N/A | | 347,500 | | 2.09 |
Exercised | | — | | N/A | | — | | N/A |
Forfeited / expired | | 95,500 | | 2.09 | | 121,000 | | 2.09 |
Options outstanding, at December 31 | | 283,500 | | 2.09 | | 379,000 | | 2.09 |
Options exercisable, at December 31 | | 134,166 | $ | 2.09 | | 23,500 | $ | 2.09 |
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The following table summarizes information about stock options outstanding at December 31, 2014:
| | | | | | | | |
Plan | | Number Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Grant Date Intrinsic Value |
EIP | | 1,395,000 | | 9.1 | $ | 1.55 | $ | 4,317,750 |
| | | | | | | | |
LTIP | | 78,500 | | 8.1 | $ | 2.09 | $ | 32,185 |
| | | | | | | | |
ISOP | | 283,500 | | 7.8 | $ | 2.09 | $ | 142,475 |
The weighted average grant date fair value of options outstanding during 2014 and 2013 was $0.84 and $1.01, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | 2014 grant | | 2013 grant |
| | | | |
Risk-free interest rate | | 1.75-1.8 % | | 1.1 % |
Dividend yield | | 0.0 % | | 0.0 % |
Expected volatility | | 45.0 % | | 50.0 % |
Expected life in years | | 6.0 | | 6.0 |
The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on the Company’s history of not paying a dividend to any common class of stock. Expected volatility is based on volatilities of publicly traded competitors and companies from our peer group as 96% of our shares are held by four owners and therefore, there is limited trading volume. The weighted average expected life in years for all grants is calculated for each year. During 2013, the forfeiture rate utilized was zero as the plans were relatively new and no significant and reliable history regarding share option exercise and employee termination patterns to estimate forfeiture rates existed until late 2013. Based on the data available late in 2013, the Company estimated a forfeiture rate of 25% and will use this rate going forward subject to refinement as experience changes.
Total share-based compensation expense for each of the years ended December 31, 2014 and 2013 was $0.2 million. As of December 31, 2014 and 2013, there was $0.7 million and $0.3 million, respectively of total unrecognized compensation expense related to non-vested share-based awards. The compensation expense is expected to be recognized over a remaining weighted average period of 3.5 years, which is equivalent to the average vesting period.
The Company received no cash during the year ended December 31, 2014 and 2013, respectively, related to stock awards exercised as only 219,332 options were vested as of December 31, 2014 and no options were exercised during the periods. The unvested options at December 31, 2014 have a total intrinsic value of $3.2 million and the vested options have a total intrinsic value of $0.3 million based on the trading price of the Company’s common stock on that date on the Over the Counter Quotation Board. However, the stock is not actively traded and the trading price of the stock is volatile. The Company did not realize any tax deductions for this qualified ISOP plan options as the related expense is not tax deductible. 125,500 options and 121,000 options were forfeited or cancelled during 2014 and 2013, respectively.
The Company has a 401K matching plan through which it contributes up to 8% of an employee’s salary at a matching rate of 50% of employee contributions, subject to an annual limitation of $4,000 per employee. The Company incurred $111,581 and $91,567 of expense associated with the 401K match during 2014 and 2013, respectively.
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16. Income Taxes
The components of consolidated net income (loss) before income taxes for the periods indicated are as follows:
| | 2014 | | 2013 |
Domestic | $ | (3,088,157) | $ | (1,124,557) |
Foreign | | 2,186,939 | | 1,541,078 |
Total | $ | (901,218) | $ | 416,521 |
| | | | |
Income tax expense (benefit) consists of:
| | | | | | | | | |
Year ended December 31, 2014 | | Current | | Deferred | | Total |
Federal tax expense | $ | | — | $ | | — | $ | | — |
State and local tax expense (benefit) | | | — | | | — | | | — |
Foreign tax expense | | | 481,638 | | | — | | | 481,638 |
Total tax expense | $ | | 481,638 | $ | | — | $ | | 481,638 |
Year ended December 31, 2013 | | Current | | Deferred | | Total |
Federal tax (benefit) | $ | | — | $ | | 4,043,260 | $ | | 4,043,260 |
State and local tax (benefit) | | (21,894) | | 840,675 | | 818,781 |
Foreign tax expense | | 179,473 | | — | | 179,473 |
Total tax expense | $ | | 157,579 | $ | | 4,883,935 | $ | | 5,041,514 |
Current Tax Expense
The Company’s major tax jurisdictions include Illinois, Virginia, the United States and Fiji. The related tax returns are examined by the Illinois Department of Revenue, the Virginia Department of Revenue, the Internal Revenue Service and the Fiji Islands Revenue and Customs Authority.
In 2014 and 2013, the Company had a U.S. taxable loss, primarily reflecting the fact that PFL income was permanently reinvested overseas through September 2014 coupled with the impact of various timing and permanent differences. Therefore, no U.S. federal, Illinois or Virginia current income tax expense has been recorded in the accompanying consolidated statements of operations related to 2014 or 2013. A current foreign tax expense of $0.5 million and $0.2 million was recorded in connection with the Company’s PFL operations in Fiji for 2014 and 2013, respectively, and is based upon the taxable income within Fiji at a tax rate of 20%.
Deferred Tax Expense or Benefit
During 2014 the Company did not incur any deferred income tax expense. The deferred income tax expense of $4.9 million for 2013 consists of $4.1 million of federal deferred tax expense and $0.8 million of deferred state tax expense, reflecting management's decision to record an increase in the valuation allowance on deferred tax assets. This expense is a non-cash expense and has no impact on the Company's liquidity, cash flows, or its ability to execute projects or conduct ongoing operations.
The Company evaluated the need to maintain a valuation allowance for deferred tax assets on a jurisdictional basis based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. The evidence includes an estimate of future taxable income that is heavily reliant upon construction contract backlog and power facility operation and maintenance activities. Management also considers historical taxable income and losses as well as other factors including expirations and the Company’s inability to utilize the net operating losses in carryback periods. 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 in light of all available evidence analyzed. All net deferred tax assets are fully reserved for as of December 31, 2014 and 2013.
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At the date of the quasi-reorganization, deferred taxes were reported in conformity with applicable income tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities. In accordance with the quasi-reorganization requirements, the tax benefits that existed as of the date of the quasi-reorganization that are realized in periods after the quasi-reorganization and were not recognized at the date of the quasi-reorganization will be recorded directly to equity. In connection with the quasi-reorganization, the valuation allowance at that point was netted against the deferred tax assets and as mentioned above, any related tax benefits that existed as of that date but were not realized as of that date, may be realized in periods after the quasi-reorganization and will be recorded directly to equity rather than to income if and when realized.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are presented below:
| | December 31, 2014 | | | December 31, 2013 |
Deferred tax assets: | | | | | |
Net operating and capital loss carry forwards –federal | $ | 21,055,483 | | $ | 21,723,553 |
Net operating and capital loss carry forwards – state | | 5,459,257 | | | 4,505,669 |
Other deferred tax assets | | 7,523 | | | 185,913 |
Total gross deferred tax assets | | 26,522,263 | | | 26,415,135 |
Deferred tax liabilities: | | | | | |
Undistributed foreign earnings | | (227,981) | | | — |
Other deferred tax liabilities | | (76,277) | | | — |
Total gross deferred tax liabilities | | (304,258) | | | — |
Total net deferred tax asset | | 26,218,005 | | | 26,415,135 |
Less valuation allowance | | 26,218,005 | | | 26,415,135 |
Net deferred tax asset | $ | — | | $ | — |
At December 31, 2014 and 2013, the Company has total net operating and capital loss carry forwards from U.S. operations of approximately $70.4 million and $69.9 million, respectively. The net operating loss carry forwards expire in the years 2021 through 2034. The capital loss carryforwards expire in 2017. Certain of these net operating losses may be subject to a limitation on future utilization due to ownership changes, foreign and / or other tax laws.
A reconciliation of the differences between income taxes from continuing operations computed at the U.S. federal statutory rate of 34%, the Fiji tax rate of 20% for 2014 and 2013, and the Company’s reported provision for income taxes is as follows:
| | | | | | | |
| | Years Ended December 31, | |
| | 2014 | | 2013 | |
Federal income tax benefit at statutory rate | $ | (306,414) | $ | 141,617 | |
State and local taxes | | (69,844) | | (21,894) | |
Foreign income taxes | | (55,421) | | (126,142) | |
Change in federal and state valuation allowance | | (197,130) | | 5,047,933 | |
Capital gains tax paid in foreign jurisdiction | | 134,562 | | — | |
Return to provision true up | | 104,256 | | — | |
Permanent items, net | | 858,281 | | — | |
Other | | 13,348 | | — | |
Income Tax Expense | $ | 481,638 | $ | 5,041,514 | |
There were no material interest expenses or penalties for the year to date. If there were material interest expenses or penalties they would be reflected in the consolidated statement of operations as interest expense and general and administrative expenses, respectively. 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 statute of limitations for the Company’s U.S. federal as well as Illinois and Virginia state tax returns are open for the 2011 through 2014 tax years. The statute of limitations for the Company’s Fijian tax return is open for the 2007 through 2014 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 within the next twelve months.
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No U.S. Federal or State deferred taxes have been provided on the undistributed earnings of non-U.S. operations of approximately $3.6 million and $3.2 million in for the period January 1, 2014 through September 30, 2014 and for the year ended December 31, 2013, respectively because we elected to permanently reinvest these earnings overseas. The Company will no longer reinvest PFL’s current earnings overseas effective October 1, 2014 in conjunction with its partial sale of PFL to Fijian Holdings Limited (FHL) for a 25% ownership interest. If we were to repatriate the earnings generated prior to October 1, 2014, those earnings would be included in taxable income at that time. However, any additional U.S. taxes may be offset in part by the use of foreign tax credits. U.S. income tax liabilities are recorded from our earnings due to operations in Vanuatu as there are no income taxes in Vanuatu. Pernix Group repatriates these earnings on a monthly basis.
17. Commitments and Contingencies
Pernix’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 safety programs and record is excellent and 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 one of the Company’s power plants for which it is inadequately insured or subject to a coverage exclusion, and the Company is unable to defend against these claims successfully or obtain indemnification or warranty recoveries, the Company may be required to pay substantial amounts, which could have a materially adverse effect on its financial condition. In Fiji, the Company is liable for a deductible of FJD 1.3 million (or approx. $0.7 million USD as of December 31, 2014) if found to be negligent or FJD 0.8 million (or approx. $0.4 million USD as of December 31, 2014) if not found to be negligent in accordance with its agreement with the Fiji Electricity Authority. In Vanuatu, during the Memorandum of Understanding (MOU) period, the insurance deductible is 10 million Vatu (or approx. $0.1 million USD) as of December 31, 2014.
VUI began to manage the power structure on Vanuatu on January 1, 2011 pursuant to a MOU with the government of Vanuatu. The prior concessionaire, UNELCO, filed a claim against the government alleging improper tender of the work. No claims have been filed against VUI but VUI joined the suit as a second defendant in order to protect its interests in the tender. In February 2014, during hearings in the Supreme Court of the Republic of Vanuatu (the Court), the Government of Vanuatu proposed a settlement with UNELCO that would leave VUI without a claim to defend pertaining to the concession and would effectively end the litigation in UNELCO’s favor. The proposed settlement called for a retender of the concession and required that any company who participates in the retender must waive any outstanding claims against the Government of Vanuatu. VUI in response presented its position to the court arguing that VUI should have an opportunity to be heard and that the Court should not accept the proposed settlement. On October 16, 2014 the Court issued its decision in favor of UNELCO and the government has issued a new agreement to VUI to continue to operate the plant under the MOU terms until the retender process is completed. As of the date of this report, VUI continues to operate and maintain the system.
The Company offers warranties on its construction services and power generating plants. The Company usually has warranties from its vendors. If warranty issues remain on projects that are substantially complete, revenue is not recognized to the extent of the estimated exposure. Should the Company be required to cover the cost of repairs not covered by the warranties of the Company’s vendors or should one of the Company’s major vendors be unable to cover future warranty claims, the Company could be required to expend substantial funds, which could harm its financial condition.
See Note 12 of the notes to the consolidated financial statements for discussion of financial and performance guarantees.
18. Reportable Segments and Geographic Information
Pernix has elected to organize its segment information around its products and services. Pernix has three segments: General Construction, Power Generation Services (including power related construction activities) and Corporate.
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:
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Schedule of Segment Reporting, Information by Segment
For Year Ended December 31, 2014
| | General Construction | | Power Generation Services | | Corporate | | Total |
Revenue | $ | 78,573,035 | $ | 6,583,394 | $ | 144,310 | $ | 85,300,739 |
Interest income (expense) | | — | | (2,277) | | 5,520 | | 3,243 |
Other expense - related party | | (83,103) | | — | | — | | (83,103) |
Depreciation and amortization (1) | | 29,200 | | 45,544 | | 52,653 | | 127,397 |
Income tax benefit (expense) | | (93,230) | | (378,520) | | (9,888) | | (481,638) |
Net income (loss) attributable to the stockholders of Pernix Group Inc. and Subsidiaries | | 1,909,811 | | 1,544,472 | | (5,294,581) | | (1,840,298) |
Total capital expenditures | | 283,672 | | 118,411 | | 146,654 | | 548,737 |
Total assets | | 15,041,221 | | 6,507,172 | | 10,484,772 | | 32,033,165 |
For Year Ended December 31, 2013
| | | | | | | | | | |
| | General Construction | | Power Generation Services | | Corporate | | Total |
Revenue | $ | 67,776,314 | $ | 5,810,652 | $ | 175,182 | $ | 73,762,148 |
Interest income (expense) | | — | | (2,828) | | 2,759 | | (69) |
Other expense - related party | | (81,975) | | — | | (54,614) | | (136,589) |
Depreciation and amortization (1) | | 19,743 | | 10,109 | | 19,286 | | 49,138 |
Income tax benefit (expense) | | (4,883,935) | | (179,473) | | 21,894 | | (5,041,514) |
Net income (loss) attributable to the stockholders of Pernix Group Inc. and Subsidiaries | | (5,405,761) | | 1,719,312 | | (993,794) | | (4,680,243) |
Total capital expenditures (2) | | 68,094 | | 74,131 | | 1,174,328 | | 1,316,553 |
Total assets | | 16,986,992 | | 3,974,398 | | 12,669,573 | | 33,630,963 |
(1)Depreciation and amortization is shown net of quasi-reorganization related adjustments for 2014 and 2013 of $64,209 and $192,736, respectively.
(2)Total Capital Expenditures for 2013 as presented in the segment table above includes the entire purchase price of the Corporate headquarters land and building, $287,868 of which is reflected as a financing activity on the statement of cash flows due to repayment of the related loan more than 90 days after the building and land purchase.
Geographical Information
The basis used to attribute revenues to individual countries is based upon the country associated with the contract (If the contract is with a U.S. entity then the revenues are attributed to the U.S.).
| | | | | | | | | | | |
| | Total Revenue | | | Property and Equipment - Net |
Location – Revenue and net property and equipment from continuing operations | | Year ended December 31, 2014 | | | Year ended December 31, 2013 | | | December 31, 2014 | | | December 31, 2013 |
United States | $ | 55,042,945 | | $ | 66,686,485 | | $ | 1,247,444 | | $ | 1,144,747 |
Fiji | | 28,720,631 | | | 4,339,976 | | | 136,570 | | | 93,012 |
Vanuatu | | 1,361,799 | | | 1,470,676 | | | 2,509 | | | 6,966 |
Other | | 175,364 | | | 1,265,011 | | | 291,915 | | | 38,174 |
Total Revenue and net fixed assets | $ | 85,300,739 | | $ | 73,762,148 | | $ | 1,678,438 | | $ | 1,282,899 |
| | | | | | | | | | | |
Major Customers
During 2014 the Company generated approximately 95% of its total revenue through three major customers. The OBO is a major customer primarily through the award of five projects since 2011 that generated revenue of $32.2 million and $66.5 million for the years ended December 31, 2014 and 2013, respectively, accounting for 38% and 90% of total revenue from continuing operations for the respective periods. The FEA is a major customer through a construction project awarded in 2014 for the Company’s ongoing power generation agreement. During 2014 revenue generated from FEA was $28.7 million or 34% of total revenues. In 2013 FEA was not considered a major customer as total revenues generated were $4.3 million. Total revenues generated in 2014 from the third major customer were $19.7 million or 23% of total revenue.
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19. Related Party Transactions — Not Described Elsewhere
The Company’s shareholders include SHBC, which holds less than 6% of Pernix’s stock at December 31, 2014. SHBC is a civil, electrical and mechanical engineering firm and construction contractor with over 4,000 employees and over fifty (50) years’ experience.
As noted earlier, SHBC and Pernix have formed a joint venture (Pernix/SHBC JV). This joint venture was established in part to construct the new U.S. Embassy in Fiji which is now complete. The joint venture limited partnership agreement between SHBC and Pernix also provides for Pernix to make a payment to SHBC of 6.5% per annum of the unreturned capital. No such payments have been made to date though the Company has accrued other expenses of $0.1 million during the twelve month periods ending December 31, 2014 and 2013 for this discretionary item.
Computhink is a related party as it is owned by a company related to SHBC. Computhink provided various facility management, computer software and other outside services related to the Corporate headquarters prior to the Company’s purchase of the land and building in March 2013. Charges from Computhink were less than $0.1 million for the year ended December 31, 2013 and there were no such expenses in 2014 because no such services were provided by Computhink. Subsequent to the Company’s purchase of the Corporate headquarter facilities, Pernix assumed as lessor the lease to Computhink. The lease term ends April 30, 2016 and Computhink rent amounts to $6,361 per month, with a 3% rent escalation clause. The Company’s charges to Computhink were less than $0.1 million for the twelve months ended December 31, 2014 and 2013.
Future minimum lease payments at December 31, 2014, from Computhink under the non-cancelable lease, are as follows:
Years Ended December 31, | | |
2015 | $ | 65,622 |
2016 | | 22,089 |
Total | $ | 87,117 |
Total related party accounts receivable and payables, net are as follows:
| | | | | | | |
| | December 31, 2014 | | | December 31, 2013 |
Accounts receivable from Computhink | $ | 68,463 | | $ | 39,447 |
Accounts payable to SHBC | | (13,800) | | | (4,860) |
20. Subsequent Events
On January 22, 2015 the Department of the Army’s U.S. Army Corps of Engineers awarded Pernix-Kaseman JV (a newly formed Limited Liability Company in which the Company owns 51%) a contract award totaling $11.6 million to construct a Communication Center Special Area at Camp Humphrey in South Korea.
In January 2015, PFL entered into a ten year lease agreement for its primary office space. The lease begins March 1, 2015 and provides a monthly charge of approximately $6,600 with an escalation clause during the lease term.
During February 2015 the Company received a contract with a total value of FJD $8.4 million (or $4.2 million USD) to complete the construction of a 33 MW substation which relates to the Kinoya Expansion project previously awarded to PFL in 2013.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. 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.
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, 2014.
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). 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, 2014. 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 (1992) 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, 2014.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company, management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors are elected for one-year terms and are elected at each annual meeting of stockholders. Executive officers serve at the discretion of the Board of Directors. As of the date of this report Pernix’s Board of Directors and executive officers are:
| | |
Name and Age;
Years Served as Director | | Principal Occupation for Past Five Years; Other Directorships |
Don Gunther
Age 76 Chairman of the Board
Director Since 2012 | | Mr. Gunther, was appointed as a Director of Pernix Group, Inc. and was appointed to the Compensation Committee on December 12, 2012. Effective December 31, 2013, Mr. Gunther was also appointed Chairman of the Board for Pernix Group, Inc. Mr. Gunther also served as Chairman of the Board of INgage Networks until late 2014, a high-tech company that is a leading enterprise networking organization and he is a director of WPX Energy, Inc., an oil and gas exploration and production company. Previously, until his retirement in 1999, Mr. Gunther was President, Vice Chairman and Director of the Bechtel Group, where he had responsibility for all of the global industry units and all corporate functions, including project management, engineering, procurement, construction, information services, information technology and contracts. Mr. Gunther’s 38-year career with Bechtel provided him with experience as a field engineer and he ultimately became a driving force behind Bechtel’s work processes, marketing strategies, organizational structure and leadership development efforts. He served as project manager and held various positions of leadership both domestically and internationally. Mr. Gunther received a bachelor’s degree in civil engineering, and an honorary doctorate, from Missouri University of Science and Technology, and served as a trustee and advisor to the University. |
| | |
Nidal Zayed
Age 54
Director Since 1998
Chief Executive Officer
since 2005 | | Mr. Zayed, as our Chief Executive Officer is the executive holding the most knowledge about, and primary responsibility for the success of, our Company’s strategies and operations. He brings to our Board the critical link between management and our Board, enabling our Board to perform its oversight function with the benefit of management’s perspective on the business. Independently, Mr. Zayed also brings to the Board particular strengths in all of the executive management skills needed for his position. Mr. Zayed, joined the Company in January 1996. 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. |
| | |
C. Robert Campbell
Age 70
Director Since 2013 | | Mr. Campbell, was appointed as a Director of Pernix Group, Inc. and was appointed to the Compensation Committee and as Chairman of the Audit Committee effective December 31, 2013. Bob brings a vast amount of financial management experience gained through his time serving in various executive level positions for several publically traded companies. Prior to his retirement, Mr. Campbell served as Executive Vice President and Chief Financial Officer of MasTec, an infrastructure construction company based in Coral Gables, Florida. Prior to joining MasTec, Mr. Campbell served in many roles including Chief Executive Officer, Chief Financial Officer, Chief Administrative Officer and Head of Planning and Development at TIMCO Aviation, BAX Global, Ryder System and Flagstar Restaurants. He received an MBA degree from Columbia University, an MS in accounting from Florida International University and a BS in industrial relations from the University of North Carolina-Chapel Hill. Currently Bob serves as a Director and Audit Committee Chairman of Forward Air, a NASDAQ-listed company. |
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Max Engler
Age 65
Director Since 1997 | | Mr. Engler brings to the Board particular strength with regard to leadership skills, international business and financial management and reporting skills, and corporate governance skills. 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., 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. |
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Ibrahim M. Ibrahim
Age 67
Director Since 1999 | | Mr. Ibrahim brings to the Board particular strength with regard to financial skills, international business skills and corporate governance skills. Mr. Ibrahim has recently retired after working for more than 40 years in leading positions for major banks in the United States and abroad. He was a Vice President and General Manger of Continental Bank in Chicago, Lebanon and Bahrain (1969 — 1984). He also worked for First National Bank Chicago as Vice President and Head of Credit and Marketing for their Middle East head-quarter in Dubai (1984-1986). Then he moved to Kuwait in 1986 and had been there for more than 23 years. He was the General Manager & Head of International Business at The Gulf Bank (1986 — 2001), and General Manger, Head of International Group at Commercial Bank of Kuwait (2001 — 2004). His last position before retirement was General Manager of Al Ahli Bank of Kuwait (2004 — 2009). Mr. Ibrahim received his M.B.A. in International Business from De Paul University in Chicago; his M.S. in Taxation from University of Alexandria and his B.A. in Accounting from the University of Alexandria. |
| | |
Trudy Clark
Age 66
Director Since 2007 | | Major General (Ret.) Clark brings to the Board particular strength with respect to leadership skills, crisis management skills, and strategic planning skills, as well as significant insight into procurement activities with the U.S. government and management and oversight of classified projects. 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 $1 million - $2.9 billion. General Clark is an experienced leader with exceptional organizational and facilities management skills. She served as the Deputy Director of the Defense Threat Reduction Agency, directing approximately 4,000 government and contractor personnel at 30 locations worldwide dealing with threats of weapons of mass destruction (WMD), 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 $5 billion of nuclear decision support systems. General Clark has a Masters in Guidance and Counseling from Troy State University in Alabama and has completed executive seminars at Syracuse, John Hopkins and Harvard Universities. |
| | |
Carl Smith
Age 66
Director Since 2007 | | Mr. Smith brings to the Board particular strength with regard to leadership skills, crisis management skills, and strategic planning skills, as well as significant insight into the Company’s obligations with the U.S. government and for the management and oversight of classified projects. 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 in Cyber Law/Information Assurance, Fiscal Law, FOIA, Privacy Act and the 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 Associations. |
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Patrick J. Gainer Age 54 Chief Financial Officer
Since September, 2014 | | Mr. Gainer joined Pernix Group, Inc. (the Company) in September 2014. Mr. Gainer is an accomplished senior financial executive with more than 25 years of multi-industry experience. He most recently served as a managing partner and CFO for two private equity portfolio companies where his responsibilities included finance, controls, audit, tax, treasury, accounting, information technology and operations. Prior to that Mr. Gainer had a twenty plus year accomplished career with Motorola in Schaumburg, Illinois where he held progressive positions with his most recent assignment being Vice President and Director of Finance of a global automotive business unit. Mr. Gainer is a proven professional, with deep knowledge of operations, international finance, expertise in driving profitability and is skilled in identifying acquisition targets, negotiating, structuring and closing transactions and related financing as well as company reorganization. Mr. Gainer also worked for several years in public accounting at the beginning of his career. He is a Certified Public Accountant and graduated from Loyola University of Chicago (B.S, Accounting) and University of Chicago, Booth School of Business (MBA, Finance and International Business). |
Code of Ethics
Our Code of Ethics sets a high standard for honesty and ethical behavior by every employee, including our principal executive officer and principal financial officer. The Code is posted on our website at http://www.pernixgroup.com/ethics-compliance.asp. To obtain a copy of the Code at no charge, submit a written request to the Corporate Secretary at 151 E. 22nd Street, Lombard, Illinois 60148. We will post on our website any required amendments to or waivers granted under our Code pursuant to SEC rules.
ITEM 11. EXECUTIVE COMPENSATION
The table below summarizes the total compensation earned by each of our Officers for the calendar years ended December 31, 2014 and 2013:
SUMMARY COMPENSATION TABLE
| | | | | | | | | | | | |
| | Year | | Salary | | Bonus | | Options Awards | | All other Compensation | | Total |
Name and Principal Position | | ($) (1) | | ($)(1) | | ($)(1) | | ($)(3) | | ($) | | ($) |
| | | | | | | | | | | | |
Nidal Zayed (2) | | 2014 | | 373,789 | | — | | 703,700 | | 23,738 | | 1,101,227 |
Chief Executive Officer | | 2013 | | 330,009 | | 75,000 | | 120,000 | | 32,495 | | 557,504 |
| | | | | | | | | | | | |
Patrick Gainer (4) | | 2014 | | 62,500 | | 14,425 | | 31,000 | | 224 | | 108,149 |
Chief Financial Officer | | 2013 | | — | | — | | — | | — | | — |
| | | | | | | | | | | | |
Gregg Pollack (5) | | 2014 | | 214,236 | | — | | 18,600 | | 19,402 | | 252,238 |
Chief Financial Officer and VP Administration | | 2013 | | 207,020 | | 25,000 | | 50,000 | | 19,883 | | 301,903 |
| | | | | | | | | | | | |
Carol Groeber (6) | | 2014 | | 163,356 | | — | | 18,600 | | 5,028 | | 186,983 |
Controller & Principal Accounting Officer | | 2013 | | 165,090 | | 35,000 | | 35,000 | | 4,944 | | 240,034 |
(1) Includes salary paid by Pernix during 2014 and 2013, before any deductions for contributions to Pernix’s 401(k) Savings Plan. Bonuses included are presented in the year for which they were earned but were paid during the first quarter of the subsequent year.
(2) Pernix provided a vehicle to Mr. Zayed at a cost of $2,331 in 2014 and $11,304 in 2013. Pernix provided Mr. Zayed with health insurance for him and his family at a cost of $18,027 in 2014 and $17,191 in 2013. The Company contributed $3,380 during 2014 and $4,000 during 2013 to Mr. Zayed’s 401K account.
(3) The amounts reported in this column reflect the aggregate fair value of stock options granted in the year computed in accordance with FASB ASC Topic 718. These amounts are not paid to or realized by the Officers. Assumptions used in the calculation of these values are included in Note 16 along with a description of equity compensation plans. Additional options awarded in early 2015 are excluded from this table and valuation of the 2015 option awards is in process and will be computed in accordance with ASC 718.
(4) On September 22, 2014, Mr. Gainer joined Pernix as the Chief Financial Officer. Prior to joining, the Company did not issue Mr. Gainer any compensation.
(5) Mr. Pollack is no longer with the Company as of September 19, 2014. As part of Mr. Pollack’s separation agreement he received a severance payout of $52,500 which was included in his salary amount above. Pernix provided Mr. Pollack with health and life insurance for him and his family at a cost of $15,402 in 2014 and $15,883 in 2013. The Company contributed $4,000 during 2014 and 2013, respectively, to Mr. Pollack’s 401K account.
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(6) Ms. Groeber is no longer with the Company as of November 14, 2014. The Company contributed $4,000 during 2014 and 2013, respectively, to Ms. Groeber’s 401K account. Pernix provided Ms. Groeber with life insurance for her family at a cost of $1,028 in 2014 and $944 in 2013.
Stock Options
Employee Awards
In late 2013, the Company’s shareholders and board of directors adopted the 2014 Equity Incentive Plan (EIP) that provides for the issuance of a variety of equity awards to employees, non-employee directors and consultants. Under the terms of this plan, 1.8 million shares, which were previously allocated for issuance under the LTIP and ISOP, are reserved for issuance under the EIP. On February 8, 2014, 222,000 options were granted to employees under the EIP, all with a three year vesting schedule. In September 2014, an additional 1,050,000 options were awarded to officers of the Company, all with a three year vesting schedule. As of December 31, 2014, a total of 1,242,000 options remain outstanding under the EIP to employees.
In December 2011, the Company’s board of directors adopted and shareholders approved the 2012 Incentive Stock Option Plan that provides for the issuance of qualified stock options to employees. Under the terms of the ISOP, 1.5 million shares were originally reserved for issuance, however with the approval of the 2013 Equity Incentive Plan the remaining 977,500 unawarded shares were transferred to the EIP. Options to purchase common stock are granted at not less than fair market value and vest ratably on the anniversary of each award grant date as defined by the individual award agreements. The options expire 10 years from the grant date or upon expiration of the plan under which they were granted, whichever is earlier. A total of 522,500 options to buy shares were granted between 2012 and 2013, 283,500 of these options remain outstanding as of December 31, 2014, with a strike price equal to the fair market value of the Company’s common stock as of the grant date ($2.09 per share) and a vesting schedule of five years.
The following summarizes stock option activity for employees for the years ended December 31, 2014 and 2013:
| | 2014 | | 2013 |
EIP | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| | | | | | | | |
Options outstanding, at beginning of year | | — | $ | N/A | | — | $ | N/A |
Granted | | 1,272,000 | | 1.56 | | — | | N/A |
Exercised | | — | | N/A | | — | | N/A |
Forfeited / expired | | 30,000 | | 2.07 | | — | | N/A |
Options outstanding, at December 31 | | 1,242,000 | | 1.55 | | — | | N/A |
Options exercisable, at December 31 | | — | | N/A | | — | | N/A |
| | 2014 | | 2013 |
ISOP | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| | | | | | | | |
Options outstanding, at beginning of year | | 379,000 | $ | 2.09 | | 152,500 | $ | 2.09 |
Granted | | — | | N/A | | 347,500 | | 2.09 |
Exercised | | — | | N/A | | — | | N/A |
Forfeited / expired | | 95,500 | | 2.09 | | 121,000 | | 2.09 |
Options outstanding, at December 31 | | 283,500 | | 2.09 | | 379,000 | | 2.09 |
Options exercisable, at December 31 | | 134,166 | $ | 2.09 | | 23,500 | $ | 2.09 |
56
The following table summarizes information about employee stock options outstanding at December 31, 2014:
| | | | | | | |
| | 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 | | 1,525,500 | (1) | 1.66 | | 1,407,750 |
(1) Includes the number of shares that may be issued upon the exercise of outstanding options to purchase shares of Common Stock under the Company’s stock option plan. The Officer awardees were Mr. Nidal Zayed (1,270,000 options), Mr. Patrick Gainer (50,000 options) and Ms. Carol Groeber (77,500 options).
Outstanding Equity Awards as of December 31, 2014
The following table provides information on the holdings of stock options by our Officers as of December 31, 2014. The option awards granted in 2012 vest one-fifth per year beginning on the first anniversary of the grant date or on January 26, 2013. The option awards granted on February 8, 2013, February 1, 2014, September 8, 2014 and September 22, 2014 all vest one-third per year beginning on the first anniversary of the grant date. The market value of the stock awards is based on a valuation of the stock as of the grant date as the shares are not actively traded on an exchange at this time. For additional information about the stock option awards see Note 16 in the notes to our consolidated financial statements.
| | | | | | | | |
| | Number of Securities | | Number of Securities | | | | |
| | Underlying Unexercised | | Underlying Unexercised | | Option Exercise | | Option Expiration |
Name | | Options – Exercisable | | Options – Not Exercisable | | Price | | Dates |
Nidal Z. Zayed | | 64,000 | | 1,206,000 | | 2.09 | | (1) |
Patrick J. Gainer | | — | | 50,000 | | 2.09 | | (1) |
Carol J. Groeber | | 20,666 | | 56,834 | | 2.09 | | (2) |
(1)180,000 options expire for Mr. Zayed upon expiration of the ISOP in December 2021. 1,090,000 and 50,000 options expire for Mr. Zayed and Mr. Gainer upon expiration of the EIP in January 2024.
(2)Ms. Groeber options expired in February 2015, as she has left company and had 90 days to execute her vested options.
Directors Compensation
During mid-2012, during our review of director compensation, our analysis of competitive survey data and peer group proxy information, confirmed that our non-employee director pay was below median in total compensation, including cash and equity compensation in comparison to our peer group of companies. Based upon these findings, management presented to the Board and the Board approved a Board recommendation that the Stockholders approve the Proposed Long-Term Incentive Plan (the “LTIP”). 706,500 unused shares allocated to the LTIP were transferred to the EIP as authorized by the Board of Directors in late 2013, for future grants to directors under the EIP.
Each non-employee director earned an average annual director fee of $29,000 in 2014. Mr. Gunther received $50,000 as director fees for his role as Chairman of the Board in 2014. A director acting as Chairman of respective sub-committee received an additional $5,500 in 2014 for their role. During 2014, each participating Director received an additional $1,500 for their participation on the Government Security Committee, Audit Committee or the Compensation Committee. Director fees are paid in cash.
57
| | | | | | | | | | | |
Directors | | 2014 Director’s Fees | | | 2014 Options Awards | | | 2014 Other Compensation | | | 2014 Total Compensation |
Max Engler | $ | 29,000 | | $ | 12,090 | | $ | — | | $ | 41,090 |
Ibrahim Ibrahim | | 29,000 | | | 12,090 | | | — | | | 41,090 |
Ralph Beck | | — | | | 34,000 | | | — | | | 34,000 |
Trudy Clark | | 30,500 | | | 12,090 | | | — | | | 42,590 |
Carl Smith | | 37,500 | | | 12,090 | | | — | | | 49,590 |
Don J. Gunther | | 58,500 | | | 23,250 | | | 11,500 | | | 93,250 |
C. Robert Campbell | | 37,500 | | | 24,180 | | | 20,000 | | | 81,680 |
TOTAL | $ | 222,000 | | $ | 129,790 | | $ | 31,500 | | $ | 383,290 |
Stock Options
Non-Employee Directors Awards
On February 8, 2014, 153,000 options were granted to non-employee directors under the EIP, all with a three year vesting schedule. As of December 31, 2014, the total award of 153,000 options remains outstanding under the EIP.
The LTIP is a non-employee director and consultant compensation plan. The purpose of the Plan is to advance the interests of the Company and its Stockholders by providing an incentive to attract, retain and reward persons performing services as Directors and Consultants for the Company, to provide a means by which such eligible recipients may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Awards, and by motivating such persons to contribute to the long-term growth and profitability of the Company. Awards may include stock options, stock awards, restricted stock, restricted stock units, and other stock or cash awards. 785,000 shares were allocated in total to cover any and all award types under the LTIP. On February 8, 2013, 78,500 option awards with a vesting period of three years were granted to six non-employee Directors.
The following summarizes stock option activity for non-employee directors for the years ended December 31, 2014 and 2013:
| | 2014 | | 2013 |
EIP | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| | | | | | | | |
Options outstanding, at beginning of year | | — | $ | N/A | | — | $ | N/A |
Granted | | 153,000 | | 2.07 | | — | | N/A |
Exercised | | — | | N/A | | — | | N/A |
Forfeited / expired | | — | | N/A | | — | | N/A |
Options outstanding, at December 31 | | 153,000 | | 2.07 | | — | | N/A |
Options exercisable, at December 31 | | 50,000 | $ | 2.07 | | — | $ | N/A |
| | 2014 | | 2013 |
LTIP | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
| | | | | | | | |
Options outstanding, at beginning of year | | 78,500 | $ | 2.09 | | — | $ | N/A |
Granted | | — | | N/A | | 78,500 | | 2.09 |
Exercised | | — | | N/A | | — | | N/A |
Forfeited / expired | | — | | N/A | | — | | N/A |
Options outstanding, at December 31 | | 78,500 | | 2.09 | | 78,500 | | 2.09 |
Options exercisable, at December 31 | | 35,166 | $ | 2.09 | | 13,500 | $ | 2.09 |
58
The following table summarizes information about stock options outstanding at December 31, 2014:
| | | | | | | |
| | 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 | | 231,500 | (1) | 2.08 | | — | (2) |
(1) Includes the number of shares that may be issued upon the exercise of outstanding options to purchase shares of Common Stock under the EIP and LTIP. The non-employee Director awardees were Mr. Ralph Beck (63,500 options), Mr. Don Gunther (38,000 options), Ms. Trudy Clark, Mr. Max Engler, Mr. Ibrahim Ibrahim, Mr. C. Robert Campbell and Mr. Carl Smith (26,000 options, respectively).
(2) Includes shares available for future issuance under the LTIP, excluding shares quantified under Column 1. As noted above the all unawarded options as of December 31, 2013 were transferred to EIP for future issuances.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table contains information as of December 31, 2014 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 other most highly compensated executive officers of the Company whose salary and bonus for the fiscal year ended December 31, 2014 exceeded $100,000 and are still actively employed with the Company, and (iv) all current executive officers and directors of the Company as a group:
| | | | | | | |
| | | | Amount and Nature of | | Percent of Common | |
| | | | Beneficial Ownership | | Stock Outstanding | |
Name | | Address | | (1) | | (2) | |
Ernil Continental Sa Bvi | | European Office Herrengasse 5 PO Box 1155 FL-9490 Vaduz Principality of Lichtenstein | | 4,386,313 | | 46.6 | % |
Halbarad Group Ltd Bvi | | European Office Herrengasse 5 PO Box 1155 FL-9490 Vaduz Principality of Lichtenstein | | 3,626,643 | | 38.6 | % |
Al Amal Investment Co. KSCC | | Dasman Complex Block #2 FL #3 Ahmed Al Jabar St Sharq 13031 Kuwait | | 549,396 | | 5.8 | % |
Sayed Hamid Behbehani & Sons Co. and Family Members | | PO Box 3065 Safat 13031 Kuwait | | 527,936 | | 5.6 | % |
Max Engler (3) | | | | 3,334 | | * | |
Ibrahim Ibrahim | | | | 1,040 | | * | |
Ralph Beck | | | | * | | * | |
Trudy Clark | | | | * | | * | |
Carl Smith | | | | * | | * | |
| | | | | | | |
Nidal Z. Zayed | | | | * | | * | |
Patrick Gainer | | | | * | | * | |
All Executive Officers and Directors as a Group (8 Persons) | | | | 5,174 | | * | |
* Less than 0.1%
59
(1) Except as indicated below, 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.
Name of Legal Entity | | Name of Natural Person(s) having sole or shared voting and
investment control over Pernix Group, Inc. shares held by the named
legal entity |
Al Amal Investment Company KSCC | | Nasrallah Behbehani |
Ernil Continental SA BVI | | Mrs. Vanessa Cosi, Mrs. Sandra A. Marc-Büchel and Fidu-Finanz Trustee Services Est., |
Halbarad Group Limited BVI | | Mrs. Vanessa Cosi, Mrs. Sandra A. Marc-Büchel and Fidu-Finanz Trustee Services Est., |
Sayed Hamed Behbehani and Sons Co. | | Fouad Behbehani and Nasrallah Behbehani |
(2) Calculated on a basis of 9,403,697 shares of Common Stock outstanding as of December 31, 2014. On various dates over the past several years, options were granted to Mr. Zayed (1,270,000 options) and Mr. Gainer (50,000 options) under the Incentive Stock Option Plan and the Equity Incentive Plan that were implemented by the Company in December 2011 and December 2013. The table excludes the options outstanding under the ISOP and EIP which are not exercised as of December 31, 2014. During 2012, the Company established a long term incentive plan for non-employee directors and consultants. During 2013 the Company awarded options under the LTIP to Mr. Beck (13,500), General Clark, Mr. Engler, Mr. Gunther, Mr. Ibrahim and Mr. Smith (all received 13,000 options, respectively). Additionally, the non-employee Directors receive awards from the EIP grant on February 8, 2014. Under the EIP grant Mr. Gunther received 25,000 options, Mr. Campbell received 26,000 options and the remaining Directors received 13,000 options each. The table excludes the options outstanding under the LTIP and EIP which are not exercised as of December 31, 2014.
(3) Max Engler serves as a director for Litra Holding AG. Litra Holding AG owns directly 33,000 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.
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 over 4,000 employees and over 50 years of experience. Ernil, Halbarad and affiliated companies hold over 96.0% of the common stock outstanding, of Pernix Group, Inc. SHBC and Pernix 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.
During the first quarter of 2013, the Company purchased for $1.1 million, the building and land on which the Company’s corporate headquarters are located. These assets were purchased from Baron Real Estate Holdings, a related party. See Note 11 in the notes to our consolidated financial statements.
As of December 31, 2013 short-term and long-term debt agreements and associated accrued interest with Bent Marketing Ltd., a related party, were fully repaid.
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.
60
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee pre-approves all audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent registered accountants. In late 2013, the Company terminated CohnReznick LLP as its principal accountant and in January 2014 the Company engaged BDO USA, LLP as its new principal accountant. The following table presents fees for professional services rendered by BDO USA, LLP, the principal accountant for the respective periods indicated:
Services Performed | | 2014 | | | 2013 (4) |
Audit Fees (1) | $ | 335,828 | | $ | 209,436 |
Audit-related fees (2) | | 34,816 | | | — |
Tax Fees (3) | | 68,345 | | | 27,759 |
Total Fees | $ | 438,989 | | $ | 237,195 |
1.Audit fees represent fees for professional services provided in connection with the audit of our annual financial statements and certain transition procedures as well as audit services provided in connection with statutory filings. These fees also include amounts related to the filing of the Company’s 2014 Registration Statements and related amendments.
2.Audit-related fees represent due diligence services related to potential acquisitions.
3.Tax fees principally represent fees for tax preparation.
4.Included in the fees above for the year ended December 31, 2013 are fees paid to BDO USA, LLP. Excluded from the table above are fees relating to services performed by CohnReznick LLP related to the year ended December 31, 2013 in the amounts of $138,500 for audit services, $1,560 for tax services and $9,012 of other accounting services.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See the audited financial statements for the year ended December 31, 2014, presented in Item 8 above.
| | |
EXHIBIT
NUMBER | | EXHIBIT DESCRIPTION |
| | |
3.1 | | Certificate of Incorporation of Pernix Group (Incorporated by reference from Exhibit 3.01 to the Form S-4 filed on 7/2/2001) |
| | |
3.2 | | By-laws of Pernix Group (Incorporated by reference from Exhibit 3.02 to the Form S-4 filed on 7/2/2001) |
| | |
3.3 | | Amendment to Certificate of Incorporation (Incorporated by reference from Exhibit 3.03 to the Form 10KSB filed on 4/2/2007) |
| | |
3.4 | | Certificate of Amendment to the Restated Certificate of Incorporation of Pernix Group, Inc. (Incorporated by reference from Appendix A of Schedule 14C filed on October 1, 2012) |
| | |
3.5 | | Certificate of Amendment to the Restated Certificate of Incorporation of Pernix Group, Inc. (Incorporated by reference from Exhibit 3.05 to the Form 10-K filed on 3/28/2014) |
| | |
4.1 | | Certificate of Designations- Series A Preferred Stock (Incorporated by reference from Exhibit 3.1 to the Form 10-Q filed on August 12, 2011) |
| | |
4.2 | | Certificate of Designations- Series B Cumulative Convertible Preferred Stock (Incorporated by reference from Exhibit 3.2 to the Form 10-Q filed on August 12, 2011) |
| | |
4.3 | | Certificate of Amendment to the Certificate of Designation of Series A Preferred Stock of Pernix Group, Inc. (Incorporated by reference from Appendix B of Schedule 14C filed on October 1, 2012) |
| | |
4.4 | | Certificate of Amendment to the Certificate of Designation of Series B Preferred Stock of Pernix Group, Inc. (Incorporated by reference from Appendix C of Schedule 14C filed on October 1, 2012) |
| | |
4.5 | | Certificate of Amendment to the Certificate of Designation of Series A Preferred Stock of Pernix Group, Inc. (Incorporated by reference from Exhibit 4.05 to the Form 10-K filed on 3/28/2014) |
| | |
10.01 | | Pernix Group , Inc. 2012 Incentive Stock Option Plan (Incorporated by reference from Appendix A to the PRE14A Proxy filing with the SEC on October 27, 2011)* |
| | |
10.02 | | Form of Incentive Stock Option Award Notice and Agreement (Incorporated by reference from Exhibit 10.2 to the Form 8-K filed on January 31, 2012) |
| | |
10.03 | | Pernix Group , Inc. 2013 Long Term Incentive Plan (Incorporated by reference form Exhibit 10.4 to the Form 8-K filed on February 14, 2013)* |
| | |
10.04 | | Form of LTIP Stock Option Award Notice and Agreement (Incorporated by reference from Exhibit 10.2 to the Form 8-K filed on February 14, 2013)* |
| | |
10.05 | | Pernix Group , Inc. 2014 Equity Incentive Plan (Incorporated by reference from Appendix A to the PRE14A Proxy filing with the SEC on October 3, 2013)* |
| | |
10.06 | | Form of EIP Award Notice and Agreement ((Incorporated by reference from appendix to the PRE14A Proxy filing with the SEC on October 3, 2013)* |
| | |
10.07 | | Preferred Stock Purchase Agreement between Pernix Group, Inc. and Ernil Continental S.A., BVI dated December 30, 2013 (Incorporated by reference from Exhibit 16.1 to the Form 8-K filed on December 23, 2013) |
| | |
10.08 | | Preferred Stock Purchase Agreement between Pernix Group, Inc. and Halbarad Group, LTD., BVI dated December 30, 2013 (Incorporated by reference from Exhibit 16.2 to the Form 8-K filed on December 23, 2013) |
| | |
10.09 | | Pernix Group , Inc. LTC Corporation, Joint Venture, Agreement** |
| | |
10.10 | | Loan and Security Facility Agreement dated as of November 10, 2014, among Pernix Group, Inc. and Pernix RE LLC, the Borrowers and a Lender, Barrington Bank & Trust Company, National Association. ** |
| | |
10.11 | | Revolving Note dated as of November 10, 2014, among Pernix Group, Inc. and Pernix RE LLC, the Borrowers and a Lender, Barrington Bank & Trust Company, National Association. ** |
| | |
14.0 | | Code of Ethics (Incorporated by reference from Exhibit 99.1 to the Form 10KSB filed on 7/31/2006) |
| | |
16.0 | | Letter to the Securities and Exchange Commission from CohnReznick LLP, dated December 10, 2013 regarding Change in Certifying Accountant (Incorporated by reference from Exhibit 16.1 to the Form 8-K filed on December 10, 2013) |
21.0 | | List of Subsidiaries and their jurisdictions** |
| | |
23.0 | | Consent of Independent Registered Public Accounting Firm |
| | |
24.0 | | Unanimous Written Consent of the Board of Directors of Pernix Group, Inc. to Approve The Registration and Sale of Common Shares (Incorporated by reference from Exhibit 24.1 to the Form S-1 filed on March 28, 2014) |
| | |
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** |
| | | | |
(101.INS)*** | | XBRL Instance Document | | N/A |
| | | | |
(101.SCH)*** | | XBRL Taxonomy Extension Schema Document | | N/A |
| | | | |
(101.CAL)*** | | XBRL Taxonomy Extension Calculation Linkbase Document | | N/A |
| | | | |
(101.LAB)*** | | XBRL Taxonomy Extension Label Linkbase Document | | N/A |
| | | | |
(101.PRE)*** | | XBRL Taxonomy Extension Presentation Linkbase Document | | N/A |
| | | | |
(101.DEF)*** | | XBRL Taxonomy Extension Definition Linkbase Document | | N/A |
63
* Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to item 15(b) of this report.
** Filed herewith
*** Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.
All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the period ended December 31, 2014.
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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 20, 2015 | | /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 20, 2015.
| | |
/s/ Don Gunther | | Chairman of the Board of Directors |
Don Gunther | | |
| | |
/s/ Nidal Z. Zayed | | Director, President, Chief Executive Officer |
Nidal Z. Zayed | | (Principal Executive Officer) |
| | |
/s/ Max Engler | | Director |
Max Engler | | |
| | |
/s/ C. Robert Campbell | | Director |
C. Robert Campbell | | |
| | |
/s/ Trudy Clark | | Director |
Trudy Clark | | |
| | |
/s/ Carl Smith | | Director |
Carl Smith | | |
| | |
/s/ Ibrahim Ibrahim | | Director |
Ibrahim Ibrahim | | |
| | |
/s/ Patrick Gainer | | Chief Financial Officer |
Patrick Gainer | | (Principal Chief Financial Officer) |
| | |
65
______________________________________________________________________________
LOAN AND SECURITY AGREEMENT
dated as of November 10, 2014
between
PERNIX GROUP, INC.
as a Borrower,
PERNIX RE LLC, as a Borrower,
and
BARRINGTON BANK & TRUST COMPANY, NATIONAL ASSOCIATION,
as Lender
________________________________________________________________________
3193012v9/28370-0031
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3193012v9/28370-0031
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3193012v9/28370-0031
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3193012v9/28370-0031
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3193012v9/28370-0031
ANNEXES
ANNEX A
Commitments
ANNEX B
Addresses for Notices
SCHEDULES
SCHEDULE 9.1
Qualification to do Business
SCHEDULE 9.6
Litigation and Contingent Liabilities
SCHEDULE 9.8
Subsidiaries
SCHEDULE 9.16
Insurance
SCHEDULE 9.17
Real Property; Collateral Locations; Collateral in Possession of
Lessor, Bailee, Consignee or Warehouseman
SCHEDULE 9.20
Labor Matters
SCHEDULE 9.24
Filings and Perfection
SCHEDULE 9.25
Loan Party Information
SCHEDULE 9.26
Vehicles
SCHEDULE 9.27
Investment Property
SCHEDULE 9.29
Intellectual Property
SCHEDULE 9.32
Depositary and Other Deposit Accounts
SCHEDULE 10.16
Commercial Tort Claims
SCHEDULE 11.1
Existing Debt
SCHEDULE 11.2
Existing Liens
SCHEDULE 11.11
Investments
EXHIBITS
EXHIBIT A
Legal Description of Real Property
EXHIBIT B
Form of Note
EXHIBIT C
Form of Compliance Certificate
EXHIBIT D
Form of Borrowing Base Certificate
EXHIBIT E
Form of Notice of Borrowing
EXHIBIT F
Form of Notice of LOC
EXHIBIT G
Form of Joinder
EXHIBIT H
Forms of Letter of Credit Applications
EXHIBIT I
Form of Membership Interest Pledge Agreement
EXHIBIT J
Form of Partnership Interest Pledge Agreement
3193012v9/28370-0031
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT, dated as of November 10, 2014 (as amended, restated, supplemented or modified from time to time, this “Agreement”), is entered into by and among PERNIX GROUP, INC., a Delaware corporation (“Pernix”), PERNIX RE LLC, an Illinois limited liability company (“Pernix RE”, and together with Pernix, the “Borrowers”, each a “Borrower”) and BARRINGTON BANK & TRUST COMPANY, NATIONAL ASSOCIATION (the “Lender” and “Issuing Lender”).
Lender has agreed to make available to Borrowers a revolving credit facility and a letter of credit facility upon the terms and conditions set forth herein.
In consideration of the mutual agreements herein contained, the parties hereto agree as follows:
SECTION 1
DEFINITIONS.
1.1
Definitions. When used herein (a) the following terms are used herein as defined in the UCC: Accounts, Certificated Security, Commercial Tort Claims, Deposit Accounts, Documents, Electronic Chattel Paper, Equipment, Farm Products, Goods, Health Care Insurance Receivables, Instruments, Inventory, Leases, Letter-of-Credit Rights, Money, Payment Intangibles, Securities, Software, Supporting Obligations, Tangible Chattel Paper and (b) the following terms shall have the following meanings:
Account Debtor means any Person who is obligated to Pernix or any Subsidiary with respect to any Account or other Receivable.
Acknowledgment of Pledge means (i) that certain Acknowledgment of Pledge, executed by Pernix SHBC L.P., and (ii) any other acknowledgment of pledge (or similar document) delivered in connection with a Membership Interest Pledge Agreement or Partnership Interest Pledge Agreement.
Affected Loan is defined in Section 7.3.
Affiliate of any Person means (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any officer or director of such Person and (c) with respect to Lender, any entity administered or managed by Lender or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans. A Person shall be deemed to be “controlled by” any other Person if such Person possesses, directly or indirectly, power to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Unless expressly stated otherwise herein, Lender shall not be deemed an Affiliate of any Loan Party.
Agreement is defined in the preamble of this Agreement.
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Applicable Margin means, as of the day prior to the Reset Date, (i) if the At Lender Liquidity on such date is less than or equal to $5,000,000, 2.75%, (ii) if the At Lender Liquidity on such date is greater than $5,000,000, but less than or equal to $7,500,000, 2.25%, and (iii) if the At Lender Liquidity on such date is greater than $7,500,000, 1.60%.
Assignment of Interest means (i) that certain Assignment of Partnership Interest, executed by Pernix, Lender and the other parties thereto, and (ii) any other assignment of interest delivered in connection with a Membership Interest Pledge Agreement or Partnership Interest Pledge Agreement.
Assignee is defined in Section 14.13.1.
At Lender Liquidity means, as of any date, all cash and Cash Equivalent Investments of Pernix held or maintained at Lender on such date, minus any LOC Liquidity held in the LOC Account on such date.
Assignment of Leases and Rents means that certain Assignment of Leases and Rents, dated as of November 10, 2014, by Pernix RE, in favor of Lender, as the same may be amended, restated, supplemented or modified from time to time.
Attorney Costs means, with respect to any Person, all reasonable fees and charges of any counsel to such Person, the reasonable allocable cost of internal legal services of such Person, all reasonable disbursements of such internal counsel and all court costs and similar legal expenses.
Bank Product Agreements means those certain cash management service agreements entered into from time to time between any Loan Party and Lender or its Affiliates in connection with any of the Bank Products.
Bank Product Obligations means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by the Loan Parties to Lender or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that a Loan Party is obligated to reimburse to Lender as a result of Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to the Loan Parties pursuant to the Bank Product Agreements.
Bank Products means any service or facility extended to any Loan Party by Lender or its Affiliates, including, without limitation, (a) deposit accounts, (b) cash management services, including, without limitation, controlled disbursement, lockbox, electronic funds transfers (including, without limitation, book transfers, fedwire transfers, ACH transfers), online reporting and other services relating to accounts maintained with Lender or its Affiliates, (c) debit cards and (d) Hedging Agreements.
Base Rate means at any time, the Prime Rate.
Borrower and Borrowers are defined in the preamble of this Agreement.
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Borrowers’ Obligations means all Obligations of Borrowers.
Borrowing Base means an amount equal to (i) 70% of the fair market value of the Lombard Property, plus (ii) the lesser of (1) $1,000,000 and (2) (A) 75% of Eligible Accounts the related project or job of which is executed within the United State of America, plus (B)
30%
of Eligible Accounts of the related project or job of which is executed outside the United States of America, plus (iii) 100% of cash held or maintained in the Pledged Account.
Borrowing Base Certificate means a certificate substantially in the form of Exhibit D.
BSA is defined in Section 10.4.
Business Day means any day on which Lender is open for commercial banking business in Chicago, Illinois and, in the case of a Business Day which relates to a LIBOR Loan, on which dealings are carried on in the London interbank eurodollar market.
Capital Lease means, with respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person.
Capital Securities means, with respect to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person’s capital, whether now outstanding or issued or acquired after the Closing Date, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership, interests in a trust, interests in other unincorporated organizations or any other equivalent of such ownership interest.
Cash Collateral means, with respect to any outstanding Letter of Credit, the cash to be held as cash collateral for such outstanding Letter of Credit, which amount may exceed the Stated Amount of such outstanding Letter of Credit.
Cash Equivalent Investment means, at any time, (a) any evidence of Debt, maturing not more than one year after such time, issued or guaranteed by the United States Government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by Lender or its holding company) rated at least A-l by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or P-l by Moody’s Investors Service, Inc., (c) any certificate of deposit, time deposit or banker’s acceptance, maturing not more than one year after such time, or any overnight Federal Funds transaction that is issued or sold by Lender or its holding company (or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000), (d) any repurchase agreement entered into with Lender (or commercial banking institution of the nature referred to in clause (c)) which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) above and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of Lender (or other commercial banking institution) thereunder, (e) money market accounts or mutual funds which invest exclusively in assets satisfying the foregoing requirements, and (f) other short term liquid investments approved in writing by Lender.
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Change of Control means the occurrence of any of the following events: (a) any Person shall (i) own and control at least 51% of the outstanding Capital Securities of Pernix, or (ii) possess the right to elect (through contract, ownership of voting securities or otherwise) at all times a majority of the board of directors (or similar governing body) of Pernix and to direct the management policies and decisions of Pernix, (b) any change in ownership of more than 30% of the currently outstanding Capital Securities of Borrower, (c) Pernix shall cease to, directly or indirectly, own
more than 51%
and control the Capital Securities of its Subsidiaries as set forth on Schedule 9.8; or (c) Nidal Zayed shall cease to be chief executive officer and president of Pernix.
Chattel Paper means all “chattel paper” as such term is defined in Section 9-102(a)(11) of the UCC and, in any event, including with respect to any Loan Party, all Electronic Chattel Paper and Tangible Chattel Paper.
Closing Date is defined in Section 12.1.
Code means the Internal Revenue Code of 1986, as amended from time to time.
Collateral means (a) all property, wherever located, whether real or personal, now owned or existing or at any time hereafter arising or acquired by the Loan Parties or in which the Loan Parties now have or at any time in the future may acquire any right, title or interest, including all of the Loan Parties’ Pledged Equity, Accounts, Chattel Paper, Commercial Tort Claims (as set forth on Schedule 10.16), Deposit Accounts, Documents, Equipment, Fixtures, General Intangibles, Health Care Insurance Receivables, Farm Products, Goods, Instruments, Intellectual Property, Inventory, Investment Property, Leases, Letter-of-Credit Rights, Money, Records, securities accounts, Securities and Supporting Obligations, (b) the Pledged Interests, and the certificates and other instruments or agreements, if any, representing or evidencing the Pledged Interests, and all dividends, distributions, cash, instruments, securities, general intangibles, financial assets, securities entitlements, investment property and all supporting obligations related thereto, and any and all additions, substitutions, replacements, profits, payments, subscription, voting, preferential rights or other rights of any kind received on account of any of the foregoing or accruing with respect thereto or by reason of recapitalization, reclassification, merger, consolidation, liquidation, exchange, renewal, redemption, substitution, or other transaction regarding the Pledged Interests, (c) (1) all rights of Pernix’s embodied in or arising out of Pernix’s status as the general partner of Pernix SHBC L.P., consisting of: (A) all economic rights, including without limitation, all rights to share in the profits and losses of Pernix SHBC L.P. and all rights to receive distributions of the assets of Pernix SHBC L.P.; and (B) all governance rights, including without limitation, all rights to vote, consent to action and otherwise participate in the management of Pernix SHBC L.P., and (2) all other rights and privileges of Pernix with respect to the interests and assets referred to in clause (b) above and in the SHBC Partnership Agreement, (d) all books and records pertaining to any of the foregoing, (e) all Proceeds and products of any of the foregoing, and (f) all collateral security and guaranties given by any Person with respect to any of the foregoing.
Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Loan Party, shall refer to such Loan Party’s Collateral or the relevant part thereof.
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Collateral Access Agreement means an agreement in form and substance reasonably satisfactory to Lender pursuant to which a mortgagee or lessor of real property on which Collateral is stored or otherwise located, or a warehouseman, processor or other bailee of Inventory or other property owned by any Loan Party, acknowledges the Liens of Lender and waives any Liens held by such Person on such property, and, in the case of any such agreement with a mortgagee or lessor, permits Lender reasonable access to and use of such real property following the occurrence and during the continuance of an Event of Default to assemble, complete and sell any Collateral stored or otherwise located thereon.
Collateral Documents means, collectively, the Mortgage, the Assignment of Leases and Rents, the Environmental Indemnity, each Membership Interest Pledge Agreement, each Partnership Interest Pledge Agreement, each Assignment of Interest, each Acknowledgment of Pledge, each Collateral Access Agreement, the Trademark Security Agreement, the Perfection Certificate, each Loan Guaranty, each control agreement, each pledge agreement, and any other agreement or instrument pursuant to which any Loan Party or any other Person grants or purports to grant Collateral to Lender or otherwise relates to such collateral.
Commitment means Lender’s commitment to make Loans, and to issue Letters of Credit, under this Agreement. The initial amount of Lender’s commitment to make Loans is set forth on Annex A.
Compliance Certificate means a Compliance Certificate in substantially the form of Exhibit C.
Consolidated Net Income means, as of any date, with respect to Pernix and its Subsidiaries, (i) the consolidated net income (or loss) of Pernix and its Subsidiaries for the twelve-month period ending on such date, excluding extraordinary gains and any gains from discontinued operations during such twelve month period
,
plus
(ii) to the extent deducted in determining such consolidated net income of Pernix and its Subsidiaries, the Consolidated Net Income Add-Back
.
Consolidated Net Income Add-Back
means, for any period, (a) non-cash tax expense, (b) depreciation and amortization, and (c) value of accrued but unpaid stock dividends on Series B Capital Securities.
Contingent Liability means, with respect to any Person, each obligation and liability of such Person and all such obligations and liabilities of such Person incurred pursuant to any agreement, undertaking or arrangement by which such Person: (a) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, dividend, obligation or other liability of any other Person in any manner (other than by endorsement of instruments in the course of collection), including any indebtedness, dividend or other obligation which may be issued or incurred at some future time; (b) guarantees the payment of dividends or other distributions upon the Capital Securities of any other Person; (c) undertakes or agrees (whether contingently or otherwise): (i) to purchase, repurchase, or otherwise acquire any indebtedness, obligation or liability of any other Person or any property or assets constituting security therefor,
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(ii) to advance or provide funds for the payment or discharge of any indebtedness, obligation or liability of any other Person (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, working capital or other financial condition of any other Person, or (iii) to make payment to any other Person other than for value received; (d) agrees to lease property or to purchase securities, property or services from such other Person with the purpose or intent of assuring the owner of such indebtedness or obligation of the ability of such other Person to make payment of the indebtedness or obligation; (e) to induce the issuance of, or in connection with the issuance of, any letter of credit for the benefit of such other Person; or (f) undertakes or agrees otherwise to assure a creditor against loss. The amount of any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the indebtedness, obligation or other liability guaranteed or supported thereby.
Controlled Group means all members of a controlled group of corporations, all members of a controlled group of trades or businesses (whether or not incorporated) under common control and all members of an affiliated service group which, together with Pernix or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.
Copyrights means all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, including those listed on Schedule 9.29, all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office, and the right to obtain all renewals of any of the foregoing.
Copyright Licenses means all written agreements naming any Loan Party as licensor or licensee, including those listed on Schedule 9.29, granting any right under any Copyright, including the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright.
Debt of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all indebtedness evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (d) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (e) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person; provided that if such Person has not assumed or otherwise become liable for such indebtedness, such indebtedness shall be measured at the fair market value of such property securing such indebtedness at the time of determination, (f) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn), bankers’ acceptances and similar obligations issued for the account of such Person (including the Letters of Credit), (g) all Bank Product Obligations and Hedging Obligations of such Person, (h) all Contingent Liabilities of such Person, (i) all Debt of any partnership of which such Person is a general partner, (j) all non-compete payment obligations, earn-outs and similar obligations and (k) any Capital Securities or other equity instrument,
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whether or not mandatorily redeemable, that under GAAP is characterized as debt, whether pursuant to financial accounting standards board issuance No. 150 or otherwise.
Default means any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default.
Dollar and the sign “$” mean lawful money of the United States of America.
Eligible Account means an Account owing to Pernix which meets each of the following requirements:
(a)
it arises from the sale or lease of goods or the rendering of services which have been fully performed by Pernix; and if it arises from the sale or lease of goods, (i) such goods comply with such Account Debtor’s specifications (if any) and have been delivered to such Account Debtor and (ii) Pernix has possession of, or if requested by Lender has delivered to Lender, delivery receipts evidencing such delivery;
(b)
it (i) is subject to a perfected, first priority Lien in favor of Lender and (ii) is not subject to any other assignment, claim or Lien;
(c)
it is a valid, legally enforceable and unconditional obligation of the Account Debtor with respect thereto, and is not subject to the fulfillment of any condition whatsoever or any counterclaim, credit, allowance, discount, rebate or adjustment by the Account Debtor with respect thereto, or to any claim by such Account Debtor denying liability thereunder in whole or in part and the Account Debtor has not refused to accept and/or has not returned or offered to return any of the goods or services which are the subject of such Account;
(d)
there is no bankruptcy, insolvency or liquidation proceeding pending by or against the Account Debtor with respect thereto;
(e)
[Reserved.]
(f)
it is not an Account arising from a “sale on approval,” “sale or return,” “consignment” or “bill and hold” or subject to any other repurchase or return agreement;
(g)
it is not an Account with respect to which possession and/or control of the goods sold giving rise thereto is held, maintained or retained by Pernix (or by any agent or custodian of Pernix) for the account of or subject to further and/or future direction from the Account Debtor with respect thereto;
(h)
it arises in the ordinary course of business of Pernix;
(i)
if the Account Debtor is the United States or any department, agency or instrumentality thereof, Pernix has assigned its right to payment of such Account to Lender pursuant to the Assignment of Claims Act of 1940, and evidence (satisfactory to Lender) of such assignment has been delivered to Lender;
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(j)
if Pernix maintains a credit limit for an Account Debtor, the aggregate dollar amount of Accounts due from such Account Debtor, including such Account, does not exceed such credit limit;
(k)
if the Account is evidenced by chattel paper or an instrument, the originals of such chattel paper or instrument shall have been endorsed and/or assigned and delivered to Lender or, in the case of electronic chattel paper, shall be in the control of Lender, in each case in a manner satisfactory to Lender;
(l)
such Account is evidenced by an invoice delivered to the related Account Debtor and is not more than ninety (90) days past the original invoice date thereof, in each case according to the original terms of sale;
(m)
it is not an Account with respect to an Account Debtor that is located in any jurisdiction which has adopted a statute or other requirement with respect to which any Person that obtains business from within such jurisdiction must file a notice of business activities report or make any other required filings in a timely manner in order to enforce its claims in such jurisdiction’s courts unless (i) such notice of business activities report has been duly and timely filed or Pernix is exempt from filing such report and has provided Lender with satisfactory evidence of such exemption or (ii) the failure to make such filings may be cured retroactively by Pernix for a nominal fee;
(n)
the Account Debtor with respect thereto is not an Affiliate of Pernix;
(o)
it is not owed by an Account Debtor with respect to which 25% or more of the aggregate amount of outstanding Accounts owed at such time by such Account Debtor is classified as ineligible under clause (l) of this definition;
(p)
if the aggregate amount of all Accounts owed by the Account Debtor thereon exceeds 25% of the aggregate amount of all Accounts at such time, then all Accounts owed by such Account Debtor in excess of such amount shall be deemed ineligible;
(q)
it is otherwise not unacceptable to Lender in its reasonable discretion for any other reason.
An Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be an Eligible Account. Further, with respect to any Account, if Lender at any time hereafter determines in its
reasonable
discretion that the prospect of payment or performance by the Account Debtor with respect thereto is materially impaired for any reason whatsoever, such Account shall cease to be an Eligible Account after notice of such determination is given to Borrowers.
Eligible Hedging Agreement
means a Hedging Agreement in connection with forward or option contracts for certain currencies for bona fide hedging purposes and not for speculation in an aggregate amount at any one time outstanding not to exceed $500,000.
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Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment.
Environmental Indemnity means that certain Environmental Indemnity Agreement, dated as of November 10, 2014, by Borrowers in favor of Lender, as the same may be amended, restated, supplemented or modified from time to time.
Environmental Laws means all present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative or judicial orders, consent agreements, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to any matter arising out of or relating to public health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, emission, release, threatened release, control or cleanup of any Hazardous Substance.
ERISA means the Employee Retirement Income Security Act of 1974.
Event of Default means any of the events described in Section 13.1.
Excluded Taxes means taxes based upon, or measured by, Lender’s (or a branch of Lender’s) overall net income, overall net receipts, or overall net profits (including franchise taxes imposed in lieu of such taxes), but only to the extent such taxes are imposed by a taxing authority (a) in a jurisdiction in which Lender is organized, (b) in a jurisdiction which Lender’s principal office is located, or (c) in a jurisdiction in which Lender’s lending office (or branch) in respect of which payments under this Agreement are made is located.
Fiscal Quarter means a fiscal quarter of a Fiscal Year.
Fiscal Year means the fiscal year of Pernix and its Subsidiaries, which period shall be the 12-month period ending on December 31 of each year.
Fixtures means all “fixtures” as such term is defined in Section 9-102(41) of the UCC and, in any event, including, whether now owned or hereafter acquired by a Loan Party, the following: plant fixtures; business fixtures; other fixtures and storage facilities, wherever located; and all additions and accessories thereto and replacements therefor.
FRB means the Board of Governors of the Federal Reserve System or any successor thereto.
GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) and the Securities and Exchange Commission, which are applicable to the circumstances as of the date of determination.
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General Intangibles means all “general intangibles” as such term is defined in Section 9-102(a)(42) of the UCC and, in any event, including with respect to any Loan Party, all Payment Intangibles, Software, all contracts, agreements, instruments and indentures in any form, and portions thereof, to which such Loan Party is a party or under which such Loan Party has any right, title or interest or to which such Loan Party or any property of such Loan Party is subject, as the same from time to time may be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of such Loan Party to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of such Loan Party to damages arising thereunder and (c) all rights of such Loan Party to perform and to exercise all remedies thereunder; provided, that the foregoing limitation shall not affect, limit, restrict or impair the grant by such Loan Party of a security interest pursuant to this Agreement in any Receivable or any money or other amounts due or to become due under any such Payment Intangible, contract, agreement, instrument or indenture.
Hazardous Substances means hazardous waste, hazardous substance, pollutant, contaminant, toxic substance, oil, hazardous material, chemical or other substance regulated by any Environmental Law.
Hedging Agreement means any agreement with respect to any swap, collar, cap, future, forward or derivative transaction, whether exchange-traded, over-the-counter or otherwise, including any involving, or settled by reference to, one or more interest rates, currencies, commodities, equity or debt instruments, any economic, financial or pricing index or basis, or any similar transaction, including any option with respect to any of these transactions and any combination of these transactions.
Hedging Obligation means, with respect to any Person, any liability of such Person under any Hedging Agreement, including any and all cancellations, buy backs, reversals, terminations or assignments under any Hedging Agreement.
Indemnified Liabilities is defined in Section 14.16.
Intellectual Property means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.
Intercompany Note means any promissory note evidencing loans made by any Loan Party to any other Loan Party.
Interest Period means the period commencing on any Reset Date through the date prior to the next succeeding Reset Date; provided that if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day;
Interest Rate means the LIBOR Rate plus the Applicable Margin.
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Investment means, with respect to any Person, any investment in another Person, whether by acquisition of any debt or Capital Security, by making any loan or advance, by becoming obligated with respect to a Contingent Liability in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business).
Investment Property means the collective reference to (a) all “investment property” as such term is defined in Section 9-102(a)(49) of the UCC (other than the equity interest of any foreign Subsidiary excluded from the definition of Pledged Equity), (b) all “financial assets” as such term is defined in Section 8-102(a)(9) of the UCC, and (c) whether or not constituting “investment property” as so defined, all Pledged Notes and all Pledged Equity.
Issuers means the collective reference to each issuer of any Investment Property.
Issuing Lender means Lender, in its capacity as the issuer of Letters of Credit hereunder, or any Affiliate of Lender that may from time to time issue Letters of Credit, or any other financial institution that Lender may cause to issue Letters of Credit for the account of Borrowers, and each of their successors and assigns in such capacity.
Jobs In Progress Report means, for any calendar month, a report setting forth for all outstanding jobs or projects of the Loan Parties, and the progress of thereof during such calendar month, including, without limitation, the value of each contract related to a job or project, the cost to complete each job or project, the gross profit (and margin) of each job or project, revenue and profit recognition for each job or project, billings for each job or project, and balance sheet data for such job or project.
L/C Application means, with respect to any request for the issuance of a Letter of Credit, a letter of credit application in one of the forms attached hereto as Exhibit H.
L/C Fee Rate means 1.60%.
L/C Interest Rate means (i) for a standby Letter of Credit, Base Rate plus 4.00%, and (ii) for trade Letter of Credit or a banker’s acceptance, the Base Rate plus 0.75%.
Lender is defined in the preamble of this Agreement. In addition to the foregoing, for the purpose of identifying the Persons entitled to share in the Collateral and the proceeds thereof under, and in accordance with the provisions of, this Agreement and the Collateral Documents, the term “Lender” shall include Affiliates of Lender providing a Bank Product.
Lender Party is defined in Section 14.16.
Letter of Credit is defined in Section 2.1.2.
LIBOR Loan means any Loan which bears interest at the Interest Rate.
LIBOR Office means the office or offices of Lender which shall be making or maintaining the LIBOR Loans of Lender hereunder. A LIBOR Office of Lender may be, at the option of Lender, either a domestic or foreign office.
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LIBOR Rate means a rate of interest equal to (a) (i) the per annum rate of interest at which United States dollar deposits for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 A.M. (London time) two (2) Business Days prior to the commencement of such Interest Period (or three (3) Business Days prior to the commencement of such Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed in the Bloomberg Financial Markets system (or other authoritative source selected by Lender in its sole discretion), divided by (ii) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), or (b) as LIBOR is otherwise determined by Lender in its sole and absolute discretion. Lender’s determination of the LIBOR Rate shall be conclusive, absent manifest error and shall remain fixed during such Interest Period.
Lien means, with respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person (including an interest in respect of a Capital Lease) which secures payment or performance of any obligation and shall include any mortgage, lien, encumbrance, title retention lien, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise.
Loan or Loans is defined in Section 2.1.1.
Loan Documents means this Agreement, the Note, the Letters of Credit, the L/C Applications, the Collateral Documents, the Subordination Agreements, Hedging Agreements, and all documents, instruments and agreements delivered in connection with the foregoing.
Loan Guarantor means any Person who becomes a guarantor pursuant to a Loan Guaranty or otherwise.
Loan Guarantor Obligations means, collectively, with respect to each Loan Guarantor, all Obligations of such Loan Guarantor under each Loan Guaranty.
Loan Guaranty means each guarantee, in form and substance satisfactory to the Lender, delivered by a Loan Guarantor, as it may be amended, restated, supplemented or modified and in effect from time to time.
Loan Parties means Borrowers, the Loan Guarantors and any other Person who becomes a party to this Agreement pursuant to a joinder agreement, and their respective successors and assigns.
LOC Account means the Lender controlled deposit account of Pernix held at Lender with account number 550053190 in which the LOC Liquidity is held and maintained.
LOC Liquidity means, at any time, the amount equal to the aggregate Cash Collateral for outstanding Letters of Credit at such time.
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Lombard Property means the property described on Exhibit A.
Margin Stock means any “margin stock” as defined in Regulation U.
Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business
or
properties of the Loan Parties
, and which is not in the ordinary course of business with respect to the cyclical nature of Borrowers’ business
, (b) a material impairment of the ability of any Loan Party to perform any of the Obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the Collateral under the Collateral Documents or upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document.
Membership Interest Pledge Agreement means each Membership Interest Pledge Agreement in form and substance similar to the form attached hereto as Exhibit I.
Mortgage means that certain Mortgage, dated as of November 10, 2014, by Pernix RE in favor of Lender, as may be amended, restated, supplemented or modified from time to time.
Multiemployer Pension Plan means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which Borrowers or any other member of the Controlled Group may have any liability.
Note means a promissory note substantially in the form attached hereto as Exhibit B.
Notice of Borrowing is defined in Section 2.2.2.
Notice of LOC has the meaning set forth in Section 2.3.1.
Obligations means all obligations (monetary (including post-petition interest, allowed or not) or otherwise) of any Loan Party under this Agreement and any other Loan Document including Attorney Costs and any reimbursement obligations of each Loan Party in respect of Letters of Credit and surety bonds, all Hedging Obligations permitted hereunder which are owed to Lender or its Affiliates and all other Bank Products Obligations, all in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or arising, or due or to become due.
OFAC is defined in Section 10.4.
Operating Lease means any lease of (or other agreement conveying the right to use) any real or personal property by any Loan Party, as lessee, other than any Capital Lease.
Other Bank means any depository or other financial institution other than Lender.
Paid in Full means (a) the payment in full in cash and performance of all Secured Obligations, (b) the termination of all Commitments and (c) the cancellation and return to Lender of all Letters of Credit.
Participant is defined in Section 14.13.2.
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Partnership Interest Pledge Agreement means (i) that certain Partnership Interest Pledge Agreement, dated as of November 10, 2014, by and between Pernix and Lender, and consented to and approved by Sayed Hamid Behbehani & Sons Co, as the same may be amended, restated, supplemented or modified from time to time, and (ii) each other Partnership Interest Pledge Agreement in form and substance similar to the form attached hereto as Exhibit J.
Patents means (a) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, including any of the foregoing referred to in Schedule 9.29, (b) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including any of the foregoing referred to in Schedule 9.29, and (c) all rights to obtain any reissues or extensions of the foregoing.
Patent Licenses means all agreements, whether written or oral, providing for the grant by or to any Loan Party of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including any of the foregoing referred to in Schedule 9.29.
Patriot Act is defined in Section 14.15.
PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.
Pension Plan means a “pension plan”, as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA or the minimum funding standards of ERISA (other than a Multiemployer Pension Plan), and as to which Borrowers or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.
Perfection Certificate means a perfection certificate executed and delivered to Lender by a Loan Party.
Permitted Lien means a Lien expressly permitted hereunder pursuant to Section 11.2.
Person means any natural person, corporation, partnership, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity.
PFL
means Pernix (Fiji) Limited.
PFL Purchase Agreement
means that certain Share Sale Agreement dated on or around October 29, 2014, executed by and among Pernix, Fijian Holdings Limited (“Buyer”) and PFL.
PFL Sale Documents
means collectively the PFL Purchase Agreement and any and all other agreements, documents or instruments (together with any and all amendments, modifications, and supplements thereto, restatements thereof, and substitutes therefor) previously, now or hereafter executed and delivered by Pernix, the Buyer or any other Person in connection with the PFL Securities Sale.
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PFL Securities Sale
means the sale of 25% of the Capital Securities of PFL by Pernix to a Person to occur no later than December 31, 2014, contemplated by the provisions of the PFL Sale Documents.
Pledged Account means the Lender controlled deposit account of Pernix held at Lender with account number 550053204.
Pledged Equity means the Capital Securities listed on Schedule 9.27, together with any other equity interests, certificates, options or rights of any nature whatsoever in respect of the Capital Securities of any Person that may be issued or granted to, or held by, any Loan Party while this Agreement is in effect; provided that in no event shall more than 65% of the total outstanding Capital Securities of any foreign Subsidiary be required to be pledged hereunder.
Pledged Interests means 100% of Pernix’s partnership interests in Pernix SHBC L.P.
Pledged Notes means all promissory notes listed on Schedule 9.27, all Intercompany Notes at any time issued to any Loan Party and all other promissory notes issued to or held by any Loan Party (other than promissory notes issued in connection with extensions of trade credit by any Loan Party in the ordinary course of business).
Prime Rate means, for any day, the rate of interest in effect for such day set forth in the Wall Street Journal on such date, or by Lender as its prime rate (whether or not such rate is actually charged by Lender), which is not intended to be Lender’s lowest or most favorable rate of interest at any one time. Any change in the Prime Rate announced by Lender shall take effect at the opening of business on the day specified in the public announcement of such change; provided that Lender shall not be obligated to give notice of any change in the Prime Rate.
Proceeds means all “proceeds” as such term is defined in Section 9-102(a)(64) of the UCC and, in any event, shall include all dividends or other income from the Investment Property, collections thereon or distributions or payments with respect thereto.
Receivable means any right to payment for goods sold or leased or for services rendered, including without limitation, any Accounts, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance.
Regulation D means Regulation D of the FRB.
Regulation U means Regulation U of the FRB.
Reportable Event means a reportable event as defined in Section 4043 of ERISA and the regulations issued thereunder as to which the PBGC has not waived the notification requirement of Section 4043(a), or the failure of a Pension Plan to meet the minimum funding standards of Section 412 of the Code (without regard to whether the Pension Plan is a plan described in Section 4021(a)(2) of ERISA) or under Section 302 of ERISA.
Reset Date shall mean January 1st, April 1st, July 1st and October 1st of each calendar year.
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Revolving Commitment means $5,000,000, as reduced from time to time pursuant to Section 5.1.
Revolving Loan Availability means the lesser of (i) the Revolving Commitment and (ii) the Borrowing Base.
Revolving Outstandings means, at any time, the sum of the aggregate principal amount of all outstanding Loans.
SEC means the Securities and Exchange Commission or any other governmental authority succeeding to any of the principal functions thereof.
Secured Obligations means, collectively, the Borrowers’ Obligations and the Loan Guarantor Obligations.
Securities Act means the Securities Act of 1933, as amended.
Senior Officer means, with respect to any Loan Party, any of the chief executive officer, the chief financial officer, the chief operating officer or the treasurer of such Loan Party.
SHBC Partnership Agreement means that certain Agreement of Limited Partnership of Telesource International, Inc./Sayed Hamid Behbehani & Sons Co., Joint Venture L.P., initially entered into by and between Telesource International, Inc. and Sayed Hamid Behbehani & Sons Co., as such agreement has been, and may be, amended, restated, supplemented or modified from time to time.
SL Project is defined in Section 9.33.
Stated Amount means, with respect to any Letter of Credit at any date of determination, (a) the maximum aggregate amount available for drawing thereunder under any and all circumstances plus (b) the aggregate amount of all unreimbursed payments and disbursements under such Letter of Credit.
Subordinated Debt means any unsecured Debt of the Loan Parties which has subordination terms, covenants, pricing and other terms which have been approved in writing by Lender and if Lender requires, to which a corresponding Subordination Agreement has been executed.
Subordinated Debt Documents means all documents and instruments relating to the Subordinated Debt, including any related Subordination Agreement, and all amendments and modifications thereof approved by Lender.
Subordination Agreements means all subordination agreements executed by a holder of Subordinated Debt in favor of Lender from time to time after the Closing Date in form and substance and on terms and conditions satisfactory to Lender.
Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person owns, directly or indirectly, such number of
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outstanding Capital Securities as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to respective Subsidiaries of Borrowers.
Taxes means any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings, and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing, but excluding Excluded Taxes.
Termination Date means the earlier to occur of (a) November 10, 2016, which date may be extended at the request of Borrowers with the written consent of Lender, or (b) such other date on which the Commitments terminate pursuant to Section 5 or Section 13.
Termination Event means, with respect to a Pension Plan that is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of Borrowers or any other member of the Controlled Group from such Pension Plan during a plan year in which Borrower or any other member of the Controlled Group was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) the termination of such Pension Plan, the filing of a notice of intent to terminate the Pension Plan or the treatment of an amendment of such Pension Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings to terminate such Pension Plan or (e) any event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or appointment of a trustee to administer, such Pension Plan.
Total Plan Liability means, at any time, the present value of all vested and unvested accrued benefits under all Pension Plans, determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.
Trademarks means (a) all trademarks, trade names, corporate names, names of Loan Parties, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, including any of the foregoing referred to in Schedule 9.29, and (b) the right to obtain all renewals thereof.
Trademark Licenses means, collectively, each agreement, whether written or oral, providing for the grant by or to any Loan Party of any right to use any Trademark, including any of the foregoing referred to in Schedule 9.29.
Trademark Security Agreement means that certain Trademark Security Agreement, dated as of the date hereof, by and between Pernix and Lender, as the same may be amended, restated, supplemented or modified from time to time.
UCC means the Uniform Commercial Code as in effect on the date hereof and from time to time in the State of Illinois, provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interests in any Collateral
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or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, “UCC” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy.
Unfunded Liability means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Pension Plans exceeds the fair market value of all assets allocable to those benefits, all determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.
Wholly-Owned Subsidiary means, as to any Person, a Subsidiary all of the Capital Securities of which (except directors’ qualifying Capital Securities) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person.
1.2
Other Interpretive Provisions.
(a)
The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.
(b)
Section, Annex, Schedule and Exhibit references are to this Agreement unless otherwise specified.
(c)
The term “including” is not limiting and means “including without limitation.”
(d)
In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including.”
(e)
Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.
(f)
This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.
(g)
This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to Lender, Borrowers and the other parties hereto and thereto and are the products of all parties. Accordingly, they
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shall not be construed against Lender merely because of Lender’s involvement in their preparation.
SECTION 2
COMMITMENTS OF LENDER; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES; EVIDENCING OF LOANS.
2.1
Commitments. On and subject to the terms and conditions of this Agreement, Lender agrees to make loans to, and to issue letters of credit for the account of, Borrowers as follows:
2.1.1
Revolving Commitment. Lender agrees to make loans on a revolving basis (each a “Loan”, and collectively, the “Loans”) from time to time until the Termination Date as Borrowers may request from Lender; provided that after giving effect to such Loans, the Revolving Outstandings will not at any time exceed Revolving Loan Availability.
2.1.2
L/C Commitment. Subject to Section 2.3.1, the Issuing Lender agrees to issue letters of credit (trade or standby) or banker’s acceptance, in each case containing such terms and conditions as are permitted by this Agreement and are reasonably satisfactory to the Issuing Lender (each, a “Letter of Credit”), at the request of and for the account of Borrowers from time to time before the scheduled Termination Date; provided that the aggregate Stated Amount of all Letters of Credit shall not at any time exceed $10,000,000.
2.2
Loan Procedures.
2.2.1
Borrowing Procedures.
(a)
Borrowers shall give written notice (each such written notice, a “Notice of Borrowing”) substantially in the form of Exhibit E or telephonic notice (followed immediately by a Notice of Borrowing) to Lender of each Loan not later than 12:00 P.M., Chicago time, on the proposed date of such Loan. If such borrowing is for an amount less than $2,500,000, then each such notice shall be effective upon receipt by Lender, shall be irrevocable, shall specify the date (which shall be a Business Day) and amount of such borrowing, and shall certify compliance with Section 11.14.2 hereof. If such borrowing shall exceed $2,500,000, then each such notice shall specify the date (which shall be a Business Day) and amount of such borrowing, shall certify compliance with Section 11.14.2 hereof, and shall require Lender’s consent. Each Loan shall be in an aggregate amount of at least $500,000 and an integral multiple of at least $100,000.
(b)
Unless payment is otherwise timely made by Borrowers, the becoming due of any Obligations (whether principal, interest, fees or other charges) shall be deemed to be a request for an Interest Rate borrowing of a Loan on the due date, in the amount of such Obligations. The proceeds of such Loans shall be disbursed as direct payment of the relevant Obligation. In addition, Lender may, at its option, charge such Obligations against any operating, investment or other account of Borrowers maintained with Lender or any of its Affiliates.
2.3
Letter of Credit Procedures.
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2.3.1
L/C Applications. Borrowers shall give written notice to the Issuing Lender in the form attached hereto as Exhibit F (“Notice of LOC”) of the proposed issuance of each Letter of Credit on a Business Day which is at least seven (7) Business Days (or such lesser number of days as the Issuing Lender shall agree in any particular instance in their sole discretion) prior to the proposed date of issuance of such Letter of Credit, and such Notice of LOC shall set forth the type of Letter of Credit (trade, banker’s acceptance or stand-by) and the proposed use of proceeds of such Letter of Credit. Each Notice of LOC shall be accompanied by an L/C Application, duly executed by Borrowers and in all respects satisfactory to the Issuing Lender, together with such other documentation as the Issuing Lender may request in support thereof, it being understood that each L/C Application shall specify, among other things, the date on which the proposed Letter of Credit is to be issued, the expiration date of such Letter of Credit (which shall not be later than the scheduled Termination) and whether such Letter of Credit is to be transferable in whole or in part. So long as the conditions precedent set forth in Section 12.2 with respect to the issuance of such Letter of Credit have been satisfied, the Issuing Lender shall issue such Letter of Credit on the requested issuance date. In the event of any inconsistency between the terms of any L/C Application and the terms of this Agreement, the terms of this Agreement shall control.
2.3.2
Reimbursement Obligations.
(a)
Borrowers hereby unconditionally and irrevocably jointly and severally agree to reimburse the Issuing Lender for each payment or disbursement made by the Issuing Lender under any Letter of Credit. On the date that any payment or disbursement is made by Issuing Lender, at Borrowers’ option, (i) such payment or disbursement shall be deemed an Obligation of Borrowers, accruing interest at the applicable L/C Interest Rate, or (ii) Lender shall withdraw from the LOC Account the corresponding amount of such payment or disbursement, and if there are insufficient funds in the LOC Account for such reimbursement, the remaining amount of such payment or disbursement to reimbursed to the Issuing Lender shall be deemed an Obligation of the Borrowers, accruing interest at the L/C Interest Rate. The Issuing Lender shall notify Borrowers whenever any demand for payment is made under any Letter of Credit by the beneficiary thereunder; provided that the failure of the Issuing Lender to so notify Borrowers shall not affect the rights of the Issuing Lender in any manner whatsoever.
(b)
Each Borrower’s reimbursement obligations hereunder shall be joint and several, irrevocable and unconditional under all circumstances, including (a) any lack of validity or enforceability of any Letter of Credit, this Agreement or any other Loan Document, (b) the existence of any claim, set-off, defense or other right which any Loan Party may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Issuing Lender or any other Person, whether in connection with any Letter of Credit, this Agreement or any other Loan Document the transactions contemplated herein or any unrelated transactions (including any underlying transaction between any Loan Party and the beneficiary named in any Letter of Credit), (c) the validity, sufficiency or genuineness of any document which the Issuing Lender has determined complies on its face with the terms of the applicable Letter of Credit, even if such document should later prove to have been forged, fraudulent, invalid or insufficient in any respect or any
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statement therein shall have been untrue or inaccurate in any respect, or (d) the surrender or impairment of any security for the performance or observance of any of the terms hereof. Without limiting the foregoing, no action or omission whatsoever by Lender under or in connection with any Letter of Credit or any related matters shall result in any liability of Lender to Borrowers, or relieve Borrowers of any of its obligations hereunder to any such Person.
2.4
Notes. The Loans shall be evidenced by a Note, with appropriate insertions, payable to the order of Lender in a face principal amount equal to the sum of the Revolving Commitment.
2.5
Recordkeeping. Lender shall record in its records, the date and amount of each Loan made by Lender, each repayment or conversion thereof and, in the case of each Loan, the dates on which each Interest Period for such Loan shall begin and end. The aggregate unpaid principal amount so recorded shall be rebuttably presumptive evidence of the principal amount of the Loans owing and unpaid. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the Secured Obligations hereunder or under any Note to repay the principal amount of the Loans hereunder, together with all interest accruing thereon.
SECTION 3
INTEREST.
3.1
Interest Rates. During each Interest Period until the Maturity Date, the Interest Rate for the outstanding principal amount of Loans shall accrue at the Interest Rate determined on the Reset Date on which such Interest Period commences; provided that if a Loan is requested on a date that is not a Reset Date, until the next succeeding Reset Date, interest on the outstanding principal amount of such requested Loan shall accrue at the Interest Rate determined on the most recently passed Reset Date; provided further that at any time an Event of Default exists, at Lender’s election, the interest rate applicable to each Loan shall be increased by 4% (and, in the case of Obligations not bearing interest, such Obligations shall bear interest at the Interest Rate applicable to Loans plus 4%). Interest shall accrue on the outstanding Obligations with respect to a Letter of Credit in accordance with Section 2.3.2. Notwithstanding the foregoing, upon the occurrence of an Event of Default under Sections 13.1.1 or 13.1.4, such increase shall occur automatically. In no event shall interest payable by Borrowers to Lender hereunder exceed the maximum rate permitted under applicable law, and if any such provision of this Agreement is in contravention of any such law, such provision shall be deemed modified to limit such interest to the maximum rate permitted under such law.
3.2
Interest Payment Dates. Accrued interest (i) on each Loan shall be jointly and severally payable by Borrowers on the last day of each Interest Period relating to such Loan, upon a prepayment of such Loan, and at maturity, and (ii) on any unreimbursed payments or disbursements owed to Lender pursuant to Section 2.3.2, shall be jointly and severally payable by Borrowers on the last date of each Interest Period, upon the payment of such unreimbursed payments or disbursements, and at maturity. After maturity, and at any time an Event of Default exists, accrued interest on all Loans and on such unreimbursed payments or disbursement shall be payable jointly and severally by the Borrower on demand thereof by Lender.
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3.3
Setting and Notice of LIBOR Rates. The applicable Interest Rate for each Interest Period shall be determined by Lender, and notice thereof shall be given by Lender promptly to Borrowers. Each determination of the applicable LIBOR Rate by Lender shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error. Lender shall, upon written request of Borrowers, deliver to Borrowers a statement showing the computations used by Lender in determining any applicable LIBOR Rate hereunder.
3.4
Computation of Interest. Interest shall be computed for the actual number of days elapsed on the basis of a year of 360 days for interest calculated at the LIBOR Rate.
SECTION 4
FEES.
4.1
Letter of Credit Fees.
(a)
Borrowers jointly and severally agree to pay to Lender a letter of credit fee for each Letter of Credit equal the greater of (i) the L/C Fee Rate in effect from time to time of the undrawn amount of such Letter of Credit (computed for the actual number of days elapsed on the basis of a year of 360 days)
, or
(ii) $300; provided that, at Lender’s election, the rate applicable to each Letter of Credit shall be increased by 4% at any time that an Event of Default exists. For stand-by letters of credit issued for a period of less than one year, such letter of credit fee shall be pro-rated for the portion of the year that the letter of credit remains issued and outstanding. Any such letter of credit fee shall be payable in in advance on the first day of each calendar quarter and on the Termination Date (or such later date on which such Letter of Credit expires or is terminated) for the period from the date of the issuance of each Letter of Credit (or the last day on which the letter of credit fee was paid with respect thereto) to the date such payment is due or, if earlier, the date on which such Letter of Credit expired or was terminated.
(b)
In addition, with respect to each Letter of Credit, Borrowers agree to pay to the Issuing Lender (i) such fees and expenses as the Issuing Lender customarily requires in connection with the issuance, negotiation, processing and/or administration of letters of credit in similar situations and (ii) a letter of credit fronting fee in the amount and at the times agreed to by Borrowers and the Issuing Lender.
4.2
Lender’s Fees. Borrowers jointly and severally agree to pay to Lender its fees as are mutually agreed to from time to time by Borrower and Lender.
SECTION 5
REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT; PREPAYMENTS.
5.1
Voluntary Reduction or Termination of the Revolving Commitment. Borrowers may from time to time on at least five Business Days’ prior written notice received by Lender permanently reduce the Revolving Commitment to an amount not less than the Revolving Outstandings. Any such reduction shall be in an amount not less than $100,000 or a higher integral multiple of $50,000. Concurrently with any reduction of the Revolving Commitment to zero, Borrowers shall pay all unpaid interest accrued on the Loans, and all letter of credit fees.
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5.2
Mandatory Prepayments.
(a)
If on any day the Revolving Outstandings exceeds the Borrowing Base, Borrowers shall immediately prepay Loans in an amount sufficient to eliminate
such excess
.
(b)
If on any day on which the Revolving Commitment is reduced pursuant to clause (a) above
and
the Revolving Outstanding exceeds the Revolving Commitment, Borrower shall immediately prepay the Loans in an amount sufficient to eliminate such excess.
5.3
Voluntary Prepayments. Borrowers may from time to time prepay the Loans in whole or in part
without penalty
; provided that Borrowers shall give Lender notice thereof not later than 12:00 P.M., Chicago time, on the day of such prepayment (which shall be a Business Day), specifying the Loans to be prepaid and the date and amount of prepayment.
5.4
Manner of Prepayments. Any prepayment of a Loan on a day other than the last day of an Interest Period therefor shall include interest on the principal amount being repaid and shall be subject to Section 7.4. Except as otherwise provided by this Agreement, all principal payments in respect of the Loans shall be applied to repay outstanding Loans in direct order of Interest Period maturities.
5.5
Repayments. The Loans, all unpaid interest accrued thereon, and all outstanding fees, expenses and costs related thereto shall be paid in full and the Revolving Commitment shall terminate on the Termination Date.
SECTION 6
MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.
6.1
Making of Payments. All payments of principal or interest on the Note(s), and of all fees, shall be made by Borrowers to Lender in immediately available funds at the office specified by Lender not later than noon, Chicago time, on the date due; and funds received after that hour shall be deemed to have been received by Lender on the following Business Day. All payments under Section 7.1 shall be made by Borrowers directly to Lender without setoff, counterclaim or other defense.
6.2
Application of Certain Payments. So long as no Default or Event of Default has occurred and is continuing, (a) payments matching specific scheduled payments then due shall be applied to those scheduled payments and (b) voluntary and mandatory prepayments shall be applied as set forth in Section 5.4. After the occurrence and during the continuance of a Default or Event of Default, all amounts collected or received by Lender as proceeds from the sale of, or other realization upon, all or any part of the Collateral shall be applied as Lender shall determine in its discretion.
6.3
Due Date Extension. If any payment of principal or interest with respect to any of the Loans, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day (unless, such immediately following Business Day is the first Business Day of a calendar month, in which case such due
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date shall be the immediately preceding Business Day) and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension.
6.4
Setoff. Borrowers and each other Loan Party agrees that Lender has all rights of set-off and bankers’ lien provided by applicable law, and in addition thereto, Borrowers and each other Loan Party agrees that (i) Lender shall have at all times the right to set-off against, or withdraw, any funds held or maintained in the LOC Account or Pledged Account, to be applied to the Obligations in its sole discretion, and (ii) at any time any Event of Default exists, Lender may apply to the payment of any Obligations of Borrowers and each other Loan Party hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of Borrowers and each other Loan Party then or thereafter with Lender.
6.5
Taxes.
(a)
All payments made by Borrowers hereunder or under any Loan Documents shall be made without setoff, counterclaim, or other defense. To the extent permitted by applicable law, all payments hereunder or under the Loan Documents (including any payment of principal, interest, or fees) to, or for the benefit, of any person shall be made by Borrowers free and clear of and without deduction or withholding for, or account of, any Taxes now or hereinafter imposed by any taxing authority.
(b)
If Borrowers make any payment hereunder or under any Loan Document in respect of which it is required by applicable law to deduct or withhold any Taxes, Borrowers shall increase the payment hereunder or under any such Loan Document such that after the reduction for the amount of Taxes withheld (and any taxes withheld or imposed with respect to the additional payments required under this Section 6.5(b)), the amount paid to Lender equals the amount that was payable hereunder or under any such Loan Document without regard to this Section 6.5(b). To the extent Borrowers withhold any Taxes on payments hereunder or under any Loan Document, Borrowers shall pay the full amount deducted to the relevant taxing authority within the time allowed for payment under applicable law and shall deliver to Lender within 30 days after it has made payment to such authority a receipt issued by such authority (or other evidence satisfactory to Lender) evidencing the payment of all amounts so required to be deducted or withheld from such payment.
(c)
If Lender is required by law to make any payments of any Taxes on or in relation to any amounts received or receivable hereunder or under any other Loan Document, or any Tax is assessed against Lender with respect to amounts received or receivable hereunder or under any other Loan Document, Borrowers will jointly indemnify such person against (i) such Tax (and any reasonable counsel fees and expenses associated with such Tax) and (ii) any taxes imposed as a result of the receipt of the payment under this Section 6.5(c). A certificate prepared in good faith as to the amount of such payment by Lender shall, absent manifest error, be final, conclusive, and binding on all parties.
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SECTION 7
INCREASED COSTS; SPECIAL PROVISIONS FOR LIBOR LOANS.
7.1
Increased Costs.
(a)
If, after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration of any applicable law, rule or regulation by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall impose, modify or deem applicable any reserve (including any reserve imposed by the FRB, but excluding any reserve included in the determination of the LIBOR Rate pursuant to Section 3), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Lender; or (ii) shall impose on Lender any other condition affecting its LIBOR Loans, its Note or its obligation to make LIBOR Loans; and the result of anything described in clauses (i) and (ii) above is to increase the cost to (or to impose a cost on) Lender (or any LIBOR Office of Lender) of making or maintaining any LIBOR Loan, or to reduce the amount of any sum received or receivable by Lender (or its LIBOR Office) under this Agreement or under its Note with respect thereto, then upon demand by Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail), Borrowers shall pay directly to Lender such additional amount as will compensate Lender for such increased cost or such reduction.
(b)
If Lender shall reasonably determine that any change in, or the adoption or phase-in of, any applicable law, rule or regulation regarding capital adequacy, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or the compliance by Lender or any Person controlling Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Lender’s or such controlling Person’s capital as a consequence of Lender’s obligations hereunder or under any Letter of Credit to a level below that which Lender or such controlling Person could have achieved but for such change, adoption, phase-in or compliance (taking into consideration Lender’s or such controlling Person’s policies with respect to capital adequacy) by an amount deemed by Lender or such controlling Person to be material, then from time to time, upon demand by Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail), Borrowers shall pay to Lender such additional amount as will compensate Lender or such controlling Person for such reduction.
7.2
Basis for Determining Interest Rate Inadequate or Unfair. If:
(a)
Lender reasonably determines (which determination shall be binding and conclusive on Borrowers) that by reason of circumstances affecting the interbank LIBOR
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market adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate; or
(b)
the LIBOR Rate as determined by Lender will not adequately and fairly reflect the cost to Lender of maintaining or funding LIBOR Loans for such Interest Period or that the making or funding of LIBOR Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of Lender materially affects such Loans;
then Lender shall promptly notify Borrowers and, so long as such circumstances shall continue, on the last day of the current Interest Period for each LIBOR Loan, such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan.
7.3
Changes in Law Rendering LIBOR Loans Unlawful. If any change in, or the adoption of any new, law or regulation, or any change in the interpretation of any applicable law or regulation by any governmental or other regulatory body charged with the administration thereof, should make it (or in the good faith judgment of Lender cause a substantial question as to whether it is) unlawful for Lender to make, maintain or fund LIBOR Loans, then Lender shall promptly notify each of the other parties hereto and, so long as such circumstances shall continue, on the last day of the current Interest Period for each LIBOR Loan of Lender (or, in any event, on such earlier date as may be required by the relevant law, regulation or interpretation), such LIBOR Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. Each Base Rate Loan made by Lender which, but for the circumstances described in the foregoing sentence, would be a Loan (an “Affected Loan”) shall remain outstanding for the period corresponding to the Loans of which such Affected Loan would be a part absent such circumstances.
7.4
Funding Losses. Borrowers hereby agree that upon demand by Lender (which demand shall be accompanied by a statement setting forth the basis for the amount being claimed), Borrowers will jointly and severally indemnify Lender against any net loss or expense which Lender may sustain or incur (including any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Lender to fund or maintain any LIBOR Loan), as reasonably determined by Lender, as a result of (a) any payment or prepayment of any LIBOR Loan of Lender on a date other than the last day of an Interest Period for such Loan (including any conversion pursuant to Section 7.3) or (b) any failure of Borrowers to borrow or prepay any Loan on a date specified therefor in a notice of borrowing or prepayment pursuant to this Agreement. For this purpose, all notices to Lender pursuant to this Agreement shall be deemed to be irrevocable.
7.5
Right of Lender to Fund through Other Offices. Lender may, if it so elects, fulfill its commitment as to any LIBOR Loan by causing a foreign branch or Affiliate of Lender to make such Loan; provided that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by Lender and the obligation of Borrowers to repay such Loan shall nevertheless be to Lender and shall be deemed held by it, to the extent of such Loan, for the account of such branch or Affiliate.
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7.6
Discretion of Lender as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, Lender shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if Lender had actually funded and maintained each LIBOR Loan during each Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the LIBOR Rate for such Interest Period.
7.7
Mitigation of Circumstances. Lender shall promptly notify Borrowers of any event of which it has knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in Lender’s sole judgment, otherwise disadvantageous to Lender) to mitigate or avoid, (i) any obligation by Borrowers to pay any amount pursuant to Sections 6.5 or 7.1 or (ii) the occurrence of any circumstances described in Sections 7.2 or 7.3 (and, if Lender has given notice of any such event described in clause (i) or (ii) above and thereafter such event ceases to exist, Lender shall promptly so notify Borrowers). Without limiting the foregoing, Lender will designate a different funding office if such designation will avoid (or reduce the cost to Borrowers of) any event described in clause (i) or (ii) above and such designation will not, in Lender’s sole judgment, be otherwise disadvantageous to Lender.
7.8
Conclusiveness of Statements; Survival of Provisions. Determinations and statements of Lender pursuant to Sections 7.1, 7.2, 7.3 or 7.4 shall be conclusive absent demonstrable error. Lender may use reasonable averaging and attribution methods in determining compensation under Sections 7.1 and 7.4, and the provisions of such Sections shall survive repayment of the Obligations, cancellation of any Note(s), expiration or termination of the Letters of Credit and termination of this Agreement.
SECTION 8
COLLATERAL AND COLLATERAL ADMINISTRATION.
8.1
Grant. Each Loan Party hereby grants, assigns and transfers to Lender and (to the extent provided herein) Lender’s Affiliates, a continuing security interest in all of such Loan Party’s Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations.
8.2
Certain Matters Relating to Receivables.
(a)
At any time and from time to time after the occurrence and during the continuance of an Event of Default, Lender shall have the right to make test verifications of the Receivables in any manner and through any medium that it reasonably considers advisable, and each Loan Party shall furnish all such assistance and information as Lender may require in connection with such test verifications. At any time and from time to time after the occurrence and during the continuance of an Event of Default, upon Lender’s request and at the expense of the relevant Loan Party, such Loan Party shall cause independent public accountants or others satisfactory to Lender to furnish to Lender reports showing calendar month end reconciliations, agings and test verifications of, and trial balances for, the Receivables.
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(b)
Lender hereby authorizes each Loan Party to collect such Loan Party’s Receivables, and Lender may curtail or terminate such authority at any time after the occurrence and during the continuance of an Event of Default. If required by Lender at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Loan Party, (i) shall be forthwith (and, in any event, within two (2) Business Days) deposited by such Loan Party in the exact form received, duly indorsed by such Loan Party to Lender if required, in a collateral account maintained under the sole dominion and control of Lender, subject to withdrawal by Lender for its own account only as provided in Section 8.6, and (ii) until so turned over, shall be held by such Loan Party in trust for Lender, segregated from other funds of such Loan Party. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.
(c)
At any time and from time to time after the occurrence and during the continuance of an Event of Default, at Lender’s request, each Loan Party shall deliver to Lender all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including all invoices and customer invoice approvals when applicable.
8.3
Communications with Obligors; Loan Parties Remain Liable.
(a)
Lender in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with Account Debtors under the Receivables to verify with them to Lender’s satisfaction the existence, amount and terms of any Receivables as of calendar month end.
(b)
Upon the request of Lender at any time after the occurrence and during the continuance of an Event of Default, each Loan Party shall notify Account Debtors on the Receivables that the Receivables have been assigned to Lender and that payments in respect thereof shall be made directly to Lender. Lender shall have the right to notify Account Debtors of the same should such Loan Party fail to do so within two (2) Business Days of Lender’s request.
(c)
Anything herein to the contrary notwithstanding, each Loan Party shall remain liable in respect of each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Lender shall have no obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by Lender of any payment relating thereto, nor shall Lender be obligated in any manner to perform any of the obligations of any Loan Party under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.
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(d)
For the purpose of enabling Lender to exercise rights and remedies under this Agreement, each Loan Party hereby grants to Lender an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to such Loan Party) to use, license or sublicense any Intellectual Property now owned or hereafter acquired by such Loan Party, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.
8.4
Investment Property.
(a)
Unless an Event of Default shall have occurred and be continuing, each Loan Party shall be permitted to receive cash dividends and distributions in accordance with Section 11.4, and to exercise all voting and other rights with respect to the Investment Property; provided, that no vote shall be cast or other right exercised or action taken which could impair the Collateral or which would be inconsistent with or result in any violation of any provision of this Agreement or any other Loan Document.
(b)
If an Event of Default shall occur and be continuing (i) Lender shall have the right to receive any and all cash dividends and distributions, payments or other Proceeds, net of related taxes due, paid in respect of the Investment Property pledged by such Loan Party hereunder and make application thereof to the Secured Obligations in such order as Lender may determine, and (ii) any or all of the Investment Property shall be registered in the name of Lender or its nominee, and upon such notice being given Lender or its nominee may thereafter exercise (x) all voting and other rights pertaining to such Investment Property and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Investment Property as if it were the absolute owner thereof (including the right to exchange at its discretion any and all of the Investment Property upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate or other structure of any Issuer, or upon the exercise by any Loan Party or Lender of any right, privilege or option pertaining to such Investment Property, and in connection therewith, the right to deposit and deliver any and all of the Investment Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as Lender may determine), all without liability except to account for property actually received by it, but Lender shall have no duty to any Loan Party to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. Additionally, each Loan Party shall do all things and take all such actions as are necessary to cause Lender to be admitted as a member of any of its Subsidiaries that are organized as a limited liability company or a partner of any of its Subsidiaries that are organized as partnerships or limited partnerships.
(c)
Each Loan Party hereby authorizes and instructs each Issuer of any Investment Property pledged by such Loan Party hereunder to (i) comply with any instruction received by it from Lender in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Loan Party, and each
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Loan Party agrees that each Issuer shall be fully protected in so complying, (ii) unless otherwise expressly permitted hereby, pay any dividends, distributions or other payments, net of applicable taxes due, with respect to the Investment Property directly to Lender and (iii) mark in its books and records Lender’s security in such Issuer’s Investment Property.
8.5
Proceeds to be Turned Over to Lender. In addition to the rights of Lender specified in Section 8.3 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, all Proceeds received by any Loan Party consisting of cash, checks and other cash equivalent items shall be held by such Loan Party, net of taxes due, in trust for Lender, segregated from other funds of such Loan Party, and shall, forthwith upon receipt by such Loan Party, be turned over to Lender in the exact form received by such Loan Party (duly indorsed by such Loan Party to Lender, if required). All Proceeds received by Lender hereunder shall be held by Lender in a collateral account maintained under its sole dominion and control. All Proceeds, while held by Lender in any collateral account (or by such Loan Party in trust for Lender) established pursuant hereto, shall continue to be held as collateral security for the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 8.6.
8.6
Application of Proceeds. At such intervals as may be agreed upon by Borrowers and Lender, or, if an Event of Default shall have occurred and be continuing, at any time at Lender’s election, Lender may apply all or any part of Proceeds from the sale of, or other realization upon, all or any part of the Collateral in payment of the Secured Obligations in such order as Lender shall determine in its discretion. Any part of such funds which Lender elects not so to apply and deems not required as collateral security for the Secured Obligations shall be paid over from time to time by Lender to the applicable Loan Party or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Secured Obligations shall have been Paid in Full shall be paid over to the applicable Loan Party or to whomsoever may be lawfully entitled to receive the same. In the absence of a specific determination by Lender, the Proceeds from the sale of, or other realization upon, all or any part of the Collateral in payment of the Secured Obligations shall be applied in the following order:
FIRST, to the payment of all fees, costs, expenses and indemnities of Lender (in its capacity as such), including Attorney Costs, and any other Secured Obligations owing to Lender in respect of sums advanced by Lender to preserve the Collateral or to preserve its security interest in the Collateral, until paid in full;
SECOND, to the payment of all fees, costs, expenses and indemnities of Lender, (in its capacity as such) until paid in full;
THIRD, to the payment of all of the Secured Obligations (other than Hedging Obligations and other Bank Product Obligations) consisting of accrued and unpaid interest owing to Lender, until paid in full;
FOURTH, to the payment of all Secured Obligations consisting of principal or Hedging Obligations owing to Lender, until paid in full;
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FIFTH, to the payment of Lender an amount equal to all Secured Obligations in respect of outstanding Letters of Credit to be held as cash collateral in respect of such obligations;
SIXTH, to the payment of all Bank Products Obligations (other than Hedging Obligations) owing to Lender or its Affiliates, until paid in full;
SEVENTH, to the payment of all other Secured Obligations owing to Lender, until paid in full; and
EIGHTH, to the payment of any remaining Proceeds, if any, to whomever may be lawfully entitled to receive such amounts.
8.7
Code and Other Remedies.
(a)
If an Event of Default shall occur and be continuing, Lender, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the UCC or any other applicable law. Without limiting the generality of the foregoing, Lender, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Loan Party or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery with assumption of any credit risk. Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Loan Party, which right or equity is hereby waived and released. Each Loan Party further agrees, at Lender’s request, to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at such Loan Party’s premises or elsewhere. Lender shall apply the net proceeds of any action taken by it pursuant to this Section 8.7, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of Lender hereunder, including Attorney Costs to the payment in whole or in part of the Secured Obligations, in such order as Lender may elect, and only after such application and after the payment by Lender of any other amount required by any provision of law, need Lender account for the surplus, if any, to any Loan Party. To the extent permitted by applicable law, each Loan Party waives all claims, damages and demands it may acquire against Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of
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Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.
(b)
To the extent that applicable law imposes duties on Lender to exercise remedies in a commercially reasonable manner, the Loan Parties acknowledge and agree that it is not commercially unreasonable for Lender (a) to fail to incur expenses reasonably deemed significant by Lender to prepare Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against Account Debtor or other Persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against Account Debtor and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other Persons, whether or not in the same business as the Loan Parties, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, (k) to purchase insurance or credit enhancements to insure Lender against risks of loss, collection or disposition of Collateral or to provide to Lender a guaranteed return from the collection or disposition of Collateral, or (l) to the extent deemed appropriate by Lender, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist Lender in the collection or disposition of any of the Collateral. The Loan Parties acknowledge that the purpose of this paragraph is to provide non-exhaustive indications of what actions or omissions by Lender would not be commercially unreasonable in Lender’s exercise of remedies against the Collateral and that other actions or omissions by Lender shall not be deemed commercially unreasonable solely on account of not being indicated in this paragraph. Without limitation upon the foregoing, nothing contained in this paragraph shall be construed to grant any rights to the Loan Parties or to impose any duties on Lender that would not have been granted or imposed by this Agreement or by applicable law in the absence of this paragraph.
8.8
Registration Rights.
(a)
If Lender shall determine to exercise its right to sell any or all of the Pledged Equity pursuant to Section 8.7 and if in the opinion of Lender it is necessary or advisable to have the Pledged Equity, or that portion thereof to be sold, registered under the provisions of the Securities Act, the relevant Loan Party will cause the Issuer thereof to (i) execute and deliver, and cause the directors and officers of such Issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such
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other acts as may be, in the opinion of Lender, necessary or advisable to register the Pledged Equity, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Equity, or that portion thereof to be sold, and (iii) make all amendments thereto and/or to the related prospectus which, in the opinion of Lender, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto. Each Loan Party agrees to cause such Issuer to comply with the provisions of the securities or “Blue Sky” laws of any and all jurisdictions which Lender shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section 11(a) of the Securities Act.
(b)
Each Loan Party recognizes that Lender may be unable to effect a public sale of any or all the Pledged Equity, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Loan Party acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Lender shall be under no obligation to delay a sale of any of the Pledged Equity for the period of time necessary to permit the Issuer thereof to register such securities or other interests for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.
(c)
Each Loan Party agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Equity pursuant to this Section 8.8 valid and binding and in compliance with applicable law. Each Loan Party further agrees that a breach of any of the covenants contained in this Section 8.8 will cause irreparable injury to Lender, that Lender has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 8.8 shall be specifically enforceable against such Loan Party, and such Loan Party hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under this Agreement.
8.9
Waiver; Deficiency. Each Loan Party waives and agrees not to assert any rights or privileges which it may acquire under Section 9-626 of the UCC. Each Loan Party shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations in full and the fees and disbursements of any attorneys employed by Lender to collect such deficiency.
8.10
Lender’s Appointment as Attorney-in-Fact, etc.
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(a)
Each Loan Party hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Loan Party and in the name of such Loan Party or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Loan Party hereby gives Lender the power and right, on behalf of and at the expense of such Loan Party, without notice to or assent by such Loan Party, to do any or all of the following:
(i)
in the name of such Loan Party or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Lender for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable;
(ii)
in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as Lender may request to evidence Lender’s security interest in such Intellectual Property and the goodwill and General Intangibles of such Loan Party relating thereto or represented thereby;
(iii)
discharge Liens levied or placed on or threatened against the Collateral, and effect any repairs or insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;
(iv)
execute, in connection with any sale provided for in Section 8.7 or 8.8, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and
(v)
(1) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to Lender or as Lender shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (5) defend any suit, action or proceeding brought against such Loan Party with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as
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Lender may deem appropriate; (7) assign any Copyright, Patent or Trademark, throughout the world for such term or terms, on such conditions, and in such manner, as Lender shall in its sole discretion determine; (8) vote any right or interest with respect to any Investment Property; (9) order good standing certificates and conduct lien searches in respect of such jurisdictions or offices as Lender may deem appropriate; and (10) generally sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and do, at Lender’s option and such Loan Party’s expense, at any time, or from time to time, all acts and things which Lender deems necessary to protect, preserve or realize upon the Collateral and Lender’s security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Loan Party might do.
Anything in this Section 8.10(a) to the contrary notwithstanding, Lender agrees that it will not exercise any rights under the power of attorney provided for in this Section 8.10(a) unless an Event of Default shall have occurred and be continuing.
(b)
If any Loan Party fails to perform or comply with any of its agreements contained herein, Lender, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.
(c)
Each Loan Party hereby ratifies all that such attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.
8.11
Duty of Lender. Lender’s sole duty with respect to the custody, safekeeping, economic and physical preservation of the Collateral in its possession shall be to deal with it in the same manner as Lender deals with similar property for its own account. Neither Lender nor any of their respective officers, directors, employees or agents shall be liable for any failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Loan Party or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on Lender hereunder are solely to protect Lender’s interests in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Loan Party for any act or failure to act hereunder.
8.12
Acknowledgements. Each Loan Party hereby acknowledges that:
(a)
it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;
(b)
Lender has no fiduciary relationship with or duty to any Loan Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the
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relationship between the Loan Parties, on the one hand, and Lender, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
(c)
no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby by the Loan Parties and Lender.
8.13
Additional Parties. Each Loan Party that is required to become a party to this Agreement pursuant to Section 10.9(6) of this Agreement shall become a Loan Party for all purposes of this Agreement upon execution and delivery by such Loan Party of a joinder agreement in the form of Exhibit G hereto.
8.14
Releases.
(a)
At such time as the Secured Obligations have been Paid in Full, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of Lender and each Loan Party hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Loan Party. At the request and sole expense of any Loan Party following any such termination, Lender shall deliver to the Loan Parties any Collateral held by Lender hereunder, and execute and deliver to the Loan Parties such documents as the Loan Parties shall reasonably request to evidence such termination.
(b)
If any of the Collateral shall be sold, transferred or otherwise disposed of by any Loan Party in a transaction permitted by this Agreement, then Lender, at the request and sole expense of such Loan Party, shall execute and deliver to such Loan Party all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of Borrowers, a Loan Guarantor shall be released from its obligations hereunder in the event that all the equity interests of such Loan Guarantor shall be sold, transferred or otherwise disposed of in a transaction permitted by this Agreement; provided that Borrowers shall have delivered to Lender, with reasonable notice prior to the date of the proposed release, a written request for release identifying the relevant Loan Guarantor and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a certification by Borrowers stating that such transaction is in compliance with this Agreement and the other Loan Documents.
8.15
Obligations and Liens Absolute and Unconditional. Each Loan Party understands and agrees that the obligations of each Loan Party under this Agreement shall be construed as continuing, absolute and unconditional without regard to (a) the validity or enforceability of any Loan Document, any of the Secured Obligations or any other collateral security therefor or guaranty or right of offset with respect thereto at any time or from time to time held by Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by any Loan Party or any other Person against Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of any Loan Party) which constitutes, or might be construed to constitute, an equitable or legal
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discharge of any Loan Party for the Secured Obligations, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Loan Party, Lender may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against any other Loan Party or any other Person or against any collateral security or guaranty for the Secured Obligations or any right of offset with respect thereto, and any failure by Lender to make any such demand, to pursue such other rights or remedies or to collect any payments from any other Loan Party or any other Person or to realize upon any such collateral security or guaranty or to exercise any such right of offset, or any release of any other Loan Party or any other Person or any such collateral security, guaranty or right of offset, shall not relieve any Loan Party of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of Lender against any Loan Party. For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.
8.16
Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against Loan Party or any Issuer for liquidation or reorganization, should Loan Party or any Issuer become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of a Loan Party’s or an Issuer’s assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a “voidable preference”, “fraudulent conveyance”, or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.
SECTION 9
REPRESENTATIONS AND WARRANTIES.
To induce Lender to enter into this Agreement and to induce Lender to make Loans and issue Letters of Credit hereunder, each Loan Party represents and warrants to Lender that, as of the date hereof, the date of any borrowing pursuant to Section 2.1.1 or the issuance of any Letter of Credit pursuant to Section 2.1.2:
9.1
Organization. Each Loan Party, and each Subsidiary thereof, is validly existing and in good standing under the laws of its jurisdiction of organization; and each Loan Party is in good standing and is duly qualified to do business in each jurisdiction set forth on Schedule 9.1 where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect.
9.2
Authorization; No Conflict. All necessary and appropriate action has been taken by each Loan Party in order to, and each Loan Party has full power, right and authority, and is duly authorized, to execute and deliver each Loan Document to which it is a party and perform its Obligations under each Loan Document to which it is a party, and Borrowers are duly authorized to borrow monies hereunder. The execution, delivery and performance by each Loan Party of each Loan Document to which it is a party, and the borrowings by Borrowers hereunder, do not and will not (a) require any consent or approval of any governmental agency or authority
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(other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law, (ii) the charter, by-laws, operating agreement, partnership agreement or other organizational documents of any Loan Party and any Subsidiary thereof or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon any Loan Party or any of their respective Subsidiaries or properties or (c) require, or result in, the creation or imposition of any Lien on any asset of any Loan Party (other than Liens in favor of Lender created pursuant to the Collateral Documents).
9.3
Validity and Binding Nature. Each of this Agreement and each other Loan Document to which any Loan Party is a party is the legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity.
9.4
Financial Condition. The audited financial statements of Pernix and its Subsidiaries as at December 31, 2013, and the Form 10-Q report of Pernix filed as of June 30, 2014, copies of each of which have been delivered to Lender, were prepared in accordance with GAAP and present fairly the financial condition of such entities as at such dates and the results of their operations for the periods then ended.
9.5
No Material Adverse Change. Since June 30, 2014, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Borrowers and Loan Parties, and their respective Subsidiaries, taken as a whole.
9.6
Litigation and Contingent Liabilities. No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to any Loan Party’s knowledge, threatened against any Loan Party or any Subsidiary thereof which could reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 9.6. Other than any liability incident to such litigation or proceedings, no Loan Party has any material contingent liabilities not listed on Schedule 9.6 or permitted by Section 11.1.
9.7
Ownership of Properties; Liens. Each Loan Party has good and valid rights in or the power to transfer its Collateral, owns good and, in the case of real property, marketable title to all of its properties and assets, including its Collateral, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) except Permitted Liens. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except filings evidencing Permitted Liens and filings for which termination statements have been delivered to Lender. Each Loan Party is duly authorized to sell, transfer, pledge and grant a Lien in its Collateral.
9.8
Equity Ownership; Subsidiaries. All issued and outstanding Capital Securities of each Loan Party are duly authorized and validly issued, fully paid, non-assessable, and free and clear of all Liens other than those in favor of Lender, and such securities were issued in compliance with all applicable state and federal laws concerning the issuance of securities. Schedule 9.8 sets forth the authorized Capital Securities of each Loan Party as of the Closing
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Date and all Capital Securities issued to each Loan Party as of the Closing Date. All of the issued and outstanding Capital Securities of each Subsidiary is, directly or indirectly, owned by Pernix. As of the Closing Date, except as set forth on Schedule 9.8, there are no pre-emptive or other outstanding rights, options, warrants, conversion rights or other similar agreements or understandings for the purchase or acquisition of any Capital Securities of any Loan Party.
9.9
Pension Plans.
(a)
The Unfunded Liability of all Pension Plans does not in the aggregate exceed twenty percent of the Total Plan Liability for all such Pension Plans. Each Pension Plan complies in all material respects with all applicable requirements of law and regulations. No contribution failure under Section 412 of the Code, Section 302 of ERISA or the terms of any Pension Plan has occurred with respect to any Pension Plan, sufficient to give rise to a Lien under Section 302(f) of ERISA, or otherwise to have a Material Adverse Effect. There are no pending or, to the knowledge of any Loan Party, threatened, claims, actions, investigations or lawsuits against any Pension Plan, any fiduciary of any Pension Plan, or the Loan Parties, any Subsidiary thereof, or other any member of the Controlled Group with respect to a Pension Plan or a Multiemployer Pension Plan which could reasonably be expected to have a Material Adverse Effect. No Loan Party, no Subsidiary thereof, or any other member of the Controlled Group has engaged in any prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Pension Plan or Multiemployer Pension Plan which would subject that Person to any material liability. Within the past five years, no Loan Party, no Subsidiary thereof, or any other member of the Controlled Group has engaged in a transaction which resulted in a Pension Plan with an Unfunded Liability being transferred out of the Controlled Group, which could reasonably be expected to have a Material Adverse Effect. No Termination Event has occurred or is reasonably expected to occur with respect to any Pension Plan, which could reasonably be expected to have a Material Adverse Effect.
(b)
All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by the Loan Parties, their respective Subsidiaries, or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; no Loan Party no Subsidiary thereof, or any other member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, could result in a withdrawal or partial withdrawal from any such plan; and no Loan Party, no Subsidiary thereof, or any other member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent.
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9.10
Investment Company Act. No Loan Party is an “investment company” or a company “controlled” by an “investment company” or a “subsidiary” of an “investment company,” within the meaning of the Investment Company Act of 1940.
9.11
Compliance with Laws. Each Loan Party, and each Subsidiary thereof, is in compliance in all material respects with the requirements of all laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
9.12
Regulation U. No Loan Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock.
9.13
Taxes. Each Loan Party, and each Subsidiary thereof, has timely filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges due and payable with respect to such return, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. The Loan Parties and their respective Subsidiaries have made adequate reserves on their respective books and records in accordance with GAAP for all taxes that have accrued but which are not yet due and payable. No Loan Party or any Subsidiary thereof has participated in any transaction that relates to a year of the taxpayer (which is still open under the applicable statute of limitations) which is a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2) (irrespective of the date when the transaction was entered into).
9.14
Solvency, etc. On the Closing Date, and immediately prior to and after giving effect to the issuance of each Letter of Credit and each borrowing hereunder and the use of the proceeds thereof, with respect to each Loan Party, individually, (a) the fair value of its assets is greater than the amount of its liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated in accordance with GAAP, (b) the present fair saleable value of its assets is not less than the amount that will be required to pay the probable liability on its debts as they become absolute and matured, (c) it is able to realize upon its assets and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business, (d) it does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature and (e) it is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which its property would constitute unreasonably small capital.
9.15
Environmental Matters. The on-going operations of each Loan Party and their respective Subsidiaries comply in all respects with all Environmental Laws, except such non-compliance which could not (if enforced in accordance with applicable law) reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. Each Loan Party, and each Subsidiary thereof, has obtained, and maintained in good standing, all licenses, permits, authorizations, registrations and other approvals required under any
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Environmental Law and required for their respective ordinary course operations, and for their reasonably anticipated future operations, and each Loan Party and each Subsidiary thereof is in compliance with all terms and conditions thereof, except where the failure to do so could not reasonably be expected to result in material liability to any Loan Party or Subsidiary thereof and could not reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. No Loan Party, or any Subsidiary thereof, or any of its properties or operations is subject to, or reasonably anticipates the issuance of, any written order from or agreement with any federal, state or local governmental authority, nor subject to any judicial or docketed administrative or other proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Substance. There are no Hazardous Substances or other conditions or circumstances existing with respect to any property, arising from operations prior to the Closing Date, or relating to any waste disposal, of any Loan Party or any Subsidiary thereof that would reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. No Loan Party or any Subsidiary thereof has any underground storage tanks that are not properly registered or permitted under applicable Environmental Laws or that at any time have released, leaked, disposed of or otherwise discharged Hazardous Substances
9.16
Insurance. Set forth on Schedule 9.16 is a complete and accurate summary of the property, casualty, worker’s compensation, errors and omissions, fidelity bonds/crime insurance program of the Loan Parties as of the Closing Date (including the names of all insurers, policy numbers, expiration dates, amounts and types of coverage, annual premiums, exclusions, deductibles, self-insured retention, and a description in reasonable detail of any self-insurance program, retrospective rating plan, fronting arrangement or other risk assumption arrangement involving any Loan Party). Each Loan Party and its properties are insured with financially sound and reputable insurance companies which are not Affiliates of the Loan Parties, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where such Loan Parties operate.
9.17
Real Property; Collateral Locations. Set forth on Schedule 9.17 is a complete and accurate list, as of the Closing Date, of the address of all real property owned or leased by any Loan Party, together with, in the case of leased property, the name and mailing address of the lessor of such property. On the date hereof, Schedule 9.17 sets forth (a) each place of business of each Loan Party (including its chief executive office), (b) all locations where all Collateral owned by each Loan Party is kept, and (c) whether each such Collateral location and place of business (including each Loan Party’s chief executive office) is owned or leased (and if leased, specifies the complete name and notice address of each lessor). No Collateral is located outside the United States or in the possession of any lessor, bailee, warehouseman or consignee, except as indicated on Schedule 9.17.
9.18
Information. All information heretofore or contemporaneously herewith furnished in writing by any Loan Party to Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of any Loan Party to Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by Lender that any projections and forecasts provided by
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Borrowers are based on good faith estimates and assumptions believed by Borrowers to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).
9.19
Burdensome Obligations. No Loan Party, or any Subsidiary thereof, is a party to any agreement or contract or subject to any restriction contained in its charter, by-laws, operating agreement, partnership agreement or other organizational documents which could reasonably be expected to have a Material Adverse Effect.
9.20
Labor Matters. Except as set forth on Schedule 9.20, no Loan Party or any Subsidiary thereof, is subject to any labor or collective bargaining agreement. There are no existing or threatened strikes, lockouts or other labor disputes involving any Loan Party or any Subsidiary thereof that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Loan Parties are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters.
9.21
Anti-Terrorism Laws.
(a)
No Loan Party (and, to the knowledge of each Loan Party, no joint venture or Subsidiary thereof) is in violation in any material respects of any United States Requirements of Law relating to terrorism, sanctions or money laundering (the “Anti-Terrorism Laws”), including the United States Executive Order No. 13224 on Terrorist Financing (the “Anti-Terrorism Order”) and the Patriot Act.
(b)
No Loan Party (and, to the knowledge of each Loan Party, no joint venture or Subsidiary thereof) (i) is listed in the annex to, or is otherwise subject to the provisions of, the Anti-Terrorism Order, (ii) is owned or controlled by, or acting for or on behalf of, any person listed in the annex to, or is otherwise subject to the provisions of, the Anti-Terrorism Order, (iii) commits, threatens or conspires to commit or supports “terrorism” as defined in the Anti-Terrorism Order or (iv) is named as a “specially designated national and blocked person” in the most current list published by OFAC.
(c)
No Loan Party (and, to the knowledge of each Loan Party, no joint venture, Subsidiary or Affiliate thereof) (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person described in clauses (b)(i) through (b)(iv) above, (ii) deals in, or otherwise engages in any transactions relating to, any property or interests in property blocked pursuant to the Anti-Terrorism Order or (iii) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.
9.22
No Default. No Default or Event of Default exists or would result from the incurrence by any Loan Party of any Debt hereunder or under any other Loan Document.
9.23
Subordinated Debt. No Loan Party has any Subordinated Debt.
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9.24
Perfected First Priority Liens. The security interests granted pursuant to this Agreement (a) upon completion of the filings and other actions specified on Schedule 9.24 (which, in the case of all filings and other documents referred to on Schedule 9.24, have been delivered to Lender in completed and duly executed form) will constitute valid perfected security interests in all of the Collateral in favor of Lender as collateral security for each Loan Party’s Obligations, enforceable in accordance with the terms hereof against all creditors of each Loan Party and any Persons purporting to purchase any Collateral from each Loan Party, and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for Permitted Liens for which priority is accorded under applicable law. The filings and other actions specified on Schedule 9.24 constitute all of the filings and other actions necessary to perfect all security interests granted hereunder. All Instruments, Chattel Paper and certificated Investment Property constituting Collateral has been delivered to Lender duly indorsed in a manner satisfactory to Lender.
9.25
Loan Party Information. On the date hereof, Schedule 9.25 sets forth (a) each Loan Party’s jurisdiction of organization, (b) the location of each Loan Party’s chief executive office, (c) each Loan Party’s exact legal name as it appears on its organizational documents and (d) each Loan Party’s organizational identification number (to the extent a Loan Party is organized in a jurisdiction which assigns such numbers) and federal employer identification number. In the past five years, no Loan Party had its chief executive offices at any location other than as listed on Schedule 9.25 or has had any other name than as listed on Schedule 9.25.
9.26
Certain Property. None of the Collateral constitutes, or is the Proceeds of, (a) Farm Products, (b) Health Care Insurance Receivables or (c) other than trucks and other motor vehicles (“Vehicles”), vessels, aircraft or any other property subject to any certificate of title or other registration statute of the United States, any State or other jurisdiction. Schedule 9.26 lists all Vehicles owned or leased by each Loan Party. Schedule 9.26 also lists (a) whether or not certificates of title exist for the Vehicles (to the extent such Vehicles are subject to any certificate of title or other registration statute of the United States, any State or other jurisdiction thereof) and (b) the registration number, state of registration and the prior lienholder (if any), together with the amount of such prior Lien, of all such Vehicles. Each Loan Party has delivered to Lender copies of all certificates of title with respect to the applicable Vehicles. Other than the recordation of Lender’s Lien on the certificate of titles for the applicable Vehicles, all action by each Loan Party necessary or desirable to protect and perfect the Lien of Lender on the Vehicles set forth on Schedule 9.26 (including all necessary filings with the offices of the relevant secretaries of state or other required governmental authorities) has been duly taken.
9.27
Investment Property.
(a)
The Pledged Equity pledged by each Loan Party hereunder constitute all the issued and outstanding equity interests of each Issuer owned by such Loan Party.
(b)
All of the Pledged Equity has been duly and validly issued and is fully paid and nonassessable, or, in the case of any foreign Subsidiary, 65% of all issued and outstanding equity interests of such foreign Subsidiary.
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(c)
Each of the Pledged Notes constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms (subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing).
(d)
Schedule 9.27 lists all Investment Property owned by each Loan Party. Each Loan Party is the record and beneficial owner of, and has good and marketable title to, the Investment Property pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except Permitted Liens.
(e)
No person other than Lender has possession or control of any of the Pledged Equity of such nature that perfection of a security interest is accomplished by control.
(f)
Upon delivery to Lender of any certificated Pledged Equity, Lender shall have a fully perfected first priority security in such Pledged Equity so long as Lender maintains possession of such Pledged Equity.
No membership interests or partnerships interest constituting Pledged Equity are certificated or are comprised of Securities.
9.28
Receivables and General Intangibles.
(a)
No material amount payable to each Loan Party under or in connection with any Receivable is evidenced by any Instrument or Chattel Paper which has not been delivered to Lender.
(b)
The names of the Account Debtors, amounts owing, due dates and other information with respect to the Receivables and Chattel Paper owned by each Loan Party are and will be correctly stated in all material respects in all records of each Loan Party relating thereto and in all invoices and reports with respect thereto furnished to Lender from time to time.
(c)
The amounts represented by each Loan Party to Lender from time to time as owing to such Loan Party in respect of the Receivables (to the extent such representations are required by any of the Loan Documents) will at all such times be accurate.
(d)
All Receivables and General Intangibles are genuine, are in all respects what they purport to be, are not evidenced by a judgment, and (as applicable) represent undisputed, bona fide transactions completed or to be completed in accordance with the terms and conditions of any document related thereto. No Loan Party has any knowledge of any fact or circumstance which would impair the validity or collectability of any Receivables or General Intangibles.
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(e)
There are no setoffs, claims or disputes existing or asserted with respect to any Receivables and no Loan Party has made any agreement with any Account Debtor for any extension of time for the payment thereof, any compromise or settlement for less than the full amount thereof, any release of any Account Debtor from liability therefor, or any deduction therefrom except a discount or allowance allowed by such Loan Party in the ordinary course of its business for prompt payment and disclosed to Lender.
9.29
Intellectual Property.
(a)
Schedule 9.29 lists all Intellectual Property owned by each Loan Party in its own name on the date hereof.
(b)
On the date hereof, all material Intellectual Property owned by any Loan Party is valid, subsisting, unexpired and enforceable and has not been abandoned.
(c)
Except as set forth in Schedule 9.29, none of the material Intellectual Property is the subject of any licensing or franchise agreement pursuant to which such Loan Party is the licensor or franchisor.
Right to Use Intellectual Property. Each Loan Party owns and possesses or has a license or other right to use its Intellectual Property as is necessary for the conduct of the businesses of such Loan Party, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect.
9.30
Inventory. If any Loan Party’s Inventory is represented or covered by documents of title, such Loan Party is the owner of the documents, free of all encumbrances, security interests and other Liens (other the Permitted Liens). With respect to each Loan Party’s Inventory: (a) no Inventory (other than Inventory in transit) is now, or shall at any time or times hereafter be stored at any location other than a location set forth on Schedule 9.17, (b) such Inventory is of good and merchantable quality, free from any defects, (c) such Inventory is not subject to any licensing, Patent, royalty, Trademark, trade name or Copyright agreements with any third parties which would require any consent of any third party upon sale or disposition of that Inventory or the payment of any monies to any third party upon such sale or other disposition, (d) to the knowledge of such Loan Party, such Inventory has been produced in accordance with the Federal Fair Labor Standards Act of 1938, as amended, and all rules, regulations and orders thereunder and (e) the completion of manufacture, sale or other disposition of such Inventory by Lender following the occurrence of Event of Default shall not require the consent of any Person and shall not constitute a breach or default under any contract or agreement to which such Loan Party is a party or to which such property is subject.
9.31
Depositary and Other Accounts. All primary deposit, securities and other primary accounts maintained by each Loan Party are maintained at Lender, and together with all other deposit, securities and other accounts of each Loan Party, are described on Schedule 9.32 hereto, which description includes for each such account the name of the Loan Party maintaining such account, the name, address, telephone and fax numbers of the financial institution at which such account is maintained, the account number and the account officer, if any, of such account. Each
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Loan Party agrees that the LOC Account and the Pledged Account are accounts maintained at Lender which are blocked by Lender.
9.32
Pernix – Serka LP; Pernix LTC LLC. As of November 10, 2014, Pernix – Serka LP’s has no active projects or jobs other than the project located in Sierra Leone, Africa, which project was issued by the Department of State Bureau of Overseas Building Operations under Contract Number SAQMMA-13-C-0211 (such project, the “SL Project”). Due to the recent Ebola outbreak in Sierra Leone, Africa, the SL Project has been put on hold until it is determined it is safe to complete the SL Project. Pernix – Serka LP (in addition completing the SL Project) and Pernix LTC LLC are in the process of being wound down, and (i) Pernix LTC LLC shall be dissolved by December 31, 2014, and (ii) Pernix – Serka LP shall be dissolved by June 30, 2015.
9.33
Hedging Agreements. No Loan Party is a party to any
Hedging Agreement, other than an Eligible
Hedging Agreement.
SECTION 10
AFFIRMATIVE COVENANTS.
Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid and performed in full and all Letters of Credit have been terminated, each Loan Party agrees that, unless at any time Lender shall otherwise expressly consent in writing, it will:
10.1
Reports, Certificates and Other Information. Furnish to Lender:
10.1.1
Annual Report. Promptly when available and in any event within 120 days after the close of each Fiscal Year a copy of the annual audit report of Pernix and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets and statements of earnings and cash flows of Pernix and its Subsidiaries as at the end of such Fiscal Year, certified without adverse reference to going concern value and without qualification by independent auditors of recognized standing selected by Borrowers reasonably acceptable Lender, together with a written statement from such accountants to the effect that in making the examination necessary for the signing of such annual audit report by such accountants, nothing came to their attention that caused them to believe that Borrowers were not in compliance with any provision of Sections 11.1, 11.3, 11.4 or 11.14 of this Agreement insofar as such provision relates to accounting matters or, if something has come to their attention that caused them to believe that Borrowers were not in compliance with any such provision, describing such non-compliance in reasonable detail; and a consolidating balance sheet of Pernix and its Subsidiaries as of the end of such Fiscal Year and consolidating statement of earnings and cash flows for Pernix and its Subsidiaries for such Fiscal Year, certified by a Senior Officer of Borrower.
10.1.2
Interim Reports. Promptly when available and in any event within 60 days after the end of each Fiscal Quarter, a copy of the Form 10-Q report filed with the SEC; and (b) promptly when available and in any event within 30 days after the end of each month, consolidated and consolidating balance sheets of Borrowers and its Subsidiaries as of the end of such month, together with consolidated and consolidating statements of earnings and a consolidated statement of cash flows for such month and for the period beginning with the first day of such Fiscal Year and ending on the last day of such month, together with a comparison
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with the corresponding period of the previous Fiscal Year certified by a Senior Officer of each Borrower.
10.1.3
Compliance Certificates. Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 10.1.1 and each Form 10-Q report pursuant to Section 10.1.2, a duly completed Compliance Certificate in the form of Exhibit C, with appropriate insertions, dated the date of such annual report or such quarterly statements and signed by a senior officer of each Borrower, containing (i) a computation of each of the financial ratios and restrictions set forth in Section 11.14 and to the effect that such officer has not become aware of any Default or Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it and (ii) a written statement of Borrowers’ management setting forth a discussion of Pernix’s and its subsidiaries’ financial condition, changes in financial condition and results of operations.
10.1.4
Reports to the SEC and to Shareholders. Promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of any Loan Party filed with the SEC; copies of all registration statements of any Loan Party filed with the SEC (other than on Form S-8); and copies of all proxy statements or other communications made to security holders generally.
10.1.5
Notice of Default, Litigation and ERISA Matters. Promptly upon becoming aware of any of the following, written notice describing the same and the steps being taken by the Loan Parties affected thereby with respect thereto:
(a)
the occurrence of an Event of Default or a Default;
(b)
any Change of Control, or any Person owning or controlling twenty percent (20%) or more of the Capital Securities of Pernix;
(c)
any litigation, arbitration or governmental investigation or proceeding not previously disclosed by Loan Parties to Lender which has been instituted or, to the knowledge of any Loan Party, is threatened against any Loan Party or to which any of the properties of any thereof is subject which might reasonably be expected to have a Material Adverse Effect;
(d)
the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that any Loan Party furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), or any material increase in the contingent liability of any Loan Party with respect to any post-retirement welfare benefit plan or other employee benefit plan of any Loan
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Party or another member of the Controlled Group, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent;
(e)
any cancellation or material change in any insurance maintained by any Loan Party;
(f)
any cancellation, termination or material reduction in any performance or other bond issued by either Fidelity and Deposit Company of Maryland or Zurich American Insurance Company, or such other entity as is approved by Lender;
(g)
any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which might reasonably be expected to have a Material Adverse Effect,
(h)
any Lien (other than Permitted Liens) on any of the Collateral which would adversely affect the ability of Lender to exercise any of its remedies hereunder; or
(i)
the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereby.
10.1.6
Borrowing Base Certificates. During any period in which there are Revolving Outstandings, within 25 days of the end of each calendar month during such period, a Borrowing Base Certificate dated as of the end of such calendar month, and together with any Notice of Borrowing or Notice of LOC, a Borrowing Base Certificate dated as of the date of such notice, in each case executed by a Senior Officer of each Borrower on behalf of each Borrower (provided that at any time an Event of Default exists, Lender may require Borrowers to deliver Borrowing Base Certificates more frequently).
10.1.7
Borrower’s Accounts. Within 25 days after the end of each calendar month, an aged schedule of Borrowers’ Receivables and an aged schedule of accounts payable by Borrower, listing the name and amount due from each Account Debtor and account creditor and showing the aggregate amounts due from (a) 0-30 days, (b) 31- 60 days, (c) 61-90 days, (d) 91-120 days, (e) 121-180 days and (f) more than 180 days, and certified as accurate by Borrowers.
10.1.8
Jobs In Progress Report. Within 25 days after the end of each calendar month, Jobs In Progress Report.
10.1.9
Management Reports. Promptly upon receipt thereof, copies of all detailed financial and management reports submitted to Borrowers by independent auditors in connection with each annual or interim audit made by such auditors of the books of Borrowers.
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10.1.10
Subordinated Debt Notices. Promptly following receipt, copies of any notices (including notices of default or acceleration) received from any holder or trustee of, under or with respect to any Subordinated Debt.
10.1.11
Updated Schedules. Contemporaneously with the furnishing of each annual audit report pursuant to Section 10.1.1, updated versions Schedules 9.1, 9.6, 9.8, 9.16, 9.17, 9.20, 9.24, 9.25, 9.26, 9.27, 9.29, 9.32, 10.16 showing information as of such audit report (it being agreed and understood that this requirement shall be in addition to the other notice and delivery requirements set forth herein). Lender may also from time to time, in its sole reasonable discretion, request that the Loan Parties provide updated schedules.
10.1.12
Other Information. Promptly from time to time, such other information (including, without limitation, business or financial data, reports, appraisals and projections) concerning the Loan Parties, their properties or business, as Lender may reasonably request.
10.2
Books, Records and Inspections. Keep, and cause each of its Subsidiaries and each other Loan Party, to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; at the full expense of such Loan Party or Subsidiary, permit Lender or any representative thereof to (a) inspect the properties and operations of such Loan Party or such Subsidiary thereof; (b) visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and each such Loan Party hereby authorizes, and shall cause its Subsidiaries to authorize, such independent auditors to discuss such financial matters with Lender or any representative thereof), (c) examine (and, at the expense of the Loan Parties, photocopy extracts from) any of its books or other records; and (d) to inspect the Inventory and other tangible assets of such Loan Party or Subsidiary, to perform appraisals of the equipment of such Loan Party or Subsidiary, and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts and any other Collateral. Notwithstanding anything to the contrary herein, Lender is entitled to conduct as many inspections and audits as it deems appropriate upon the occurrence and continuance of an Event of Default
; provided however, that such Loan Party or Subsidiary shall only be liable for the expense of one inspection per year provided no Event of Default has occurred and is continuing
.
10.3
Maintenance of Property; Insurance.
(a)
Keep, and cause its Subsidiaries and each other Loan Party, to keep, all property useful and necessary in the business of the Loan Parties and their respective Subsidiaries, in good working order and condition, ordinary wear and tear excepted.
(b)
Maintain, and cause each of its Subsidiaries and each other Loan Party to maintain, with responsible insurance companies, such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated, but which shall insure against all risks and liabilities of the type identified on Schedule 9.16 and shall have insured amounts no less than, and deductibles no higher than, those set forth on such schedule;
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and, upon request of Lender, furnish to Lender original or electronic copies of policies evidencing such insurance, and a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Loan Parties. Such Loan Party shall cause each issuer of an insurance policy to provide Lender with an endorsement (i) showing Lender as loss payee with respect to each policy of insurance set forth on Schedule 9.16, as applicable, and naming Lender as an additional insured with respect to each policy of insurance Schedule 9.16, as applicable, (ii) providing that 30 days’ notice will be given to Lender prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to Lender. Each Loan Party shall execute and deliver to Lender a collateral assignment, in form and substance satisfactory to Lender, of each business interruption insurance policy maintained by such Loan Party.
(c)
UNLESS SUCH LOAN PARTY PROVIDES LENDER WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, LENDER MAY PURCHASE INSURANCE AT SUCH LOAN PARTY’S EXPENSE TO PROTECT LENDER’S INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT SUCH LOAN PARTY’S INTERESTS. THE COVERAGE THAT LENDER PURCHASES MAY NOT PAY ANY CLAIM THAT IS MADE AGAINST SUCH LOAN PARTY IN CONNECTION WITH THE COLLATERAL. SUCH LOAN PARTY MAY LATER CANCEL ANY INSURANCE PURCHASED BY LENDER, BUT ONLY AFTER PROVIDING LENDER WITH EVIDENCE THAT SUCH LOAN PARTY HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF LENDER PURCHASES INSURANCE FOR THE COLLATERAL, SUCH LOAN PARTY WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT MAY BE IMPOSED WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE PRINCIPAL AMOUNT OF THE LOANS OWING HEREUNDER. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF THE INSURANCE THE LOAN PARTIES MAY BE ABLE TO OBTAIN ON THEIR OWN.
10.4
Compliance with Laws; Payment of Taxes and Liabilities. (a) Comply, and cause each of its Subsidiaries and each other Loan Party to comply, in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; (b) without limiting clause (a) above, ensure, and cause each of its Subsidiaries and each other Loan Party to ensure, that no person who owns a controlling interest in or otherwise controls a Loan Party is or shall be (i) listed on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control (“OFAC”), Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (ii) a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders, (c) without limiting clause (a) above, comply, and cause each of its Subsidiaries and each other Loan Party to comply, with all applicable Bank Secrecy Act (“BSA”) and anti-money
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laundering laws and regulations and (d) pay, and cause each of its Subsidiaries and each other Loan Party to pay, prior to delinquency, all taxes and other governmental charges against it or any of its property, including the Collateral, as well as claims of any kind which, if unpaid, could become a Lien on any of its property; provided that the foregoing shall not require any Subsidiary or Loan Party to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP and, in the case of a claim which could become a Lien on any Collateral, such contest proceedings shall stay the foreclosure of such Lien or the sale of any portion of the Collateral to satisfy such claim.
10.5
Maintenance of Existence, etc. Subject to Section 11.5, maintain and preserve, and cause each of its Subsidiaries and each other Loan Party to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect).
10.6
Use of Proceeds. Use the proceeds of the Loans and the Letters of Credit for working capital purposes and for other general business purposes; and not use or permit any proceeds of any Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of “purchasing or carrying” any Margin Stock.
10.7
Employee Benefit Plans.
(a)
Maintain, and cause each other member of the Controlled Group to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations.
(b)
Make, and cause each other member of the Controlled Group to make, on a timely basis, all required contributions to any Multiemployer Pension Plan.
(c)
Not, and not permit any other member of the Controlled Group to (i) seek a waiver of the minimum funding standards of ERISA, (ii) terminate or withdraw from any Pension Plan or Multiemployer Pension Plan or (iii) take any other action with respect to any Pension Plan that would reasonably be expected to entitle the PBGC to terminate, impose liability in respect of, or cause a trustee to be appointed to administer, any Pension Plan, unless the actions or events described in clauses (i), (ii) and (iii) individually or in the aggregate would not have a Material Adverse Effect.
10.8
Environmental Matters. If any release or threatened release or other disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of any Loan Party, such Loan Party shall, and shall cause its applicable Subsidiaries and any other applicable Loan Party to, cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply with all Environmental Laws and to preserve the value of such real property or other assets. Without limiting the generality of the foregoing, each Loan Party shall, and shall cause each of its Subsidiaries and each other Loan Party to, comply with any federal or state judicial or
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administrative order requiring the performance at any real property of any Loan Party or Subsidiary of activities in response to the release or threatened release of a Hazardous Substance. To the extent that the transportation of Hazardous Substances is permitted by this Agreement, each Loan Party shall, and shall cause each of its Subsidiaries and each other Loan Party to, dispose of such Hazardous Substances, or of any other wastes, only at licensed disposal facilities operating in compliance with Environmental Laws.
10.9
Further Assurances.
(a)
Take, and cause each of its Subsidiaries and each other Loan Party to take, such actions as are necessary or as Lender may reasonably request from time to time to ensure that the Obligations of each Loan Party under the Loan Documents are secured by a first priority perfected Lien in favor of Lender (subject only to Permitted Liens) on substantially all of the assets of Borrowers and each Loan Party (as well as all Capital Securities of each domestic Subsidiary and to the extent requested to do so by Lender, 65% of all Capital Securities of each direct foreign Subsidiary) and guaranteed by each Loan Guarantor (including, upon the acquisition or creation thereof, any Subsidiary acquired or created after the Closing Date), in each case as Lender may determine, including (i) the execution and delivery of guaranties, security agreements, pledge agreements, mortgages, deeds of trust, financing statements and other documents, and the filing or recording of any of the foregoing and (ii) the delivery of certificated securities and other Collateral with respect to which perfection is obtained by possession.
(b)
At least five (5) Business Days prior to the creation or acquisition of a Subsidiary by such Loan Party, provide written notice of the same to Lender. Within one (1) day of such creation or acquisition, (i) if the Loan Party’s equity interest in such Subsidiary is to be pledged as Collateral under this agreement, such Loan Party shall deliver to Lender (A) if such Subsidiary is a limited liability company or a partnership, a fully executed Membership Interest Pledge Agreement or Partnership Interest Pledge Agreement, as applicable, together with the related executed Assignment of Interest and executed Acknowledgment of Pledge and any other documentation required by Lender, all in form and substance satisfactory to Lender, and (B) if such Subsidiary is a corporation, all related certificated securities, duly indorsed in a manner satisfactory to the Lender, evidencing the Capital Securities of such Subsidiary, and (ii) if such Subsidiary is to become a Loan Party hereunder, as determined in Lender’s sole discretion, a joinder agreement (substantially in the form of Exhibit G hereto), a UCC financing statement naming such Subsidiary as debtor and Lender as secured party, and any other documentation requested by Lender, all in form and substance satisfactory to Lender.
(c)
At any time and from time to time, upon the written request of Lender, and at the sole expense of such Loan Party, such Loan Party will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, if the Loan Party’s interest in such instruments and documents is to be pledged as collateral under this agreement, including (i) filing any financing or continuation
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statements under the UCC (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby, (ii) in the case of Investment Property or any deposit, securities or other accounts, and any other relevant Collateral, taking any actions necessary to enable Lender to obtain “control” (within the meaning of the applicable UCC) with respect thereto, including without limitation, if requested by Lender, entering into account control agreements granting Lender control of any deposit, securities, or other account held at an Other Bank and (iii) if requested by Lender, delivering, to the extent permitted by law, any original motor vehicle certificates of title received by such Loan Party from the applicable secretary of state or other governmental authority after information reflecting Lender’s security interest has been recorded therein.
10.10
Deposit Accounts. Unless Lender otherwise consents in writing, in order to facilitate Lender’s maintenance and monitoring of Lender’s security interests in the Collateral, maintain all of such Loan Party’s primary depositary, securities and other primary accounts with Lender. To the extent such Loan Party maintains deposit, securities or other accounts at any Other Bank, such Loan Party will promptly provide written notice to Lender if the funds held or maintained in all deposit, securities or other accounts of such Loan Party at any one Other Bank exceed in the aggregate $500,000. If requested by Lender, such Loan Party shall deliver to Lender a fully executed control agreement within thirty days of Lender’s request, in form and substance satisfactory to Lender, providing Lender with control over any deposit, securities or other accounts of such Loan Party at any Other Bank.
10.11
Delivery of Instruments, Certificated Securities and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper shall be immediately delivered to Lender, duly indorsed in a manner satisfactory to Lender, to be held as Collateral pursuant to this Agreement and in the case of Electronic Chattel Paper, the applicable Loan Party shall cause Lender to have control thereof within the meaning set forth in Section 9-105 of the UCC. In the event that a Default or Event of Default shall have occurred and be continuing, upon the request of Lender, any Instrument, Certificated Security or Chattel Paper not theretofore delivered to Lender and at such time being held by any Loan Party shall be immediately delivered to Lender, duly indorsed in a manner satisfactory to Lender, to be held as Collateral pursuant to this Agreement and in the case of Electronic Chattel Paper, the applicable Loan Party shall cause Lender to have control thereof within the meaning set forth in Section 9-105 of the UCC.
10.12
Maintenance of Perfected Security Interest; Further Documentation.
(a)
Such Loan Party shall maintain the security interest created by this Agreement as a perfected security interest having at least the priority described in Section 9.24 and shall defend such security interest against the claims and demands of all Persons whomsoever.
(b)
Such Loan Party shall not pledge, assign, transfer, create or permit to exist any tax liens and other Liens, encumbrances and security interests on any part of the Collateral other than Permitted Liens, and such Loan Party shall not enter into any agreement doing the same (other than with respect to Permitted Liens).
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(c)
Such Loan Party shall not permit the filing of any financing statements or other documents perfecting a Lien upon or security interest in any of the Collateral except in connection with Section 11.2.
(d)
Such Loan Party will furnish to Lender from time to time statements and schedules further identifying and describing the assets and property of such Loan Party and such other reports in connection therewith as Lender may reasonably request, all in reasonable detail.
(e)
Such Loan Party shall promptly notify Lender (a) of any material change with respect to any of the Collateral, (b) of any material change in the business or financial condition of any material Account Debtor, or if such Loan Party has reason to believe that any material Account Debtor will cease to be an Account Debtor or will significantly alter the business relationship between such Loan Party and such Account Debtor and (c) if an Eligible Account ceases to be an Eligible Account.
(f)
Changes in Locations, Name, etc. Such Loan Party shall not, except upon 30 days’ prior written notice to Lender and delivery to Lender of (a) all additional financing statements and other documents reasonably requested by Lender as to the validity, perfection and priority of the security interests provided for herein and (b) if applicable, a written supplement to Schedule 9.17 showing any additional location at which Collateral shall be kept:
(i)
permit any of the Collateral to be kept at a location other than those listed on Schedule 9.17;
(ii)
change its jurisdiction of organization or the location of its chief executive office from that specified on Schedule 9.17 or in any subsequent notice delivered pursuant to this Section 10.12; or
(iii)
change its name, identity or corporate structure.
(g)
If any Loan Party shall cause to be delivered Collateral or other property to any bailee after the Closing Date, such Loan Party shall cause such bailee to sign a Collateral Access Agreement. Such requirement may be waived at the option of Lender.
10.13
Investment Property.
(a)
If such Loan Party shall become entitled to receive or shall receive any certificate, option or rights in respect of the equity interests of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any of the Pledged Equity, or otherwise in respect thereof, such Loan Party shall accept the same as the agent of Lender, hold the same in trust for Lender and deliver the same forthwith to Lender in the exact form received, duly indorsed by such Loan Party to Lender, if required, together with an undated instrument of transfer covering such certificate duly executed in blank by such Loan Party and with, if Lender so requests, signature
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guarantied, to be held by Lender, subject to the terms hereof, as additional Collateral for the Secured Obligations. Upon the occurrence and during the continuance of an Event of Default, (i) any sums paid upon or in respect of the Investment Property upon the liquidation or dissolution of any Issuer shall be paid over to Lender to be held by it hereunder as additional Collateral for the Secured Obligations, and (ii) in case any distribution of capital shall be made on or in respect of the Investment Property or any property shall be distributed upon or with respect to the Investment Property pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected Lien in favor of Lender, be delivered to Lender to be held by it hereunder as additional Collateral for the Secured Obligations. Upon the occurrence and during the continuance of an Event of Default, if any sums of money or property so paid or distributed in respect of the Investment Property shall be received by such Loan Party, such Loan Party shall, until such money or property is paid or delivered to Lender, hold such money or property in trust for Lender, segregated from other funds of such Loan Party, as additional Collateral for the Secured Obligations.
(b)
Without the prior written consent of Lender, such Loan Party will not (i) vote to enable, or take any other action to permit, any Issuer to issue any Capital Securities of any nature or to issue any other Securities or interests convertible into or granting the right to purchase or exchange for any Capital Securities of any nature of any Issuer, except, in each case, as permitted by this Agreement, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Investment Property or Proceeds thereof (except
that, so long as no Event of Default has occurred or is continuing hereunder, Borrowers may complete the PFL Securities Sale so long as the proceeds of such PFL Securities Sale are deposited in an account with Lender, and may issue additional common or Series A or Series B preferred shares to existing shareholders, which may require payment of current dividends at a market rate as of the date of issuance, and
pursuant to
any other
transaction expressly permitted by this Agreement), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Investment Property or Proceeds thereof, or any interest therein, except for Permitted Liens, (iv) enter into any agreement or undertaking restricting the right or ability of such Loan Party or Lender to sell, assign or transfer any of the Investment Property or Proceeds thereof, except, with respect to such Investment Property, shareholders’ agreements entered into by such Loan Party with respect to Persons in which such Loan Party maintains an ownership interest of 50% or less, (v) do or take any other action which will impair the Lender’s interests or rights in the Investment Property, (vi) permit, suffer or otherwise consent to any termination of, or amendment, supplement or other modification to, its charters, by-laws, operating agreement, partnership agreement or other organizational documents other than as permitted under Section 11.6 or (vii) allow any membership interests or partnership interest comprising its Pledged Equity to be comprised of Securities.
(c)
In the case of each Loan Party which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Investment Property issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify Lender promptly in writing of the occurrence of any of the events described
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in Section 10.13(a) with respect to the Investment Property issued by it, (iii) the terms of Sections 8.4 and 8.7 shall apply to such Issuer with respect to all actions that may be required of it pursuant to Section 8.4 or 8.8 regarding the Investment Property issued by it and (iv) it shall mark in books and records Lender’s security interests and Lien on the related Investment Property.
10.14
Receivables.
(a)
Other than in the ordinary course of business consistent with its past practice, including normally occurring retention receivables, and in amounts which are not material to such Loan Party, such Loan Party will not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof.
(b)
Such Loan Party will deliver to Lender a copy of each material demand, notice or document received by it that questions or calls into doubt the validity or enforceability of more than 5% of the aggregate amount of the then outstanding Receivables for all Loan Parties.
10.15
Intellectual Property.
(a)
Such Loan Party (either itself or through licensees) will (i) continue to use each Trademark material to its business in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) use such Trademark with the appropriate notice of registration and all other notices and legends required by applicable law, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless Lender shall obtain a perfected security interest in such mark pursuant to this Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or omit to do any act whereby such Trademark may become invalidated or impaired in any way.
(b)
Such Loan Party (either itself or through licensees) will not do any act, or omit to do any act, whereby any Patent material to its business may become forfeited, abandoned or dedicated to the public.
(c)
Such Loan Party (either itself or through licensees) (i) will employ each Copyright material to its business and (ii) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of such Copyrights may become invalidated or otherwise impaired. Such Loan Party will not (either itself or through licensees) do any act whereby any material portion of such Copyrights may fall into the public domain.
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(d)
Such Loan Party (either itself or through licensees) will not do any act that knowingly uses any Intellectual Property material to its business to infringe the intellectual property rights of any other Person.
(e)
Such Loan Party will notify Lender immediately if it knows, or has reason to know, that any application or registration relating to any material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding, such Loan Party’s ownership of, or the validity of, any material Intellectual Property or such Loan Party’s right to register the same or to own and maintain the same.
(f)
Whenever such Loan Party, either by itself or through any agent, employee, licensee or designee, (i) shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof or (ii) obtain rights in any Intellectual Property not listed on Schedule 9.29, such Loan Party shall report such filing to Lender concurrently with the next delivery of financial statements of Borrowers pursuant to Section 10.1 of this Agreement. Upon the request of Lender, such Loan Party shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as Lender may request to evidence Lender’s security interest in any Copyright, Patent or Trademark and the goodwill and General Intangibles of such Loan Party relating thereto or represented thereby.
(g)
Such Loan Party will take all reasonable and necessary steps to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of all material Intellectual Property owned by it.
(h)
In the event that any material Intellectual Property is infringed upon or misappropriated or diluted by a third party, such Loan Party shall (i) take such actions as such Loan Party shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify Lender after it learns thereof and, to the extent, in its reasonable judgment, such Loan Party determines it appropriate under the circumstances, sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution.
10.16
Other Matters.
(a)
If any Loan Party shall lease any real property or facilities and the value of Collateral located at such leased real property is in excess of
$100,000
in fair market value after the Closing Date, such Loan Party shall use reasonable efforts to cause the landlord in respect of such leased property or facilities to sign a Collateral Access Agreement. Such requirement may be waived at the option of Lender.
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(b)
Each Loan Party authorizes Lender to, at any time and from time to time, file financing statements, continuation statements, and amendments thereto that describe the Collateral as “all assets” of each Loan Party, or words of similar effect, and which contain any other information required pursuant to the UCC for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, and each Loan Party agrees to furnish any such information to Lender promptly upon request. Any such financing statement, continuation statement, or amendment may be filed at any time in any jurisdiction.
(c)
Each Loan Party shall, at any time and from time and to time, take such steps as Lender may reasonably request for Lender (i) to obtain an acknowledgment, in form and substance reasonably satisfactory to Lender, of any bailee having possession of any of the Collateral, stating that bailee holds such Collateral for Lender, (ii) to obtain “control” of any letter-of-credit rights, or electronic chattel paper (as such terms are defined by the UCC with corresponding provisions thereof defining what constitutes “control” for such items of Collateral), with any agreements establishing control to be in form and substance reasonably satisfactory to Lender, and (iii) otherwise to insure the continued perfection and priority of Lender’s security interest in any of the Collateral and of the preservation of its rights therein. If any Loan Party shall at any time, acquire a “commercial tort claim” (as such term is defined in the UCC), such Loan Party shall promptly notify Lender thereof in writing and supplement Schedule 10.16, therein providing a reasonable description and summary thereof, and upon delivery thereof to Lender, such Loan Party shall be deemed to thereby grant to Lender (and such Loan Party hereby grants to Lender) a security interest and lien in and to such commercial tort claim and all proceeds thereof, all upon the terms of and governed by this Agreement.
(d)
Without limiting the generality of the foregoing, if any Loan Party at any time holds or acquires an interest in any electronic chattel paper or any “transferable record”, as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in §16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, such Loan Party shall promptly notify Lender thereof and, at the request of Lender, shall take such action as Lender may reasonably request to vest in Lender “control” under Section 9-105 of the UCC of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, §16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. Lender agrees with the Loan Parties that Lender will arrange, pursuant to procedures satisfactory to Lender and so long as such procedures will not result in Lender’s loss of control, for the Loan Parties to make alterations to the electronic chattel paper or transferable record permitted under Section 9-105 of the UCC or, as the case may be, Section 201 of the federal Electronic Signatures in Global and National Commerce Act or §16 of the Uniform Electronic Transactions Act for a party in control to make without loss of control, unless an Event of Default has occurred and is continuing or would occur after taking into account any action by any Loan Party with respect to such electronic chattel paper or transferable record.
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10.17
Post Closing Covenants.
(a)
(c) Within 60 days after November 10, 2014, Pernix shall deliver to Lender fully executed copies of a pledge agreement and related documents documenting Pernix’s pledge of its Capital Securities in Vanuatu Utilities & Infrastructure Limited to Lender, all in form and substance satisfactory to Lender.
(b)
If by December 31, 2014, Pernix LTC LLC has not dissolved, by January 10, 2015, Pernix shall deliver to Lender a fully executed Membership Interest Pledge Agreement, together with the related executed Assignment of Interest, the related executed Acknowledgment of Pledge, and any other documentation required by Lender, all in form and substance satisfactory to Lender.
(c)
If by April 30, 2015, Pernix – Serka LP has not dissolved, by May 10, 2015, Pernix shall deliver to Lender a fully executed Partnership Interest Pledge Agreement, together with the related executed Assignment of Interest, the related executed Acknowledgment of Pledge, and any other documentation required by Lender, all in form and substance satisfactory to Lender.
SECTION 11
NEGATIVE COVENANTS
Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid and performed in full and all Letters of Credit have been terminated, each Borrower and each other Loan Party agrees, that, unless at any time Lender shall otherwise expressly consent in writing, it will:
11.1
Debt. Not, and not permit any other Loan Party to create, incur, assume or suffer to exist any Debt, except:
(a)
Obligations under this Agreement and the other Loan Documents;
(b)
Debt secured by Liens permitted by Section 11.2(d), and extensions, renewals and refinancings thereof;
(c)
Debt of Pernix to any domestic Wholly-Owned Subsidiary or Debt of any domestic Wholly-Owned Subsidiary to Pernix or another domestic Wholly-Owned Subsidiary; provided that such Debt shall be evidenced by a demand note in form and substance reasonably satisfactory to Lender and pledged and delivered to Lender pursuant to the Collateral Documents as additional collateral security for the Obligations, and the obligations under such demand note shall be subordinated to the Obligations of the applicable Loan Parties hereunder in a manner reasonably satisfactory to Lender;
(d)
Debt described on Schedule 11.1 and any extension, renewal or refinancing thereof so long as the principal amount thereof is not increased;
(e)
Contingent Liabilities arising with respect to customary indemnification obligations in favor of purchasers in connection with dispositions permitted under Section 11.5;
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(f)
Subordinated Debt;
(g)
Hedging Obligations incurred in favor of Lender or an Affiliate thereof for bona fide hedging purposes and not for speculation;
and
(h)
other
indebtedness incurred by Borrowers in the ordinary course of business not otherwise permitted under (a) through (f) above,
in an aggregate outstanding amount together with the Debt described in clause (b) above, not at any time exceeding $500,000.
11.2
Liens. Not, and not permit any other Loan Party to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature (whether now owned or hereafter acquired), except:
(a)
Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being diligently contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves in accordance with GAAP and the execution or other enforcement of which is effectively stayed;
(b)
Liens arising in the ordinary course of business (such as (i) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by law and (ii) Liens in the form of deposits or pledges incurred in connection with worker’s compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or being diligently contested in good faith by appropriate proceedings and not involving any advances or borrowed money or the deferred purchase price of property or services and, in each case, for which it maintains adequate reserves in accordance with GAAP and the execution or other enforcement of which is effectively stayed;
(c)
Liens described on Schedule 11.2 as of the Closing Date;
(d)
subject to the limitation set forth in Section 11.1(b), (i) Liens arising in connection with Capital Leases (and attaching only to the property being leased), (ii) Liens existing on property at the time of the acquisition thereof by any Loan Party (and not created in contemplation of such acquisition) and (iii) Liens that constitute purchase money security interests on any property securing debt incurred for the purpose of financing all or any part of the cost of acquiring such property, provided that any such Lien attaches to such property within 20 days of the acquisition thereof and attaches solely to the property so acquired;
(e)
attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding $100,000 arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings;
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(f)
easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of any Loan Party;
(g)
Liens arising under this Agreement and the other Loan Documents; and
(h)
the replacement, extension or renewal of any Lien permitted by clause (c) above upon or in the same property subject thereto arising out of the extension, renewal or replacement of the Debt secured thereby (without increase in the amount thereof).
11.3
Operating Leases. Not permit the aggregate amount of all rental payments under Operating Leases made (or scheduled to be made) by the Loan Parties (on a consolidated basis) to exceed $500,000 for real property leases in any Fiscal Year. Operating leases of equipment entered into in the ordinary course of business for purposes of contract performance are not subject to these provisions.
11.4
Restricted Payments. Not, and not permit any other Loan Party to, (a) purchase or redeem any of its Capital Securities except for the currently outstanding preferred stock and / or payment of dividends thereon, (b) pay any management fees or similar fees to any of its equityholders or any Affiliate thereof, (c) make any redemption, prepayment (whether mandatory or optional), defeasance, repurchase or any other payment in respect of any Subordinated Debt or (d) set aside funds for any of the foregoing. Notwithstanding the foregoing, so long as no Default or Event of Default has occurred and is continuing, a Loan Party may make distributions to any holders of its Capital Securities, including, without limitation, to any such holder to pay federal and state income taxes then due and owing by such holder with respect to the income of such Loan Party, so long as the amount of such distributions shall not be greater, nor the receipt by such Loan Party of tax benefits less, than they would have been had such Loan Party not filed consolidated income tax returns with such Person
.
11.5
Mergers, Consolidations, Sales. Not, and not permit any other Loan Party to, (a) be a party to any merger or consolidation, (b) sell, transfer, dispose of, convey or lease any of its assets or Capital Securities (including the sale of Capital Securities of any Subsidiary) except for sales of inventory in the ordinary course of business and the sale of a 25% equity interest in PFL as permitted pursuant to Section 10.13 hereof, or (c) sell or assign with or without recourse any receivables, except for (i) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into Pernix or into any other domestic Wholly-Owned Subsidiary and (ii) any such purchase or other acquisition by Borrowers or any domestic Wholly-Owned Subsidiary of the assets or Capital Securities of any Wholly-Owned Subsidiary.
11.6
Modification of Organizational Documents. Not permit the charters, by-laws, operating agreement, partnership agreement or other organizational documents of any Loan Party to be amended or modified in any way which could reasonably be expected to materially adversely affect the interests of Lender or the Collateral; not change, or allow any Loan Party to change, its state of formation or its organizational form other than in accordance with Section 10.13(f).
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11.7
Transactions with Affiliates. Not, and not permit any other Loan Party to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates (other than the Loan Parties) which is on terms which are less favorable than are obtainable from any Person which is not one of its Affiliates.
11.8
Unconditional Purchase Obligations. Not, and not permit any other Loan Party to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services.
11.9
Inconsistent Agreements. Not, and not permit any other Loan Party to enter into any agreement containing any provision which would (a) be violated or breached by any borrowing by Borrowers hereunder or by the performance by any Loan Party of any of its Obligations hereunder or under any other Loan Document, (b) prohibit any Loan Party from granting to Lender, a Lien on any of its assets or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends (except for to current preferred shareholders) or make other distributions to Pernix or any Subsidiary, or pay any Debt owed to Pernix or any Subsidiary, (ii) make loans or advances to any Loan Party or (iii) transfer any of its assets or properties to any Loan Party, other than (A) customary restrictions and conditions contained in agreements relating to the sale of all or a substantial part of the assets of any Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary to be sold and such sale is permitted hereunder, (B) restrictions or conditions imposed by any agreement relating to purchase money Debt, Capital Leases and other secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt and (C) customary provisions in leases and other contracts restricting the assignment thereof.
11.10
Business Activities; Issuance of Equity. Not, and not permit any other Loan Party to, engage in any line of business other than the businesses engaged in on the date hereof and businesses reasonably related thereto. Not, and not permit any other Loan Party to, issue any Capital Securities other than any issuance in accordance with Section 11.5.
11.11
Investments. Not, and not permit any other Loan Party to, make or permit to exist any Investment in any other Person, except the following:
(a)
contributions by such Loan Party to the capital of any domestic Wholly-Owned Subsidiary in existence on the Closing Date, or by any Subsidiary to the capital of any other domestic Wholly-Owned Subsidiary in existence on the Closing Date, so long as the recipient of any such capital contribution has guaranteed the Obligations and such guaranty is secured by a pledge of all of its Capital Securities and substantially all of its real and personal property, in each case in accordance with Sections 10.9 and 10.11
(b)
Investments constituting Debt permitted by Section 11.1;
(c)
Contingent Liabilities constituting Debt permitted by Section 11.1 or Liens permitted by Section 11.2;
(d)
Cash Equivalent Investments;
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(e)
Investments in securities of Account Debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such Account Debtors; and
(f)
Investments listed on Schedule 11.11 as of the Closing Date.
(g)
provided that (x) any Investment which when made complies with the requirements of the definition of the term Cash Equivalent Investment may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; (y) no Investment otherwise permitted by clause (b) or (c) shall be permitted to be made if, immediately before or after giving effect thereto, any Default or Event of Default exists.
11.12
Restriction of Amendments to Certain Documents. Not amend or otherwise modify, or waive any rights under any provisions of any Subordinated Debt.
11.13
Fiscal Year. Not change its Fiscal Year.
11.14
Financial Covenants.
11.14.1
Minimum Net Income. Not permit the Consolidated Net Income of Pernix, (as adjusted for non-cash expenses including amortization, depreciation, non-cash tax expense and other non-cash items that may arise including non current pay dividends on Preferred Stock) as of December 31, 2014, and at the end of each Fiscal Quarter thereafter to be less than $1.00.
11.14.2
Minimum Liquidity. Not permit the At Lender Liquidity to be less than $5,000,000 at any time.
11.15
Hedging Agreement. Not enter into any Hedging Agreements or other agreements related to Hedging Obligations
, other than Eligible Hedging Agreements
.
11.16
Cancellation of Debt. Not cancel any claim or debt owing to it, except for reasonable consideration or in the ordinary course of business, and except for the cancellation of debts or claims not to exceed $25,000 in any Fiscal Year.
11.17
Guarantees. Not make or permit to exist any guarantees, except by endorsement of instruments for deposit or collection or in the ordinary course of business.
11.18
Loans. Not loan, advance, distribute or otherwise provide any money in excess of $100,000 to any Person or Persons, or permit to exist any loan, advance or distribution other than as permitted pursuant to Section 11.3 hereof.
11.19
Deposit Accounts. Not withdraw, and not permit any other Loan Party to withdraw, funds from, direct or transfer funds out of, or otherwise access either the LOC Account or the Pledged Account without Lender’s prior written consent, except that Borrowers may deposit (i) in the LOC Account any LOC Liquidity, and (ii) in the Pledged Account, any cash to be included in the calculation of the Borrowing Base. Not permit the funds held or
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maintained in any deposit, securities or other accounts of such Loan Party at any one Other Bank to exceed in the aggregate $500,000.
11.20
Pernix – Serka LP. Not permit, and will cause Pernix – Serka LP to not permit, Pernix-Serka LP or Pernix–Serka LLC (i) to operate their respective businesses in any manner, or take any action, other than in connection with the completion of the SL Project and the winding down of their respective businesses and operations, (ii) take on any additional projects or jobs that are not in already in existence as of the date hereof, and (iii) to create or acquire any new assets other than those created or acquired in connection with the SL Project.
SECTION 12
EFFECTIVENESS; CONDITIONS OF LENDING, ETC.
The obligation of Lender to make its Loans and of the Issuing Lender to issue Letters of Credit is subject to the following conditions precedent:
12.1
Initial Credit Extension. The obligation of Lender to make the initial Loans and the obligation of the Issuing Lender to issue its initial Letter of Credit (whichever first occurs) is subject to the conditions precedent that (a) the conditions set forth in Section 12.2 are met to Lender’s satisfaction, and (b) Lender shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to Lender) as applicable, in form and substance satisfactory to Lender (and the date on which all such conditions precedent have been satisfied or waived in writing by Lender is called the “Closing Date”):
12.1.1
Loan Documents. Loan Documents.
12.1.2
Authorization Documents. For each Loan Party, such Person’s (a) charter (or similar formation document), certified by the appropriate governmental authority; (b) good standing certificates in its state of incorporation (or formation) and in each other state requested by Lender; (c) bylaws (or similar governing document); (d) resolutions of its board of directors (or similar governing body) approving and authorizing such Person’s execution, delivery and performance of the Loan Documents to which it is party and the transactions contemplated thereby; and (e) signature and incumbency certificates of its officers executing any of the Loan Documents (it being understood that Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by an officer of such Loan Party (or similar officer) as being in full force and effect without modification.
12.1.3
Consents, etc. Certified copies of all documents evidencing any necessary corporate or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Loan Parties of the documents referred to in this Section 12.
12.1.4
Collateral and Guaranty Documents. A counterpart of the Collateral Documents, executed by each applicable party thereto, together with all instruments, transfer powers and other items required to be delivered in connection therewith.
12.1.5
Perfection Certificate. A Perfection Certificate completed and executed by each Loan Party.
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12.1.6
Compliance with Law. Evidence that all governmental, regulatory and other third party approvals have been granted.
12.1.7
[Reserved].
12.1.8
Delivery of Pledged Collateral. Instruments, Chattel Paper or Certificated Securities, duly indorsed in a manner satisfactory to Lender, if any.
12.1.9
LOC Account. If a Letter of Credit is to be issued, Borrowers shall have deposited in the LOC Account the related Cash Collateral.
12.1.10
Subordination Agreements. Subordination Agreements with respect to all Subordinated Debt, if any.
12.1.11
Insurance. Evidence of the existence of insurance required to be maintained pursuant to Section 10.3(b), together with evidence that Lender has been named as a loss payee and an additional insured on all related insurance policies.
12.1.12
Financial Statements. Unaudited financial statements of Pernix and its subsidiaries as of June 30, 2014, in form satisfactory to Lender.
12.1.13
Payment of Fees. Evidence of payment by Borrowers of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with all Attorney Costs of Lender to the extent invoiced prior to the Closing Date (in an amount not to exceed $7000).
12.1.14
Solvency Certificate. A Solvency Certificate executed by a Senior Officer of each Borrower.
12.1.15
Search Results; Lien Terminations. Certified copies of Uniform Commercial Code search reports dated a date reasonably near to the Closing Date, listing all effective financing statements which name any Loan Party (under their present names and any previous names) as debtors, together with (a) copies of such financing statements, and (b) such other Uniform Commercial Code termination statements as Lender may reasonably request.
12.1.16
Filings, Registrations and Recordings. Lender shall have received each document (including UCC financing statements) required by the Collateral Documents or under law or reasonably requested by Lender to be filed, registered or recorded in order to create in favor of Lender a perfected Lien on the Collateral described therein, prior to any other Liens (subject only to Permitted Liens), in proper form for filing, registration or recording.
12.1.17
Borrowing Base Certificate; Notice of Borrowing. A Borrowing Base Certificate and a Notice of Borrowing, if applicable, dated as of the Closing Date.
12.1.18
Closing Certificate, Consents and Permits. A certificate executed by the officers of each Borrower certifying the matters set forth in Section 12.2.1 as of the Closing Date.
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12.1.19
Real Estate Documents. With respect to the Lombard Property, a duly executed Mortgage providing for a fully perfected Lien, in favor of Lender, in all right, title and interest of Pernix RE in such real property, together with:
(a)
an ALTA Loan Title Insurance Policy, issued by an insurer acceptable to Lender, insuring Lender’s first priority Lien on such real property and containing such endorsements as Lender may reasonably require (it being understood that the amount of coverage, exceptions to coverage and status of title set forth in such policy shall be acceptable to Lender);
(b)
copies of all documents of record concerning such real property as shown on the commitment for the ALTA Loan Title Insurance Policy referred to above;
(c)
original or certified copies of all insurance policies required to be maintained with respect to such real property by this Agreement, the Mortgage or any other Loan Document;
(d)
a survey certified to Lender meeting such standards as Lender may reasonably establish and otherwise reasonably satisfactory to Lender; and
(e)
an appraisal, prepared by an independent appraiser engaged directly by Lender of such parcel of real property or interest in real property, which appraisal shall satisfy the requirements of the Financial Institutions Reform, Recovery and Enforcement Act, if applicable, and shall evidence compliance with the supervisory loan-to-value limits set forth in the Federal Deposit Insurance Corporation Improvement Act of 1991, if applicable.
Additionally, in the case of any mortgaged real property, a waiver from the mortgagee thereof waiving any Lien in respect of personal property kept at the premises subject to such Mortgage, permitting access to the location by Lender and its agents and containing such other terms and provisions as may be required by Lender.
12.1.20
References. Lender shall have completed a satisfactory review of the business and operations of Pernix and its Subsidiaries.
12.1.21
Other. Such other documents as Lender may reasonably request.
12.2
Conditions. The obligation (a) of Lender to make each Loan and (b) of the Issuing Lender to issue each Letter of Credit is subject to the following further conditions precedent that:
12.2.1
Compliance with Warranties, No Default, etc. Both before and after giving effect to any borrowing and the issuance of any Letter of Credit, the following statements shall be true and correct:
(a)
the representations and warranties of each Loan Party set forth in this Agreement and the other Loan Documents shall be true and correct in all respects with
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the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date);
(b)
no Default or Event of Default shall have then occurred and be continuing; provided that non-compliance with Section 11.14 will constitute a Event of Default notwithstanding any applicable cure period;
(c)
Borrowers are in compliance with Section 11.14.2; and
(d)
with respect to the issuance of a Letter of Credit, Borrowers shall have deposited in the LOC Account the related Cash Collateral.
12.2.2
Confirmatory Certificate. If requested by Lender, Lender shall have received a certificate dated the date of such requested Loan or Letter of Credit and signed by a duly authorized representative of each Borrower as to the matters set out in Section 12.2.1 (it being understood that each request by Borrowers for the making of a Loan or the issuance of a Letter of Credit shall be deemed to constitute a representation and warranty by each Borrower that the conditions precedent set forth in Section 12.2.1 will be satisfied at the time of the making of such Loan or the issuance of such Letter of Credit), together with such other documents as Lender may reasonably request in support thereof.
SECTION 13
EVENTS OF DEFAULT AND THEIR EFFECT.
13.1
Events of Default. Each of the following shall constitute an Event of Default under this Agreement:
13.1.1
Non-Payment of the Loans, etc. Default in the payment when due of the principal of any Loan; or default, and continuance thereof for five days, in the payment when due of any interest, fee, reimbursement obligation with respect to any
Revolving Loan,
Letter of Credit or other amount payable by Borrowers hereunder or under any other Loan Document.
13.1.2
Non-Payment of Other Debt. Any default shall occur under the terms applicable to any Debt of any Loan Party in an aggregate amount (for all such Debt so affected and including undrawn committed or available amounts and amounts owing to all creditors under any combined or syndicated credit arrangement) exceeding $250,000 and such default shall (a) consist of the failure to pay such Debt when due, whether by acceleration or otherwise, or (b) accelerate the maturity of such Debt or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable (or require any Loan Party to purchase or redeem such Debt or post cash collateral in respect thereof) prior to its expressed maturity.
13.1.3
Other Material Obligations. Default
, after any applicable cure period,
in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, any Loan Party with respect to any material purchase or lease of goods or services where such default, singly or in the aggregate with all other such defaults, might reasonably be expected to have a Material Adverse Effect.
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13.1.4
Bankruptcy, Insolvency, etc. Any Loan Party becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or any Loan Party applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for such Loan Party or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for any Loan Party or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of any Loan Party, and if such case or proceeding is not commenced by such Loan Party, it is consented to or acquiesced in by such Loan Party, or remains for 60 days undismissed; or any Loan Party takes any action to authorize, or in furtherance of, any of the foregoing.
13.1.5
Non-Compliance with Loan Documents. (a) Failure by the Loan Parties to comply with Section 11.14 and the continuance of such failure for three (3) days,
(b) Failure by any Loan Party to comply with or to perform any covenant set forth in
Sections 10.1.4
,
10.1.5
,
10.1.6
,
10.1.10
,
10.3(b), 10.5, 10.6, 10.17 or any other section in Section 11;
(c) Failure by any Loan Party to comply with or to perform any covenant set forth in
Sections 10.1.1, 10.1.2, 10.1.3, 10.1.7, 10.1.8, 10.1.9, 10.1.11, (
provided, however, that if Lender has, in its sole discretion, granted an extension for the time of performance thereof, such failure shall not constitute an Event of Default if such Loan Party has performed within the time as so extended), or (d
) failure by any Loan Party to comply with or to perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 13) and continuance of such failure described in this clause (c) for 30 days.
13.1.6
Representations; Warranties. Any representation or warranty made by any Loan Party herein or any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by any Loan Party to Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified.
13.1.7
Pension Plans. (a) Any Person institutes steps to terminate a Pension Plan if as a result of such termination Borrowers or any member of the Controlled Group could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $250,000; (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; (c) the Unfunded Liability exceeds twenty percent of the Total Plan Liability, or (d) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that Borrowers or any member of the Controlled Group have incurred on the date of such withdrawal) exceeds $250,000.
13.1.8
Judgments. Any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $250,000 shall be rendered against any Loan Party and shall not have been paid, discharged or vacated or
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had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments.
13.1.9
Attachment. A notice of lien, levy, or assignment (and excluding retention receivables held in the ordinary course of business) is filed or recorded with respect to all or any or all assets of a Loan Party by the United States government or any department, agency or instrumentality thereof or by any state, county, municipal or other governmental agency, or if any taxes or debts owing at any time to any one of them becomes a lien or encumbrances upon such Loan Party’s assets and any of the foregoing is not released, bonded or otherwise secured to Lender's reasonable satisfaction within ten (10) days after the same becomes a lien or encumbrance on such assets.
13.1.10
Loan Documents. Any event occurs or condition exists which is specified as an event of default under any of the other Loan Documents, or any of the Loan Documents shall for any reason not be or shall cease to be in full force and effect, or any of the Loan Documents is declared to be null and void.
13.1.11
Other Defaults. Any event occurs or condition exists which is specified as an event of default under any document, agreement or instrument entered into in connection with or evidencing Debt owed by any Loan Party to any Person other than Lender.
13.1.12
Invalidity of Collateral Documents, Perfection. Any Collateral Document shall cease to be in full force and effect; any Loan Party (or any Person by, through or on behalf of any Loan Party) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document; or Lender shall not have a perfected security interest in or Lien on the Collateral prior to all other security interests and Liens other than the Permitted Liens.
13.1.13
Attachment of Collateral. All or any part of the Collateral (i) is attached, seized, subjected to an injunction, writ or distress warrant, or is levied upon and on or before ten (10) business days thereafter such assets are not returned and/or such writ, distress warrant or levy is not dismissed, stayed or lifted or (ii) or any direct, indirect, legal, equitable or beneficial interest in the Collateral is assigned, transferred or sold without Lender’s prior written consent.
13.1.14
Depreciation in Collateral. There shall be any material loss or depreciation in the value of any Collateral or, unless expressly permitted by this Agreement or the other Loan Documents, all or any part of any such Collateral or any direct, indirect, legal, equitable or beneficial interest therein is assigned, transferred or sold without the Lender’s prior written except as allowed by this Agreement. This provision excludes the sale of 25% of the borrower’s interest in PFL.
13.1.15
Invalidity of Subordination Provisions, etc. Any subordination provision in any document or instrument governing Subordinated Debt, or any subordination provision in any subordination agreement that relates to any Subordinated Debt, or any subordination provision in any guaranty by any Loan Party of any Subordinated Debt, shall cease to be in full force and effect, or any Loan Party or any other Person (including the holder of any applicable Subordinated Debt) shall contest in any manner the validity, binding nature or enforceability of any such provision.
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Change of Control. A Change of Control shall occur.
13.1.16
Bond. Any cancellation, termination or material reduction in any performance or other bond issued by either Fidelity and Deposit Company of Maryland or Zurich American Insurance Company, or such other entity as is approved by Lender.
13.1.17
Material Adverse Effect. The occurrence of any event having a Material Adverse Effect.
13.2
Effect of Event of Default. (a) If any Event of Default described in Section 13.1.4 shall occur in respect of the Loan Parties, the Commitments shall immediately terminate and the Loans and all other Obligations hereunder shall become immediately due and payable all without presentment, demand, protest or notice of any kind; (b) if any other Event of Default shall occur and be continuing, Lender may declare the Commitments to be terminated in whole or in part and/or declare all or any part of the Loans and all other Obligations hereunder to be due and payable, whereupon the Commitments shall immediately terminate (or be reduced, as applicable) and/or the Loans and other Obligations hereunder shall become immediately due and payable (in whole or in part, as applicable) without presentment, demand, protest or notice of any kind, and (c) upon any Event of Default provided that any applicable notification and cure periods have lapsed, Lender shall have all (i) the right to setoff against any account of Borrowers held or maintained at Lender, including without limitation the LOC Account and the Pledged Account, the outstanding Obligations, (ii) rights and remedies provided for in this Agreement and the other Loan Documents, (iii) all rights and remedies provided by the UCC (in each applicable jurisdiction) and (iv) all rights and remedies in any other applicable law (including, without limitation, all other legal and equitable remedies available to Lender). Lender shall promptly advise the Loan Parties of any such declaration, but failure to do so shall not impair the effect of such declaration. Any LOC Liquidity in the LOC Account, shall be held by Lender (without liability for interest thereon) and applied to the Obligations arising in connection with any drawing under a Letter of Credit. After the expiration or termination of all Letters of Credit, such Cash Collateral shall be applied by Lender to any remaining Obligations hereunder and any excess shall be delivered to Borrowers or as a court of competent jurisdiction may elect.
SECTION 14
GENERAL.
14.1
Marshalling; Amendments. To the extent that it lawfully may, each Loan Party hereby agrees that it will not invoke any law relating to the marshalling of Collateral which might cause delay in or impede the enforcement of Lender’s rights under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that they lawfully may, Each Loan Party hereby irrevocably waives the benefits of all such laws. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the other Loan Documents shall in any event be effective unless the same shall be in writing and acknowledged by Lender, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
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14.2
Confirmations. Borrowers and each holder of a Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal amount of the Loans then outstanding under such Note.
14.3
Notices. Except as otherwise provided in Sections 2.2.1 and 2.3.1, all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on Annex B or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. For purposes of Sections 2.2.1 and 2.3.1, Lender shall be entitled to rely on telephonic instructions from any person that Lender in good faith believes is an authorized officer or employee of Borrowers, and Borrowers shall jointly and severally hold Lender harmless from any loss, cost or expense resulting from any such reliance.
14.4
Computations. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if any Loan Party notifies Lender that the Loan Parties wish to amend any covenant in Sections 10 or 11.14 (or any related definition) to eliminate or to take into account the effect of any change in GAAP on the operation of such covenant (or if Lender notifies the Loan Parties that Lender wishes to amend Sections 10 or 11.14 (or any related definition) for such purpose), then Loan Parties’ compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant (or related definition) is amended in a manner satisfactory to the Loan Parties and Lender.
14.5
Costs, Expenses and Taxes.
(a)
Each Loan Party, jointly and severally, agrees to pay on demand all reasonable out-of-pocket costs and expenses of Lender (including Attorney Costs and any Taxes) in connection with the preparation, execution, syndication, delivery and administration (including perfection and protection of any Collateral and the costs of Intralinks (or other similar service), if applicable) of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), whether or not the transactions contemplated hereby or thereby shall be consummated, and all reasonable out-of-pocket costs and expenses (including Attorney Costs and any Taxes) incurred by Lender after an Event of Default in connection with the collection of the Obligations or the enforcement of this Agreement the other Loan Documents or any such other documents or during any workout, restructuring or negotiations in respect thereof. In addition, each Loan Party agrees to
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pay, and to save Lender harmless from all liability for, any fees of the Loan Parties’ auditors in connection with any reasonable exercise by Lender of their rights pursuant to Section 10.2. All Obligations provided for in this Section 14.5 shall survive repayment of the Loans, cancellation of the Notes, expiration or termination of the Letters of Credit and termination of this Agreement.
(b)
Each Loan Party agrees to pay, and to save Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.
(c)
The agreements in this Section 14.5 shall survive repayment of all (and shall be) Secured Obligations (and termination of all commitments under this Agreement), any foreclosure under, or any modification, release or discharge of, any or all of the Collateral Documents and termination of this Agreement.
14.6
GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
14.7
Confidentiality. As required by federal law and Lender’s policies and practices, Lender may need to obtain, verify, and record certain customer identification information and documentation in connection with opening or maintaining accounts, or establishing or continuing to provide services. Lender agrees to use commercially reasonable efforts (equivalent to the efforts Lender applies to maintain the confidentiality of its own confidential information) to maintain as confidential all information provided to them by any Loan Party and designated as confidential, except that Lender may disclose such information (a) to Persons employed or engaged by Lender in evaluating, approving, structuring or administering the Loans and the Commitments; (b) to any assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 14.7 (and any such assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any federal or state regulatory authority or examiner, or any insurance industry association, or as reasonably believed by Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of Lender’s counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which Lender is a party; (f) to any nationally recognized rating agency that requires access to information about Lender’s investment portfolio in connection with ratings issued with respect to Lender; (g) to any Affiliate of Lender, the Issuing Lender or any other Person who may provide Bank Products to the Loan Parties; (h) to Lender’s independent auditors and other professional advisors as to which such information has been identified as confidential; or (i) that ceases to be confidential through no fault of Lender. Notwithstanding the foregoing, Borrowers consent to the publication by Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this
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Agreement, and Lender reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements. If any provision of any confidentiality agreement, non-disclosure agreement or other similar agreement between Borrowers and Lender conflicts with or contradicts this Section 14.7 with respect to the treatment of confidential information, this section shall supersede all such prior or contemporaneous agreements and understandings between the parties.
14.8
Severability. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All obligations of the Loan Parties and rights of Lender expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law.
14.9
Nature of Remedies. All Obligations of the Loan Parties and rights of Lender expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. No failure to exercise and no delay in exercising, on the part of Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
14.10
Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the parties hereto and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof (except as relates to the fees described in Section 4) and any prior arrangements made with respect to the payment by the Loan Parties of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of Lender.
14.11
Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by Lender shall deemed to be originals.
14.12
Successors and Assigns. This Agreement shall be binding upon the Loan Parties, Lender and their respective successors and assigns, and shall inure to the benefit of the Loan Parties, Lender and the successors and assigns of Lender. No other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. No Loan Party may assign or transfer any of its rights or Obligations under this Agreement without the prior written consent of Lender.
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14.13
Assignments; Participations.
14.13.1
Assignments.
(a)
Lender may at any time assign to one or more Persons (any such Person, an “Assignee”) all or any portion of its Loans and Commitments, with the prior written consent of Borrowers, so long as no Event of Default exists (which consent shall not be unreasonably withheld or delayed and shall not be required for an assignment by Lender to an Affiliate of Lender). Borrowers shall be deemed to have granted its consent to any assignment requiring its consent hereunder unless Borrowers have expressly objected to such assignment within three Business Days after notice thereof.
(b)
From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to an assignment agreement between Lender and the Assignee, shall have the rights and obligations of Lender hereunder and (ii) Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, Lender) pursuant to an effective assignment agreement, Borrowers shall execute and deliver to the Assignee (and, as applicable, Lender) a Note in the principal amount of the Assignee’s pro rata share of the Revolving Commitment (and, as applicable, a Note in the principal amount of the pro rata share of the Revolving Commitment retained by Lender). Each such Note shall be dated the effective date of such assignment. Upon receipt by Lender of such Note, Lender shall return to Borrowers any prior Note held by it.
(c)
Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section 14.13.1 shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release Lender from any of its obligations hereunder or substitute any such pledgee or assignee for Lender as a party hereto.
14.13.2
Participations. Lender may at any time sell to one or more Persons participating interests in its Loans, Commitments or other interests hereunder (any such Person, a “Participant”). In the event of a sale by Lender of a participating interest to a Participant, (a) Lender’s obligations hereunder shall remain unchanged for all purposes, (b) Borrowers shall continue to deal solely and directly with Lender in connection with Lender’s rights and obligations hereunder and (c) all amounts payable by Borrowers shall be determined as if Lender had not sold such participation and shall be paid directly to Lender. Borrowers agree that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement and with respect to any Letter of Credit to the same extent as if the amount of its participating interest were owing directly to it as Lender under this Agreement; provided that such right of set-off shall be subject to the obligation
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of each Participant to share with Lender, and Lender agrees to share with each Participant, on a pro rata basis. Borrowers also agree that each Participant shall be entitled to the benefits of Section 6.5 or 7 as if it were Lender (provided that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Section 6.5 or 7 than would have been paid to Lender on such date if no participation had been sold and that each Participant complies with Section 6.5 or 7 as if it were a direct assignee).
14.14
Captions. Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement.
14.15
Customer Identification - USA Patriot Act Notice. Lender (for itself and not on behalf of any other party) hereby notifies the Loan Parties that, pursuant to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Loan Parties, which information includes the name and address of the Loan Parties and other information that will allow Lender, as applicable, to identify the Loan Parties in accordance with the Act.
14.16
INDEMNIFICATION BY LOAN PARTIES. IN CONSIDERATION OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT BY LENDER AND THE AGREEMENT BY LENDER TO EXTEND THE COMMITMENTS PROVIDED HEREUNDER, EACH LOAN PARTY HEREBY AGREES TO INDEMNIFY, EXONERATE AND HOLD LENDER AND EACH OF THE OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES AND AGENTS OF LENDER (EACH A “LENDER PARTY”) FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, LOSSES, LIABILITIES, DAMAGES AND EXPENSES, INCLUDING ATTORNEY COSTS (COLLECTIVELY, THE “INDEMNIFIED LIABILITIES”), INCURRED BY LENDER PARTIES OR ANY OF THEM AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY TENDER OFFER, MERGER, PURCHASE OF CAPITAL SECURITIES, PURCHASE OF ASSETS OR OTHER SIMILAR TRANSACTION FINANCED OR PROPOSED TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, WITH THE PROCEEDS OF ANY OF THE LOANS, (B) THE USE, HANDLING, RELEASE, EMISSION, DISCHARGE, TRANSPORTATION, STORAGE, TREATMENT OR DISPOSAL OF ANY HAZARDOUS SUBSTANCE AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY, (C) ANY VIOLATION OF ANY ENVIRONMENTAL LAWS WITH RESPECT TO CONDITIONS AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY OR THE OPERATIONS CONDUCTED THEREON, (D) THE INVESTIGATION, CLEANUP OR REMEDIATION OF OFFSITE LOCATIONS AT WHICH ANY LOAN PARTY OR THEIR RESPECTIVE PREDECESSORS ARE ALLEGED TO HAVE DIRECTLY OR INDIRECTLY DISPOSED OF HAZARDOUS SUBSTANCES OR (E) THE EXECUTION, DELIVERY, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY ANY OF LENDER PARTIES, EXCEPT FOR ANY SUCH INDEMNIFIED LIABILITIES ARISING ON ACCOUNT OF THE APPLICABLE LENDER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL, NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION. IF AND TO THE EXTENT THAT THE FOREGOING UNDERTAKING MAY BE UNENFORCEABLE FOR ANY REASON, EACH LOAN PARTY HEREBY AGREES TO MAKE THE MAXIMUM
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CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. ALL OBLIGATIONS PROVIDED FOR IN THIS SECTION 14.16 SHALL SURVIVE REPAYMENT OF THE LOANS, CANCELLATION OF THE NOTES, EXPIRATION OR TERMINATION OF THE LETTERS OF CREDIT, ANY FORECLOSURE UNDER, OR ANY MODIFICATION, RELEASE OR DISCHARGE OF, ANY OR ALL OF THE COLLATERAL DOCUMENTS AND TERMINATION OF THIS AGREEMENT.
14.17
Nonliability of Lender. The relationship between Borrowers on the one hand and Lender on the other hand shall be solely that of Borrower and lender. Lender has no fiduciary relationship with or duty to any Loan Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Loan Parties, on the one hand, and Lender, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. Lender undertakes no responsibility to any Loan Party to review or inform any Loan Party of any matter in connection with any phase of any Loan Party’s business or operations. Each Loan Party agrees that Lender shall have no liability to any Loan Party (whether sounding in tort, contract or otherwise) for losses suffered by any Loan Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. NO LENDER PARTY SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH INTRALINKS OR OTHER SIMILAR INFORMATION TRANSMISSION SYSTEMS IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER PARTY HAVE ANY LIABILITY WITH RESPECT TO, AND EACH LOAN PARTY HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). Each Loan Party acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party. No joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Loan Parties and Lender.
14.18
FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. EACH LOAN PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR
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THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH LOAN PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH LOAN PARTY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
14.19
WAIVER OF JURY TRIAL. EACH LOAN PARTY AND LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
SECTION 15
JOINT AND SEVERAL LIABILITY, ETC.
15.1
Joint and Several. BORROWERS ACKNOWLEDGE AND IRREVOCABLY AGREE THAT THEY SHALL BE JOINTLY AND SEVERALLY LIABLE, IN ALL RESPECTS, FOR THE PAYMENT AND PERFORMANCE OF THE LOANS, ALL OTHER OBLIGATIONS, AND THIS AGREEMENT (INCLUDING EACH OF THE OBLIGATIONS, COVENANTS AND AGREEMENTS SET FORTH HEREIN). Each Borrower hereby agrees that it is jointly and severally liable for, and absolutely and unconditionally promises to pay to Lender, the prompt payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of the Obligations and all costs and expenses including, without limitation, all court costs and Attorney Costs and paralegals’ fees (including allocated costs of in-house counsel and paralegals) and expenses paid or incurred by Lender in endeavoring to collect all or any part of the Obligations from, or in prosecuting any action against, any Borrower or any guarantor of all or any part of the Obligations. Each Borrower further agrees that the Obligations may be extended or renewed in whole or in part without notice to or further assent from it, and that it remains bound pursuant to this Section 15 notwithstanding any such extension or renewal. Each Borrower is primarily and not secondarily liable for all Obligations, including all Obligations of each other Borrower. Each Borrower waives any right to require Lender to sue any Borrower, any guarantor, or any other Person obligated for all or any part of the Obligations (each, an “Obligated Party”), or otherwise to enforce its payment against any Collateral securing all or any part of the Obligations.
15.2
No Discharge or Diminishment. (a) Except as otherwise provided for herein, the obligations of each Borrower hereunder are unconditional and absolute and not subject to any reduction, limitation, impairment or termination for any reason (other than the indefeasible payment in full in cash of the Obligations), including: (i) any claim of waiver, release, extension, renewal, settlement, surrender, alteration, or compromise of any of the Obligations, by
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operation of law or otherwise; (ii) any change in the corporate existence, structure or ownership of any Borrower or any guarantor of or other Person liable for any of the Obligations; (iii) any insolvency, bankruptcy, reorganization or other similar proceeding affecting any Obligated Party, or their assets or any resulting release or discharge of any obligation of any Obligated Party; or (iv) the existence of any claim, setoff or other rights which any Borrower may have at any time against any Obligated Party, Lender, or any other Person, whether in connection herewith or in any unrelated transactions; (b) the obligations of each Borrower hereunder are not subject to any defense or setoff, counterclaim, recoupment, or termination whatsoever by reason of the invalidity, illegality, or unenforceability of any of the Obligations or otherwise, or any provision of applicable law or regulation purporting to prohibit payment by any Obligated Party, of the Obligations or any part thereof; (c) further, the obligations of any Borrower hereunder are not discharged or impaired or otherwise affected by: (i) the failure of Lender to assert any claim or demand or to enforce any remedy with respect to all or any part of the Obligations; (ii) any waiver or modification of or supplement to any provision of any agreement relating to the Obligations; (iii) any release, non-perfection, or invalidity of any indirect or direct security for the obligations of any Borrower for all or any part of the Obligations or any obligations of any guarantor of or other Person liable for any of the Obligations; (iv) any action or failure to act by Lender with respect to any Collateral securing any part of the Obligations; or (v) any default, failure or delay, willful or otherwise, in the payment or performance of any of the Obligations, or any other circumstance, act, omission or delay that might in any manner or to any extent vary the risk of such Borrower or that would otherwise operate as a discharge of any Borrower as a matter of law or equity (other than the indefeasible payment in full in cash of the Obligations).
15.3
Defenses Waived. To the fullest extent permitted by applicable law, each Borrower hereby waives any defense based on or arising out of any defense of any Borrower or the unenforceability of all or any part of the Obligations from any cause, or the cessation from any cause of the liability of any Borrower, other than the indefeasible payment in full in cash of the Obligations. Without limiting the generality of the foregoing, each Borrower irrevocably waives acceptance hereof, presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against any Obligated Party, or any other Person. Each Borrower confirms that it is not a surety under any state law and shall not raise any such law as a defense to its obligations hereunder. Lender may, in its sole discretion, foreclose on any Collateral held by it by one or more judicial or non-judicial sales, accept an assignment of any such Collateral in lieu of foreclosure or otherwise act or fail to act with respect to any Collateral securing all or a part of the Obligations, compromise or adjust any part of the Obligations, make any other accommodation with any Obligated Party or exercise any other right or remedy available to it against any Obligated Party, without affecting or impairing in any way the liability of any Borrower under this Section 15 except to the extent the Obligations have been fully and indefeasibly paid in cash. To the fullest extent permitted by applicable law, each Borrower waives any defense arising out of any such election even though that election may operate, pursuant to applicable law, to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Borrower against any Obligated Party or any security.
15.4
Rights of Subrogation. No Borrower will assert any right, claim or cause of action, including, without limitation, a claim of subrogation, contribution or indemnification that
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it has against any Obligated Party, or any Collateral, until Borrowers have fully paid and performed all of the Obligations.
15.5
Reinstatement; Stay of Acceleration. If at any time any payment of any portion of the Obligations is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, or reorganization of any Borrower or otherwise, each Borrower’s obligations under this Agreement with respect to that payment shall be reinstated at such time as though the payment had not been made. If acceleration of the time for payment of any of the Obligations is stayed upon the insolvency, bankruptcy or reorganization of any Borrower, all such amounts otherwise subject to acceleration under the terms of any agreement relating to the Obligations shall nonetheless be payable by Borrowers forthwith on demand by Lender.
15.6
Information. Each Borrower assumes all responsibility for being and keeping itself informed of the other Borrowers’ financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks that each Borrower assumes and incurs under this Section 15, and agrees that Lender shall not have any duty to advise any Borrower of information known to it regarding those circumstances or risks.
15.7
Contribution. Each of the Borrowers covenants and agrees that its right to receive any contribution under this Section 15 from another Borrower shall be subordinate and junior in right of payment to the payment in full in cash of the Obligations, provided that nothing in this provision shall affect any Borrower’s joint and several liability for the entire amount of the Obligations. This provision is for the benefit of both Lender and Borrowers and may be enforced by any one, or more, or all of them in accordance with the terms hereof.
15.8
Liability Cumulative. The liability of each Borrower under this Section 15 is in addition to and shall be cumulative with all liabilities of each Borrower to Lender under this Agreement and the other Loan Documents to which such Borrower is a party or in respect of any obligations or liabilities of the other Borrowers, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary.
15.9
Each Borrower as a Representative of other Borrowers. Each Borrower is hereby appointed by the other Borrower to act as the contractual representative of the other Borrower hereunder and under each other Loan Document, and each Borrower irrevocably authorizes the other Borrower to act as the contractual representative of the Borrowers with the rights and duties expressly set forth herein and in the other Loan Documents. Each Borrower agrees to act as such contractual representative upon the express conditions contained in this Section 15. Additionally, each Borrower hereby appoints the other Borrower as its agent to receive all of the proceeds of the Loans. Lender, and its officers, directors, agents or employees, shall not be liable to any Borrower for any action taken or omitted to be taken by any Borrower pursuant to this Section 15 or this Agreement taken as a whole. Each Borrower shall have and may exercise all rights and powers of the other Borrower under the Loan Documents, together with such rights and powers as are reasonably incidental thereto. Each Borrower may execute any of its duties, rights or remedies under this Agreement and under any other Loan Document by or through authorized officers. Each Borrower hereby empower and authorizes the other Borrower, on
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behalf of both Borrowers, to execute and deliver to Lender the Loan Documents and all related agreements, certificates, documents, or instruments as shall be necessary or appropriate to effect the purposes of the Loan Documents, including without limitation, any solvency certificates borrowing base certificates or compliance certificates. Each Borrower agrees that any action taken by the other Borrower in accordance with the terms of this Agreement or the other Loan Documents, and the exercise by any Borrower of its rights or powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon both Borrowers.
[signature pages follow]
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The parties hereto have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date first set forth above.
![[prnx_ex10z10014.gif]](prnx_ex10z10014.gif)
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Schedule 9.1
Qualifications to do Business
| |
Entity
| Registered Jurisdictions
|
Pernix Group, Inc.
| State of Delaware
State of Illinois
State of Colorado
State of Texas
State of Louisiana
State of Georgia
State of West Virginia
|
PERNIX RE LLC
| State of Illinois
|
3193012v9/28370-0031
Schedule 9.6
Litigation and Contingent Liabilities
None.
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Schedule 9.8
Subsidiaries
Capital Securities issued by Pernix Group, Inc.
(beneficial owners of 5% or more as of 10/21/2014)
| | |
Owner
|
Number of Shares Held
| Percent of Outstanding Common Stock
|
Ernil Continental Sa Bvi
| 4,386,313
| 46.6%
|
Halbarad Group Ltd Bvi
| 3,628,643
| 38.6%
|
Al Amal Investment Co. KSCC
| 549,396
| 5.8%
|
Sayed Hamid Behbehani & Sons Co. and Family members
| 527,936
| 5.6%
|
Pernix Group, Inc. owns Capital Securities in each of the following:
| |
Subsidiary Name
| Capital Securities Percentage
|
PERNIX RE LLC
| 100%
|
Vanuatu Utilities & Infrastructure LTD
Pernix LTC LLC
Pernix (Fiji) Limited
Pernix Solomon Islands LTD
Pernix for Construction Contracting, LTD.
Pernix Niger SARL
Pernix Guam LLC
Pernix - Serka LP
Pernix Technical Works, Co. LLC
PERNIX SHBC, L.P.
Pernix Tishman LLC
| 100%
80% 1
100%2 ( 75%)
100%
100%
100%
100%
52%
49%3
51%
51%
|
| |
| |
PERNIX RE LLC has no Subsidiaries.
1 LTC, Inc. the 20% owner of Pernix LTC LLC declared bankruptcy in May 2014.
2 Pernix Group, Inc. is currently negotiating to sell 25% interest in Pernix (Fiji) Limited, the Share Sale Agreement was signed on October 29, 2014. Closing is still being scheduled.
3United Arab Emerate law prevents foreign ownership of legal entities more than 49%, Pernix has a power of attorney from 51% owner of Pernix Technical Works granting control over Pernix Technical works.
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Schedule 9.16
Insurance
See attached.
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Schedule 9.17
Real Property; Collateral Locations; Collateral in Possession of Lessor, Bailee, Consignee or Warehouseman
Pernix Group, Inc. – Collateral Locations:
Chief Executive Office:
151 East 22nd Street
Lombard, Illinois 60148
Lessor: PERNIX RE LLC
Other Collateral Locations:
6312 S. Fiddler Green Circle, Office # 305
Greenwood Village, Colorado, 80111
Lessor: Regus Group Companies
Located at:
6312 S. Fiddler Green Circle, Office # 300E
Greenwood Village, Colorado, 80111
PERNIX RE LLC – Collateral Locations:
Chief Executive Office (Owned):
151 East 22nd Street
Lombard, Illinois 60148
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Schedule 9.20
Labor Matters
None.
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Schedule 9.24
Filings and Perfection
See attached.
Please note that the attached financing statements will be filed with the applicable filing office.
Execution of the following by all parties thereto:
1. Loan and Security Agreement
2. Partnership Interest Pledge Agreement
3. Assignment of Partnership Interest in blank
4. Acknowledgment of Pledge
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Schedule 9.25
Loan Party Information
Pernix Group, Inc.
| |
Jurisdiction of Organization:
| State of Delaware, USA
|
Chief Executive Office:
| 151 E. 22nd Street, Lombard, IL, 60148
|
Former Offices:
| 860 Parkview BLVD, Lombard, IL, 60148
|
Exact Legal Name:
| Pernix Group, Inc.
|
Former Names:
| Telesource International, Inc. ( August 17, 2011)
|
Delaware File Number:
| 3404659
|
Federal EIN:
| 36-4025775
|
| |
Jurisdiction of Organization:
| State of Illinois, USA
|
Chief Executive Office:
| 151 E. 22nd Street, Lombard, IL 60148
|
Exact Legal Name:
| PERNIX RE LLC
|
Former Names:
| Pernix Government Services LLC ( March 26, 2013)
|
| Pernix Construction U.S. LLC (February 10, 2012)
|
Illinois File Number:
| 0388044-3
|
Federal EIN:
| 90-0819291
|
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Schedule 9.26
Vehicles
Pernix Group, Inc.
| |
Vehicle Make
| Acura MDX
|
Vehicle Year
| 2014
|
VIN
| 5FRYD4H4XEB015327
|
Leased or Owned
| Leased
|
Title
| McGrath Acura of Westmont
|
License Plate Number
| L563123- Illinois
|
| |
Vehicle Make
| Volkswagen Jetta
|
Vehicle Year
| 2012
|
VIN
| 3VWDP7AJ2CH370734
|
Leased or Owned
| Leased
|
Title
| VW Credit Leasing Ltd.
|
License Plate Number
| P26 8334- Illinois
|
PERNIX RE LLC
None.
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Schedule 9.27
Investment Property
Pernix Group, Inc. owns Capital Securities in each of the following:
| |
Subsidiary Name
| Capital Securities Percentage
|
PERNIX RE LLC
| 100%
|
Vanuatu Utilities & Infrastructure LTD
Pernix LTC LLC
Pernix (Fiji) Limited
Pernix Solomon Islands LTD
Pernix for Construction Contracting, LTD.
Pernix Niger SARL
Pernix Guam LLC
Pernix - Serka LP
Pernix Technical Works, Co. LLC
PERNIX SHBC, L.P.
Pernix Tishman LLC
| 100%
80%
100%1 ( 75%)
100%
100%
100%
100%
52%
49%
51%
51%
|
1 Pernix Group, Inc. is currently negotiating to sell 25% interest in Pernix (Fiji) Limited, the Share Sale Agreement was signed on October 29, 2014. Closing is still being scheduled.
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Schedule 9.29
Intellectual Property
Owned by Pernix Group, Inc.
| | | |
REF.
| MARK
| REG NUMBER
| REG DATE
|
1.
| PERNIX
| 4,238,031
| Nov. 6, 2012
|
2.
| PERNIX GROUP
| 4,234,347
| Oct. 30, 2012
|
3.
| ![[prnx_ex10z10015.jpg]](prnx_ex10z10015.jpg)
| 4,238,032
| Nov. 6, 2012
|
4.
| ![[prnx_ex10z10016.jpg]](prnx_ex10z10016.jpg)
| 4,234,348
| Oct. 30, 2012
|
Patents
None.
Copyrights
None.
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Schedule 9.32
Depositary and Other Deposit Accounts
| | | | | |
Loan Party
| Bank
| Account #
| Type of Bank
| Type of Account
| Address of Bank
|
Pernix Group, Inc.
| J.P. Morgan Chase
| 936645308
| Commercial
| Commercial Checking
| 10 S. Dearborn
Chicago, IL, 60603
|
Pernix Group, Inc.
| Wells Fargo
| 4123425779
| Commercial
| Money Market Account
| 10 S. Wacker Drive
Chicago, IL 60606
|
| | | | | |
Pernix RE, LLC
| Wells Fargo
| 4125326090
| Commercial
| Commercial Check
| 10 S. Wacker Drive
Chicago, IL 60606
|
Pernix Group, Inc.
| Barrington Bank & Trust
| 550053093
| Commercial
| Commercial Checking
| 201 South Hough Street
Barrington, IL 60010
|
Pernix Group, Inc. TAMU
| Barrington Bank & Trust
| 550053107
| Commercial
| Commercial Checking
| 201 South Hough Street
Barrington, IL 60010
|
Pernix RE, LLC
| Barrington Bank & Trust
| 550051848
| Commercial
| Commercial Checking
| 201 South Hough Street
Barrington, IL 60010
|
Pernix Serka Joint Venture
| Barrington Bank & Trust
| 550051821
| Commercial
| Commercial Checking
| 201 South Hough Street
Barrington, IL 60010
|
Pernix Group, Inc.
| Barrington Bank & Trust
| 550053190
| Commercial
| Letter of Credit Cash Collateral
| 201 South Hough Street
Barrington, IL 60010
|
Pernix Group, Inc.
| Barrington Bank & Trust
| 550053204
| Commercial
| Line of Credit Pledge Cash Collateral
| 201 South Hough Street
Barrington, IL 60010
|
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Schedule 10.16
Commercial Tort Claims
None.
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Schedule 11.1
Existing Debt
None.
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Schedule 11.2
Existing Liens
None.
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Schedule 11.11
Investments
None.
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ANNEX A
COMMITMENTS
| | |
Lender
| Revolving
Commitment Amount
| Letter of Credit
Commitment Amount
|
Barrington Bank & Trust Company, National Association
| $5,000,000
| $10,000,000
|
TOTALS
| $5,000,000
| $10,000,000
|
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ANNEX B
ADDRESSES FOR NOTICES
BORROWERS:
Pernix Group, Inc.
151 East 22nd Street
Lombard, Illinois 60148
Attn: Nidal Zayed, John Zayed or Patrick Gainer
Telephone: (630) 620-4787
Facsimile: (630) 620-4753
Pernix RE LLC
151 East 22nd Street
Lombard, Illinois 60148
Attn: Nidal Zayed, John Zayed or Patrick Gainer
Telephone: (630) 620-4787
Facsimile: (630) 620-4753
LENDER:
Barrington Bank & Trust Company, National Association
201 South Hough Street
Barrington, Illinois 60010
Attn: William Dierking
Telephone: (847) 842-4500
Facsimile: 847-304-6670
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EXHIBIT A
LEGAL DESCRIPTION OF REAL PROPERTY
![[prnx_ex10z10018.gif]](prnx_ex10z10018.gif)
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EXHIBIT B
FORM OF REVOLVING NOTE
November 10, 2014
Chicago, Illinois
$5,000,000
Each of the undersigned, for value received, jointly and severally promise to pay to the order of BARRINGTON BANK & TRUST COMPANY, NATIONAL ASSOCIATION (“Lender”) FIVE MILLION DOLLARS AND 00/100 ($5,000,000), or such lesser amount equal to the aggregate unpaid principal amount of all Loans owing from the undersigned (each a “Borrower”, collectively, the “Borrowers”) to Lender at such time, together with all unpaid interest accrued thereon and all other fees, costs, and expenses related thereto, on the dates set forth in the Loan and Security Agreement (as defined below).
Each Borrower further promises to jointly and severally pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Loan and Security Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America.
This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Loan and Security Agreement, dated as of November 10, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan and Security Agreement”; capitalized terms not otherwise defined herein are used herein as defined in the Loan and Security Agreement), among the Borrowers and Lender, to which Loan and Security Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or upon its due date accelerated.
This Note is secured by the Collateral as set forth in the Loan and Security Agreement and the Collateral Documents, and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof.
If a payment under this Note (principal, interest or other) is ten (10) or more days late, Borrowers will be charged, and each Borrowers agrees to jointly and severally pay immediately, a late fee of five percent (5%) of the unpaid portion of the payment. Each Borrower agrees that the damages to be sustained by Lender for the detriment caused by any late payment are extremely difficult and impractical to ascertain, and that the late fee specified in the preceding sentence is a reasonable estimate of such damages, does not constitute interest, and is not a penalty.
THIS NOTE SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
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EACH BORROWER ACKNOWLEDGES AND IRREVOCABLY AGREES THAT IT SHALL BE JOINTLY AND SEVERALLY LIABLE, IN ALL RESPECTS, FOR THE PAYMENT AND PERFORMANCE OF THE LOANS, ALL OTHER OBLIGATIONS, THIS NOTE, THE LOAN AND SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS(INCLUDING EACH OF THE OBLIGATIONS, COVENANTS AND AGREEMENTS SET FORTH THEREIN).
PERNIX GROUP, INC.
By:
Name:
Title:
PERNIX RE LLC
By:
Name:
Title:
3193012v9/28370-0031
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
To:
Barrington Bank & Trust Company, National Association, as Lender
Please refer to the Loan and Security Agreement dated as of November 10, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan and Security Agreement”) by and among Pernix Group, Inc. and Pernix RE LLC (each a “Borrower” and collectively, the “Borrowers”), and Barrington Bank & Trust Company, National Association, as Lender. Terms used but not otherwise defined herein are used herein as defined in the Loan and Security Agreement.
I.
Reports. Enclosed herewith is a copy of the [annual audited/quarterly] report of Borrowers as at _____________, ____ (the “Computation Date”), which report fairly presents in all material respects the financial condition and results of operations of Borrowers and their respective Subsidiaries as of the Computation Date and has been prepared in accordance with GAAP consistently applied.
II.
Financial Tests. Borrowers hereby certify and warrant to you that the following is a true and correct computation as at the Computation Date of the following ratios and/or financial restrictions contained in the Loan and Security Agreement:
[REVISE AS APPROPRIATE]
A.
Section 11.14.1 - Minimum Net Income
1.
Consolidated net income (or loss)
of Pernix and its subsidiaries
$__________
2.
Plus (to the extent deducted):
non-cash tax expense
$__________
depreciation
$__________
amortization
$__________
value of accrued but unpaid
Stock dividends on Series B
Capital Securities
$__________
3.
Minus:
extraordinary gains
$__________
gains from
discontinued operations
$__________
4.
Consolidated Net Income
(Item A.1 plus Item A.2 minus Item A-3)
$__________
5
Minimum required
$1.00
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6.
Met
Yes/No
B.
Minimum Liquidity
1.
Cash of Pernix Group, Inc.
as of the Computation Date
$__________
2.
Cash Equivalents of Pernix Group,
Inc. as of the Computation Date
$__________
3.
LOC Liquidity as of
the Computation Date
$__________
4.
At Lender Liquidity as of
the Computation Date
(Item B.1 plus Item B.2) minus Item B.3
$__________
5.
Minimum Required
$5,000,000
6.
Met
Yes/No
Borrowers further certify to you that no Default or Event of Default has occurred and is continuing.
Described below is a discussion of Pernix’s and its subsidiaries’ financial condition, changes in the financial condition and results of operations.
[___]
Borrowers have caused this Certificate to be executed and delivered by its duly authorized officer on _________, ____.
PERNIX GROUP, INC.
By:
Name:
Title:
PERNIX RE LLC
By:
Name:
Title:
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EXHIBIT D
FORM OF BORROWING BASE CERTIFICATE
To:
Barrington Bank & Trust Company, National Association, as Lender
Please refer to the Loan and Security Agreement dated as of November 10, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan and Security Agreement”) by and among Pernix Group, Inc. and Pernix RE LLC (each a “Borrower” and collectively, the “Borrowers”), and Barrington Bank & Trust Company, National Association, as Lender. Terms used but not otherwise defined herein are used herein as defined in the Loan and Security Agreement.
Borrowers hereby certify and warrant to Lender that at the close of business on ______________, ____, the Borrowing Base was $_____________, computed as set forth on the schedule attached hereto.
Borrowers have caused this Certificate to be executed and delivered by its officer thereunto duly authorized on ___________, ______.
PERNIX GROUP, INC.
By:
Name:
Title:
PERNIX RE LLC
By:
Name:
Title:
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SCHEDULE TO BORROWING BASE CERTIFICATE
Dated as of [_________________]
![[prnx_ex10z10020.gif]](prnx_ex10z10020.gif)
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EXHIBIT E
FORM OF NOTICE OF BORROWING
To:
Barrington Bank & Trust Company, National Association, as Lender
Please refer to the Loan and Security Agreement dated as of November 10, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan and Security Agreement”) by and among Pernix Group, Inc. and Pernix RE LLC (each a “Borrower” and collectively, the “Borrowers”), and Barrington Bank & Trust Company, National Association, as Lender. Terms used but not otherwise defined herein are used herein as defined in the Loan and Security Agreement.
The undersigned hereby give irrevocable notice, pursuant to Section 2.2.1 of the Loan and Security Agreement, of a request hereby for a borrowing as follows:
(i)
The requested borrowing date for the proposed borrowing (which is a Business Day) is ______________, ____.
(ii)
The aggregate amount of the proposed borrowing is $______________.
(iii)
[Use of requested borrowing: ]
The undersigned hereby certify that on the date hereof and on the date of borrowing set forth above, and immediately after giving effect to the borrowing requested hereby: (i) there exists and there shall exist no Default or Event of Default under the Loan and Security Agreement; provided that non-compliance with Section 11.14 of the Loan and Security Agreement will constitute an Event of Default notwithstanding any applicable cure period; (ii) each of the representations and warranties contained in the Loan and Security Agreement and the other Loan Documents is true and correct as of the date hereof, and will be true and correct as of and on the date of such borrowing and immediately after giving effect to the such borrowing, except to the extent that such representation or warranty expressly relates to another date and except for changes therein expressly permitted or expressly contemplated by the Loan and Security Agreement and (iii) Borrowers are in compliance with Section 11.14.2 of the Loan and Security Agreement.
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Borrowers have caused this Notice of Borrowing to be executed and delivered by its officer thereunto duly authorized on ___________, ______.
PERNIX GROUP, INC.
By:
Name:
Title:
PERNIX RE LLC
By:
Name:
Title:
[Consented to By:
BARRINGTON BANK & TRUST COMPANY, NATIONAL ASSOCIATION
By:
Name:
Title:
]
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EXHIBIT F
FORM OF NOTICE OF LOC
To:
Barrington Bank & Trust Company, National Association, as Lender
Please refer to the Loan and Security Agreement dated as of November 10, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan and Security Agreement”) by and among Pernix Group, Inc. and Pernix RE LLC (each a “Borrower” and collectively, the “Borrowers”), and Barrington Bank & Trust Company, National Association, as Lender. Terms used but not otherwise defined herein are used herein as defined in the Loan and Security Agreement.
The undersigned hereby gives irrevocable notice, pursuant to Section 2.3.1 of the Loan and Security Agreement, of a request hereby for a Letter of Credit as follows:
(i)
Type: ____________________
(ii)
Use of Letter of Letter of Credit: [___].
Attached hereto as Schedule I is the related L/C Application, duly executed by [applicable Borrower], together with such other documentation as the Issuing Lender has requested in support thereof. Borrowers certify that the L/C Application specifies, among other things, the date on which the proposed Letter of Credit is to be issued, the expiration date of such Letter of Credit (which shall not be later than the scheduled Termination) and whether such Letter of Credit is to be transferable in whole or in part.
The undersigned hereby certify that on the date hereof and on the date of issuance of the Letter of Credit set forth above, and immediately after giving effect to such issuance requested hereby: (i) there exists and there shall exist no Default or Event of Default under the Loan and Security Agreement; provided that non-compliance with Section 11.14 of the Loan and Security Agreement will constitute an Event of Default notwithstanding any applicable cure period; (ii) each of the representations and warranties contained in the Loan and Security Agreement and the other Loan Documents is true and correct as of the date hereof, and will be true and correct as of and on the date of such issuance and immediately after giving effect to the such issuance, except to the extent that such representation or warranty expressly relates to another date and except for changes therein expressly permitted or expressly contemplated by the Loan and Security Agreement, (iii) Borrowers are in compliance with Section 11.14.2 of the Loan and Security Agreement, and (iv) Borrowers have deposited in the LOC Account the related Cash Collateral.
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Borrowers have caused this Notice of LOC to be executed and delivered by its officer thereunto duly authorized on ___________, ______.
PERNIX GROUP, INC.
By:
Name:
Title:
PERNIX RE LLC
By:
Name:
Title:
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EXHIBIT G
FORM OF JOINDER
This JOINDER AGREEMENT (this “Agreement”) dated as of [______] is executed by the undersigned for the benefit of Barrington Bank & Trust Company, National Association, as Lender (the “Lender”) in connection with that certain Loan and Security Agreement dated as of November 10, 2014 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan and Security Agreement”) by and among Pernix Group, Inc. and Pernix RE LLC (each a “Borrower” and collectively, the “Borrowers”), and Barrington Bank & Trust Company, National Association, as Lender. Capitalized terms not otherwise defined herein are being used herein as defined in the Loan and Security Agreement.
Each Person signatory hereto is required to execute this Agreement pursuant to Section 10.9(b) of the Loan and Security Agreement.
In consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each signatory hereby agrees as follows:
1.
Each such Person assumes all the obligations of a Loan Guarantor and a Loan Party under the Loan and Security Agreement and agrees that such person or entity is a Loan Guarantor and a Loan Party and bound as a Loan Guarantor and a Loan Party under the terms of the Loan and Security Agreement, as if it had been an original signatory to such agreement. In furtherance of the foregoing, such Person hereby assigns, pledges and grants to Lender a security interest in all of its right, title and interest in and to the Collateral owned thereby to secure the Secured Obligations.
2.
Schedules 9.1, 9,6, 9.8, 9.16, 9.17, 9.20, 9.24, 9.25, 9.26, 9.27, 9.29, 9.32, and 10.16 of the Loan and Security Agreement are hereby amended to add the information relating to each such Person set out on Schedules 9.1, 9,6, 9.8, 9.16, 9.17, 9.20, 9.24, 9.25, 9.26, 9.27, 9.29, 9.32, and 10.16 respectively, hereof. Each such Person hereby makes to Lender the representations and warranties set forth in the Loan and Security Agreement applicable to such Person and the applicable Collateral and confirms that such representations and warranties are true and correct after giving effect to such amendment to such Schedules.
3.
In furtherance of its obligations under Section 10.9(b) of the Loan and Security Agreement, each such Person agrees to deliver to Lender appropriately complete UCC financing statements naming such person or entity as debtor and Lender as secured party, and describing its Collateral and such other documentation as Lender (or its successors or assigns) may require to evidence, protect and perfect the Liens created by the Loan and Security Agreement, as modified hereby. Each such Person acknowledges the authorizations given to Lender under Section 10.16(b) of the Loan and Security Agreement and otherwise.
4.
Each such Person’s address for notices shall be the address of Borrowers set forth in the Loan and Security Agreement and each such Person hereby appoints Pernix as its agent to receive notices hereunder.
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5.
This Agreement shall be deemed to be part of, and a modification to, the Loan and Security Agreement and shall be governed by all the terms and provisions of the Loan and Security Agreement, with respect to the modifications intended to be made to such agreement, which terms are incorporated herein by reference, are ratified and confirmed and shall continue in full force and effect as valid and binding agreements of each such person or entity enforceable against such person or entity. Each such Person hereby waives notice of Lender’s acceptance of this Agreement. Each such Person will deliver an executed original of this Agreement to Lender.
[add signature block for each new Loan Party]
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EXHIBIT H
LETTER OF CREDIT APPLICATIONS
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![[prnx_ex10z10022.gif]](prnx_ex10z10022.gif)
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![[prnx_ex10z10026.gif]](prnx_ex10z10026.gif)
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![[prnx_ex10z10028.gif]](prnx_ex10z10028.gif)
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EXHIBIT I
FORM OF MEMBERSHIP INTEREST PLEDGE AGREEMENT
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Form of Membership Interest Pledge Agreement
This Membership Interest Pledge Agreement (as amended, restated, supplemented or modified from time to time, this “Pledge Agreement”), dated as of [__], is made and entered into between Pernix Group, Inc. (“Pledgor”), and Barrington Bank and Trust Company, National Association (the “Secured Party”), and consented to and approved by the parties set forth on the signature pages hereto.
RECITALS:
WHEREAS, Secured Party, Pledgor, and Pernix RE LLC entered into that certain Loan and Security Agreement, dated as of November 10, 2014 (as amended, restated, supplemented or modified from time to time, the “Loan Agreement”), pursuant to which Secured Party has agreed to make loans to Pledgor and Pernix RE LLC (“Loans”).
WHEREAS, Pledgor owns issued and outstanding membership interests, limited liability company interests, or other such similar interest, [LLC Entity] and as a condition to the making of the Loans, Secured Party requires Pledgor to execute and deliver this Pledge Agreement and grant the security interest contemplated hereby in order to secure the Obligations; and
NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained, and to induce Secured Party to make the Loans, it is agreed as follows:
1.
Definitions. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the
Loan Agreement. In addition, the following terms have the meanings set forth below:
(a)
“Bylaws” means the Bylaws of Pernix Group, Inc., as such Bylaws may be amended, restated, supplemented or modified from time to time.
(b)
“Event of Default” is defined in Section 7 hereof.
(c)
“LLC Entity” means [___].
(d)
“Member” means a “Member” of the LLC Entity, as such term is defined in Operating Agreement.
(e)
“Obligations” means all obligations, indebtedness and liabilities of the Pledgor and Pernix RE LLC to Secured Party arising under or in relation to the Loan Agreement and the other Loan Documents, in each case, whether now existing or hereafter arising, now due or to become due, direct or indirect, joint, several or joint and several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, or howsoever otherwise arising, incurred, created or evidenced.
(f)
“Operating Agreement” means [___], as may be amended, restated, supplemented or modified from time to time.
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(g)
“Securities Act” means the Securities Act of 1933, as amended.
(h)
“UCC” means the Illinois or [__] Uniform Commercial Code, or such other uniform commercial code, as is applicable, each as amended from time to time
(i)
The meanings given to terms herein are equally applicable to both the singular and plural forms of such terms. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Pledge Agreement will refer to this Pledge Agreement as a whole and not to any particular provision of this Pledge Agreement, and section, schedule and exhibit references are to this Pledge Agreement unless otherwise specified.
2.
Pledge. For the prompt payment, performance and other satisfaction in full of all Obligations, Pledgor hereby pledges and grants to Secured Party a security interest in all of its right, title and interest in, to and under the following, whether now owned or existing or hereafter arising or acquired, and wherever located (collectively, the “Pledged Collateral”):
(a)
100% of Pledgor’s membership interests, limited liability company interests, or other such similar interests, in LLC Entity (collectively, the “Pledged Interests”), and the certificates and other instruments or agreements, if any, representing or evidencing the Pledged Interests, and all dividends, distributions, cash, instruments, securities, general intangibles, financial assets, securities entitlements, investment property and all supporting obligations related thereto, and any and all additions, substitutions, replacements, profits, payments, subscription, voting, preferential rights or other rights of any kind received on account of any of the foregoing or accruing with respect thereto or by reason of recapitalization, reclassification, merger, consolidation, liquidation, exchange, renewal, redemption, substitution, or other transaction regarding the Pledged Interests;
(b)
(1) all rights of Pledgor embodied in or arising out of Pledgor’s status as a Member of LLC Entity, consisting of: (i) all economic rights, including without limitation, all rights to share in the profits and losses of LLC Entity and all rights to receive distributions of the assets of LLC Entity; and (ii) all governance rights, including without limitation, all rights to vote, consent to action and otherwise participate in the management of LLC Entity, and (2) all other rights and privileges of Pledgor with respect to the interests and assets referred to in clause (a) above and in the Operating Agreement;
(c)
any and all property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing; and
(d)
all books, records, reports and correspondence with respect to the foregoing.
3.
Delivery or Transfer of Pledged Collateral. Secured Party has the right, at any time upon the occurrence and during the continuance of an Event of Default, in its discretion and without notice to Pledgor, to transfer to or to register in the name of Secured Party any or all of the Pledged Collateral. Concurrently with the execution and delivery of this Pledge Agreement, Pledgor is delivering to Secured Party (i) an assignment of membership interests, limited liability company interests, or other such similar interests, in blank (the “Assignment of Interest”), in the
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form set forth on Exhibit A hereto, with respect to the Pledged Interests of LLC Entity, transferring all of the Pledged Interests in blank, duly executed by Pledgor and undated and (ii) an acknowledgment to this Pledge Agreement (“Acknowledgment”) for LLC Entity, in the form set forth on Exhibit B hereto. Secured Party shall have the right, at any time in its discretion upon the occurrence and during the continuance of an Event of Default, to transfer to, and to designate on any Assignment of Interest, any person to whom the Pledged Interests are sold in accordance with the provisions hereof. In addition, Secured Party shall have the right at any time to exchange an Assignment of Interest representing or evidencing the Pledged Interests or any portion thereof for one or more additional or substitute Assignments of Interest representing or evidencing smaller or larger percentages of the Pledged Interests represented or evidenced thereby, subject to the terms hereof and thereof.
4.
Representations and Warranties. Pledgor represents and warrants to Secured Party that as of the date hereof:
(a)
Pledgor’s exact legal name is as set forth on the organizational documents recorded with the Secretary of State of the State of Delaware, a recent certified copy of which has been provided to Secured Party.
(b)
Pledgor has the full right, power and authority to enter into and execute and deliver this Pledge Agreement and to perform and consummate the transactions contemplated hereby.
(c)
Pledgor’s ownership percentage in LLC Entity is as set forth on Exhibit C hereto, and Pledgor is the beneficial owner of the Pledged Collateral and has good and marketable title to the Pledged Collateral, free and clear of any security interest, lien, charge or encumbrance thereon or affecting the title thereto, except for the security interests created by this Pledge Agreement.
(d)
Neither the execution and delivery of this Pledge Agreement or the pledge of the Pledged Collateral hereunder will violate (i) any rule, law, regulation, order, writ, judgment, injunction, decree or award binding on Pledgor or (ii) the provisions of any instrument or agreement to which Pledgor is a party or is subject, including the Bylaws, the Operating Agreement or any other organizational documents of Pledgor or LLC Entity, or by which its property may be bound or affected, or conflict with or cause a default thereunder, or result in or require the creation or imposition of any lien in, of or on the property of Pledgor pursuant to the terms of such instrument or agreement.
(e)
No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any person is required (i) in connection with Pledgor’s grant of security interest in the Pledged Collateral or (ii) for the perfection of or the exercise by Secured Party of its rights and remedies hereunder, or if required, (1) such consent, approval, order or authorization has been obtained, (2) such registration, declaration or filing has been accomplished, or (3) such notice has been given prior to the date hereof.
(f)
This Pledge Agreement has been duly authorized, executed and delivered by Pledgor and constitutes the legal, valid and binding obligation of Pledgor enforceable in
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accordance with its terms except as enforceability may be limited by the applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or law), and creates a security interest which is enforceable against Pledgor in all Pledged Collateral it now owns or hereafter acquires.
(g)
The Pledged Interests were duly and validly issued, are fully paid and non-assessable and Pledgor owns the Pledged Interests as set forth in Section 2.
(h)
Neither the Pledged Collateral nor the Pledged Interests are evidenced by or represented by certificates of any kind and no membership interests, limited liability company interests, or other such interest similar of LLC Entity are comprised of “securities” (as such term is defined in the UCC).
(i)
The security interest granted herein (i) will not cause a termination of LLC Entity under the Internal Revenue Code of 1986, as amended, and (ii) complies with all applicable state and federal security laws and regulations. Pledgor has been provided with all information and agreements that it requires in connection with the security interest granted herein.
(j)
No uniform commercial code financing statement describing all or any portion of the Pledged Collateral has been filed in any jurisdiction, other than any uniform commercial code financing statement naming Secured Party as secured party with respect to the Pledged Collateral.
(k)
When a uniform commercial code financing statement, adequately describing the Pledged Collateral, has been filed by Secured Party in the Delaware Secretary of State’s office against Pledgor with respect to the Pledged Collateral, such Secured Party will have a fully perfected first-priority security interest in the Pledged Collateral.
(l)
No person has possession or control of any of the Pledged Collateral of such nature that perfection of a security interest is accomplished by control.
The representations and warranties set forth in this Section 4 will survive the execution and delivery of this Pledge Agreement.
5.
Covenants. Pledgor covenants and agrees that until the indefeasible payment, performance or other satisfaction in full of the Obligations and termination of this Pledge Agreement as provided herein:
(a)
Pledgor will not change its name or address without providing at least thirty (30) days prior written notice to Secured Party.
(b)
Pledgor will notify LLC Entity to mark its books and records acknowledging the security interest hereby granted in the Pledged Interests.
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(c)
Without Secured Party’s consent, Pledgor will not sell, assign, transfer, pledge, dispose of, grant any option or warrant with respect to or otherwise encumber any of its rights in or to any Pledged Collateral or any dividends, other distributions, payments or other rights or proceeds with respect thereto or grant a lien, charge, encumbrance or security interest on any thereof.
(d)
Pledgor will not (i) do anything to impair its or Secured Party’s interests or rights in the Pledged Collateral or (ii) without Secured Party’s consent, permit, suffer or otherwise consent to any termination of, or amendment, supplement or other modification to, the Bylaws, the Operating Agreement or any other of its or LLC Entity’s respective organizational documents.
(e)
Pledgor will keep and maintain complete, accurate and proper books and records with respect to the Pledged Collateral, and furnish to Secured Party, such reports relating to the Pledged Collateral as Secured Party will from time to time reasonably request. Pledgor will give prompt notice in writing to Secured Party of the occurrence of any Event of Default and of any other development which might materially or adversely affect the Pledged Collateral.
(f)
Pledgor will pay when due all taxes, assessments and governmental charges imposed upon or with respect to, and all claims against, the Pledged Interests.
(g)
Pledgor will not suffer to exist or authorize the filing of any uniform commercial code financing statement naming it as debtor covering all or any portion of the Pledged Collateral other than a uniform commercial code financing statement listing Secured Party as secured party.
(h)
Pledgor will not certificate, or evidence by any other instrument, any of the Pledged Interests.
(i)
Pledgor will promptly deliver any and all proxies or other instruments as Secured Party may reasonably request in order to permit Secured Party to exercise the rights and remedies provided herein.
(j)
Without Secured Party’s consent, Pledgor will not (i) vote any Pledged Interests to permit LLC Entity to issue, or consent to the issuance by LLC Entity of, any securities, membership interests, limited liability company interests or any other similar interests, or any right to receive the same or any right to receive the proceeds thereof, (ii) consent to the admittance of any additional Member to LLC Entity (other than Secured Party), (iii) consent to the treatment or designation of any membership interests, limited liability company interests, or other such similar interests of LLC Entity as being comprised of, or deemed to be, “securities” (as such term is defined in the UCC), and (iv) vote any Pledged Interests to permit LLC Entity to enter into or effect a merger or consolidation with any other entity, dissolution, liquidation, or retirement or reduction of capital.
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(k)
Pledgor will, at its expense, promptly execute, acknowledge and deliver all such instruments and take all such action as Secured Party from time to time may reasonably request in order to ensure to Secured Party the benefits of the liens and first-priority security interests in and to the Pledged Collateral created by this Pledge Agreement, including the delivery to Secured Party of all certificates and other documentation evidencing any of the Pledged Collateral and authorizing Secured Party to file any uniform commercial code financing statements, including amendments and continuations thereto, deemed reasonably necessary by Secured Party.
(l)
Pledgor will at its sole cost and expense defend the title to the Pledged Collateral and the security interests of Secured Party granted herein against the claim of any person and will maintain and preserve such security interest until the indefeasible payment, performance or other satisfaction in full of the Obligations and termination of this Pledge Agreement as provided herein.
(m)
No membership interests, limited liability company interests or any other similar interests of LLC Entity will be comprised of “securities” (as such term is defined in the UCC).
(n)
Pledgor hereby consents to Secured Party’s right to become and be admitted as a Member of LLC Entity and to receive distributions and allocations from LLC Entity upon the exercise of Secured Party’ rights and remedies hereunder without further action, approval or consent following the occurrence and continuance of an Event of Default. Pledgor will do all such things and take all such actions as are necessary in order for Secured Party to become admitted as a Member.
6.
Pledgor’s and Secured Party’s Rights.
(a)
So long as no Event of Default has occurred and is continuing, Pledgor has the right, from time to time, to vote and give consents with respect to the Pledged Collateral or any part thereof for all purposes not inconsistent with the provisions of this Pledge Agreement, the Loan Agreement and any other Loan Document.
(b)
Upon the occurrence and continuance of an Event of Default, all rights of Pledgor to exercise voting and other consensual rights with respect to the Pledged Collateral will cease and Secured Party will have the right, from time to time in, in the Secured Party’s sole discretion, to vote and give consents with respect to the Pledged Collateral and to exercise any other rights incident to control of the Pledged Collateral.
(c)
So long as no Event of Default has occurred and is continuing, Pledgor may receive cash or property distributions, dividends or proceeds attributable to the Pledged Collateral.
(d)
Upon the occurrence of an Event of Default, all rights of Pledgor to receive any cash or property distributions or any other proceeds with respect to the Pledged Collateral
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will cease and Secured Party will instead have the right to receive any such cash or property distributions, dividends or proceeds attributable to the Pledged Collateral to be disbursed in its sole discretion. To the extent Pledgor receives any cash or property distributions, dividends or proceeds contrary to this paragraph, Pledgor will hold such cash or property distributions, dividends or proceeds in trust for the benefit of Secured Party separate from other funds of Pledgor and such cash or property distributions, dividends or proceeds will promptly be paid over to Secured Party, as Pledged Collateral in the same form as so received, to be disbursed in Secured Party’s sole discretion.
(e)
Upon the occurrence and continuance of an Event of Default, Secured Party will have the right to succeed Pledgor as a Member in LLC Entity, with all rights attendant to the Pledged Interests, including voting rights.
7.
Defaults and Remedies. Failure of Pledgor to comply with this Pledge Agreement, a breach of any representations or warranty made by Pledgor hereunder, or the occurrence of a default or event of default under and/or as defined in the Loan Agreement or any other Loan Document will constitute an “Event of Default” hereunder. Upon the occurrence and continuance of an Event of Default, Secured Party is hereby authorized and empowered to exercise all rights, remedies and privileges (a) hereunder and under the Loan Agreement or any other Loan Document; (b) afforded a “secured party” under the UCC; or (c) otherwise provided by law or in equity, including any and all of the following in a commercially reasonable manner: (i) succeeding Pledgor as a Member in LLC Entity; (ii) transferring and registering in its name the whole or any part of the Pledged Collateral; (iii) exchanging certificates or instruments representing or evidencing the Pledged Interests for certificates or instruments of smaller or larger denominations; (iv) voting the Pledged Interests in its commercially reasonable discretion; (v) collecting and receiving all dividends and other distributions made thereon; (vi) selling in one or more sales after ten days written notice is sent to Pledgor of the time and place of any public sale or of the time after which a private sale is to take place (which notice Pledgor agrees is commercially reasonable), but without any previous notice or advertisement, the whole or any part of the Pledged Collateral; (vii) completing by inserting the Effective Date (as defined therein) and the name of the assignee thereunder and deliver to such assignee the Assignment of Interest executed and delivered by Pledgor and (vii) otherwise acting with respect to the Pledged Collateral as though Secured Party were the outright owner thereof; provided, however, Secured Party will not have any duty to exercise any such right of sale or to preserve the same and will not be liable for any failure to do so or for any delay in doing so. Secured Party shall promptly notify Pledgor of any such exercise; provided, however, that providing such notice is not required for Secured Party to exercise any such rights or remedies, nor will the failure to provide such notice by Secured Party result in a breach of this Pledge Agreement or result in a default hereunder by Secured Party. Any sale will be made at a public or private sale at Secured Party’s place of business, or at any public building to be named in the notice of sale, either for cash or upon credit or for future delivery at such price as Secured Party may deem fair and reasonable, and Secured Party may be the purchaser of the whole or any part of the Pledged Collateral so sold and hold the same thereafter in its own right free from any claim of Pledgor or any right of redemption. Secured Party reserves the right to reject any and all bids at such sale which, in its commercially reasonable discretion, it deems inadequate. Demands of performance, notices of sale, advertisements and the presence of property at any sale are hereby waived and any sale hereunder may be conducted by an auctioneer or any officer or agent of Secured Party.
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8.
(a)
In the event of any sales hereunder or any receipt of distributions, dividends or proceeds by Secured Party hereunder, Secured Party will, after deducting all costs or expenses of every kind (including reasonable attorneys’ fees and disbursements) for care, safekeeping, collection, sale, delivery or otherwise, apply the residue of the proceeds of the foregoing to the payment or reduction, either in whole or in part, of the Obligations, in such order as Secured Party shall determine in its sole discretion.
(b)
If, at any time when Secured Party determines to exercise its right to sell the whole or any part of the Pledged Collateral hereunder, such Pledged Collateral or the part thereof to be sold will not, for any reason whatsoever, be effectively registered under the Securities Act, Secured Party may, in its discretion (subject only to applicable requirements of law), sell such Pledged Collateral or part thereof by private sale in such manner and under such circumstances as is commercially reasonable and will not be required to effect such registration or to cause the same to be effected. Without limiting the generality of the foregoing, in any such event Secured Party may either, in accordance with applicable securities laws, (i) proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Collateral or part thereof could be or will have been filed under the Securities Act (or similar statute); (ii) approach and negotiate with a single possible purchaser to effect such sale; or (iii) restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment and not with a view to the distribution or sale of such Pledged Collateral or part thereof. In addition to a private sale as provided above in this Section 7, if any of the Pledged Collateral will not be freely distributable to the public without registration under the Securities Act (or similar statute) at the time of any proposed sale pursuant to this Section 7, then Secured Party will not be required to effect such registration or cause the same to be effected but, subject to applicable requirements of law, may proceed with such sale provided that Secured Party requires any such sale hereunder (including a sale at auction) be conducted subject to restrictions (i) as to the financial sophistication and ability of any person permitted to bid or purchase at any such sale; (ii) as to the content of legends to be placed upon any certificates or other written evidence of title representing the Pledged Collateral sold in such sale, including restrictions on future transfer thereof; (iii) as to the representations required to be made by each person bidding or purchasing at such sale relating to that person’s access to financial information about LLC Entity, and such person’s intentions as to the holding of the Pledged Collateral so sold for investment, for its own account, and not with a view to the distribution thereof; and (iv) as to such other matters necessary or appropriate in order that such sale (notwithstanding any failure so to register) may be effected in compliance with the UCC and other laws affecting the enforcement of creditors’ rights and the Securities Act and all applicable state securities laws.
(c)
Pledgor recognizes that Secured Party may be unable to effect a public sale of any or all the Pledged Collateral and may be compelled to resort to one or more private sales thereof. Pledgor also acknowledges that any such private sale may result in prices and
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other terms less favorable to the seller than if such sale were a public sale. Pledgor agrees that such sale will not be deemed to have been made in a commercially unreasonable manner merely because it was conducted as a private sale. Secured Party will be under no obligation to delay a sale of any of the Pledged Collateral for the period of time necessary to permit the registrant to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if Pledgor and LLC Entity would agree to do so.
(d)
Pledgor agrees, to the extent not prohibited by applicable law, that upon the occurrence and during the continuance of an Event of Default, it will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium or redemption law now or hereafter in force in order to prevent or delay the enforcement of this Pledge Agreement, or the absolute sale of the whole or any part of the Pledged Collateral or the possession thereof by any purchaser at any sale hereunder, and Pledgor waives the benefit of all such laws to the extent not prohibited by applicable law. No failure or delay on the part of Secured Party to exercise any such right, power or remedy and no notice or demand which may be given to or made upon Secured Party with respect to any such remedies will operate as a waiver thereof, or limit or impair Secured Party’s right to take any action or to exercise any power or remedy hereunder, without notice or demand, or prejudice its rights as against Pledgor.
(e)
Pledgor further agrees that each and every covenant contained herein is specifically enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that (i) any of the Obligations are not then due and payable in accordance with the agreements and instruments governing and evidencing such Obligations or (ii) the Obligations have been paid in full.
The rights and remedies of Secured Party under this Pledge Agreement are cumulative and not exclusive of any other rights or remedies available to such Secured Party at law or equity. All costs and expenses (including reasonable attorneys’ fees, expenses and costs) incurred by the Secured Party in enforcing or protecting the security interest hereby granted or any of the rights or remedies under this Pledge Agreement will be payable on demand, will bear interest at the highest rate provided in the Loan Agreement, and will be secured by the Pledged Interests.
8.
Power of Attorney; Proxy. Pledgor irrevocably designates, makes, constitutes and appoints Secured Party as its true and lawful attorney- (and agent-) in-fact. Upon the occurrence and continuance of an Event of Default and without notice to Pledgor, Secured Party may, as Pledgor’s attorney-in-fact, in the name, place and stead of Pledgor, file any claims, take any actions or institute any proceedings which Secured Party may deem to be necessary or advisable in connection with the Pledge Collateral, including (i) request that LLC Entity transfer any or all of the Pledged Collateral on its books to Secured Party, with full power of substitution in the premises; (ii) endorse the name of Pledgor upon any checks, notes, acceptance, money orders, certificates, drafts or other forms of payment of security that come into Secured Party’s possession; and (iii) vote or grant any consent in respect of the Pledged Collateral. After deducting all costs and expenses of every kind (including reasonable attorneys’ fees and
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disbursements), Secured Party shall apply all proceeds of the Pledged Collateral to the payment or reduction of the Obligations in such order as Secured Party shall determine in its sole discretion. The appointment set forth herein is deemed to be coupled with an interest and therefore irrevocable. Pledgor hereby waives and releases any and all claims or causes of action which Pledgor might have against such attorney-in-fact acting under the terms of authority which Pledgor has granted herein.
9.
Waiver. No delay on the behalf of Secured Party in exercising any power of sale, lien, option or other right or remedy hereunder, and no notice or demand which may be given to or made upon Pledgor by Secured Party with respect to any power of sale, lien, option or other right or remedy hereunder, constitutes a waiver thereof, or limits or impairs Secured Party’s right to take any action or to exercise any power of sale, lien, option, or any other right or remedy hereunder or prejudice Secured Party’s rights as against Pledgor in any respect.
10.
Termination. This Pledge Agreement will terminate and be of no further force or effect at such time as the Obligations are indefeasibly paid, performed or otherwise satisfied in full. Upon the occurrence of the foregoing, Secured Party will deliver to Pledgor the Pledged Collateral at the time subject to this Pledge Agreement and then in such Secured Party’s possession or control and all instruments of assignment executed in connection therewith, free and clear of the liens hereof and, except as otherwise provided herein, all of Pledgor’s obligations hereunder will at such time terminate. Notwithstanding any prior revocation, termination, surrender or discharge of this Pledge Agreement, the effectiveness of this Pledge Agreement will automatically continue or be reinstated, as the case may be, in the event that any payment received or credit received by Secured Party in respect of the Obligations is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, diversion of trust funds, or otherwise under any applicable state or federal law, including laws pertaining to bankruptcy or insolvency, in which case this Pledge Agreement will be enforceable as if the returned, disgorged or rescinded payment or credit had not been received or given, whether or not Secured Party relied upon this payment or credit or changed its position as a consequence of it.
11.
Lien Absolute. All rights of Secured Party hereunder, and all obligations of Pledgor hereunder, are absolute and unconditional irrespective of:
(a)
any lack of validity or enforceability of the Loan Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Obligations;
(b)
any change in the time, manner or place of payment of, or in any other term of, all or any part of the Obligations, or any other amendment or waiver of or any consent to any departure from the Loan Agreement, any other Loan Documents or any other agreement or instrument governing or evidencing any Obligations;
(c)
any exchange, release or non-perfection of any other collateral, including any real property, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations or
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(d)
any other circumstance which might otherwise constitute a defense available to, or a discharge of, Pledgor, except payment in full of the Obligations.
12.
Release. Pledgor hereby waives notice of acceptance of this Pledge Agreement, and also presentment, demand, protest and notice of dishonor of any and all of the Obligations, and promptness in commencing suit against any party hereto or liable hereon, and in giving any notice to or of making any claim or demand hereunder upon Pledgor.
13.
Indemnity; Liability. Pledgor agrees to indemnify and hold Secured Party harmless from all liability, loss, damage or expense which Secured Party may incur under or by reason of this Pledge Agreement, or for any action taken by Secured Party under this Pledge Agreement, or by reason or in defense of any and all claims and demands asserted against Secured Party arising out of the Pledged Collateral, except to the extent such claims and demands arise from the gross negligence or willful misconduct of the Lender as determined by a final, nonappealable judgment by a court of competent jurisdiction. Should Secured Party incur any such liability, loss, damage or expense, the amount thereof (including reasonable attorneys’ fees), with interest thereon at the rate set forth in the Loan Agreement will be payable by Pledgor immediately, without demand. Secured Party has no duty to protect, insure, collect or realize upon the Pledged Collateral or preserve rights in it against prior parties. Secured Party is not responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Pledged Collateral regardless of the cause thereof, except to the extent arising from the gross negligence or willful misconduct of the Lender as determined by a final, nonappealable judgment by a court of competent jurisdiction.
14.
Miscellaneous. This Pledge Agreement is binding upon Pledgor and its successors and assigns, and inures to the benefit of, and is enforceable by Secured Party and its respective successors and assigns. None of the terms or provisions of this Pledge Agreement may be waived, altered, modified or amended except in writing duly signed for and on behalf of Secured Party and Pledgor.
15.
Severability. If for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing or future law, such invalidity will not impair the operation of or affect those portions of this Pledge Agreement which are valid.
16.
Notices. All notices and other communications provided to any party hereto under this Pledge Agreement will be given in accordance with the Loan Agreement.
17.
Section Titles. The Section titles contained in this Pledge Agreement are and will be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto.
18.
Counterparts. This Pledge Agreement may be executed in any number of counterparts, which, collectively and separately, constitutes one agreement. The delivery of an executed counterpart of a signature page to this Pledge Agreement by telecopier or by electronic mail in pdf format is effective as delivery of a manually executed counterpart of this Pledge Agreement.
19.
GOVERNING LAW; FORUM; WAIVER OF JURY TRIAL. THIS PLEDGE AGREEMENT IS GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
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LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF ILLINOIS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF ILLINOIS. ANY LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO THIS PLEDGE AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT RELATED THERETO MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS IN THE COUNTY OF COOK OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND APPELLATE COURTS THEREOF, AND, BY EXECUTION AND DELIVERY OF THIS PLEDGE AGREEMENT, PLEDGOR HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION, SUIT OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. PLEDGOR WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS PLEDGE AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, VERBAL OR WRITTEN STATEMENT OR OTHER ACTION OF THE PARTIES HERETO.
[Signatures contained on following page]
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IN WITNESS WHEREOF, this Pledge Agreement has been duly executed as of the date first written above.
PLEDGOR:
PERNIX GROUP, INC.
By: ______________________________
Name:
Title:
SECURED PARTY:
BARRINGTON BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
By:
Name:
Title:
CONSENTED TO AND APPROVED BY:
[___], as a [manager] and [member] of [LLC Entity]
By:____________________________________
Name:
Title:
[___], as a [manager] and [member] of [LLC Entity]
By:____________________________________
Name:
Title:
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EXHIBIT B
FORM OF ACKNOWLEDGMENT OF PLEDGE
[LLC Entity Letterhead]
ACKNOWLEDGMENT OF PLEDGE
[DATE]
Barrington Bank and Trust Company, National Association
201 South Hough Street
Barrington, Illinois 60010
Attn: William Dierking
Dear Mr. Dierking:
Reference is made to the Membership Interest Pledge Agreement dated as November 10, 2014 (as amended, restated, supplemented or modified from time to time, the “Pledge Agreement”) by and between the Pernix Group, Inc. (the “Pledgor”), and Barrington Bank and Trust Company, National Association, as Secured Party, and consented to and approved by other parties thereto. Capitalized terms used but not defined herein have the meanings provided in the Pledge Agreement.
In connection with the pledge of the Pledged Collateral to Barrington Bank and Trust Company, National Association by the Pledgor, the undersigned hereby represents, warrants and agrees with Barrington Bank and Trust Company, National Association as follows:
(a)
It acknowledges the security interest granted to Barrington Bank and Trust Company, National Association pursuant to the Pledge Agreement in the Pledged Interests issued by the undersigned (for the purposes of this Acknowledgment of Pledge, the “Pledged Interest”);
(b)
In accordance with the Pledgor’s instructions, the undersigned has registered on its books and records Barrington Bank and Trust Company, National Association’s security interest in the Pledged Interests; and that no other lien on such Pledged Interests is registered on the books and records of the undersigned;
(c)
The undersigned shall deliver directly to Barrington Bank and Trust Company, National Association at Barrington Bank and Trust Company, National Association’s address set forth above (or such other address as Barrington Bank and Trust Company, National
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Association provides), any and all instruments and/or certificates evidencing any right, option or warrant, and all new, additional or substituted securities issued to, or to be received by, Pledgor by virtue of its ownership of the Pledged Interests issued by the undersigned or upon exercise by Pledgor of any option, warrant or right attached to such Pledged Interest;
(d)
To the extent within the control of the undersigned, the undersigned will not issue any additional membership interests, limited liability company interests, or other such similar interests or securities without the prior written consent of Secured Party;
(e)
The undersigned has not entered into an agreement with any third party to act on such third party’s instructions without further consent of Pledgor with respect to the Pledged Interests; and agrees that it will not enter into any such agreement with any third party concerning any Pledged Interests;
(f)
After the occurrence and during the continuance of an Event of Default, the undersigned shall pay directly to Barrington Bank and Trust Company, National Association any and all cash distributions which might be declared and payable (including any unpaid distributions accrued prior to the date hereof) on any of the Pledged Interests or any of the other Pledged Collateral issued by the undersigned, and which but for the provisions of this letter would be paid to Pledgor;
(g)
At any time upon and during the continuance of an Event of Default, and upon Barrington Bank and Trust Company, National Association’s exercise of applicable remedies pursuant to the Pledge Agreement, upon written instructions from Barrington Bank and Trust Company, National Association, the undersigned shall register the transfer of such Pledged Interests to Barrington Bank and Trust Company, National Association or Barrington Bank and Trust Company, National Association’s nominee, as applicable;
(h)
The Pledged Interests have been duly authorized and validly issued and are not subject to, nor (to the extent within the control of the undersigned) will the undersigned at any time permit it to become subject to, any restrictions governing its issuance, transfer, ownership or control other than those currently set forth in its operating agreement; and
(i)
The undersigned will comply with Barrington Bank and Trust Company, National Association’s instructions relating to the Pledged Interests without the need for further consent from Pledgor provided such instructions are in accordance with the Loan Documents.
The undersigned agrees that, if at any time Barrington Bank and Trust Company, National Association shall determine to exercise its right to sell all or any of the Pledged Collateral issued by the undersigned, the undersigned will, upon Barrington Bank and Trust Company, National Association’s request and at Pledgor’s expense:
(a)
provide Barrington Bank and Trust Company, National Association with such other information and projections as may be necessary or, in Barrington Bank and Trust Company, National Association’s reasonable opinion, advisable to enable Barrington Bank and Trust Company, National Association to effect the sale of such Pledged Collateral;
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(b)
do or cause to be done all such other acts and things as may be necessary to make the sale of such Pledged Collateral or any part thereof valid and binding and in compliance with applicable law; and
(c)
do or cause to be done all such other acts and things as may be necessary to constitute Barrington Bank and Trust Company, National Association or Barrington Bank and Trust Company, National Association’s designees or transferees a member of the undersigned.
Barrington Bank and Trust Company, National Association is hereby authorized, in connection with any sale of the Pledged Collateral issued by the undersigned, to deliver or otherwise disclose to any prospective purchaser of such Pledged Collateral (i) any information and projections provided to Barrington Bank and Trust Company, National Association pursuant to subsection (a) above and (ii) any other information in Barrington Bank and Trust Company, National Association’s possession relating to the undersigned or such Pledged Collateral.
[Remainder of Page Intentionally Left Blank]
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Very truly yours,
[LLC ENTITY]
By:_________________________________
Name:_______________________________
Title:________________________________
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Exhibit C
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EXHIBIT J
FORM OF PARTNERSHIP INTEREST PLEDGE AGREEMENT
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Form of Partnership Interest Pledge Agreement
This Partnership Interest Pledge Agreement (as amended, restated, supplemented or modified from time to time, this “Pledge Agreement”), dated as of [___], is made and entered into between Pernix Group, Inc. (“Pledgor”), and Barrington Bank & Trust Company, National Association (the “Secured Party”), and consented to and approved by the parties set forth on the signature pages hereto.
RECITALS:
WHEREAS, Secured Party, Pledgor, and Pernix RE LLC entered into that certain Loan and Security Agreement, dated as of November 10, 2014 (as amended, restated, supplemented or modified from time to time, the “Loan Agreement”), pursuant to which Secured Party has agreed to make loans to Pledgor and Pernix RE LLC (“Loans”).
WHEREAS, Pledgor owns issued and outstanding partnership interests in [__], and as a condition to the making of the Loans, Secured Party requires Pledgor to execute and deliver this Pledge Agreement and grant the security interest contemplated hereby in order to secure the Obligations; and
NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained, and to induce Secured Party to make the Loans, it is agreed as follows:
·
Definitions. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Loan Agreement. In addition, the following terms have the meanings set forth below:
(a)
“Bylaws” means the Bylaws of Pernix Group, Inc., as such Bylaws may be amended, restated, supplemented or modified from time to time.
(b)
“Event of Default” is defined in Section 7 hereof.
(c)
“[Limited/General] Partner” means the [limited/general] partner of such Partnership.
(d)
“Obligations” means all obligations, indebtedness and liabilities of Pledgor and Pernix RE LLC to Secured Party arising under or in relation to the Loan Agreement and the other Loan Documents, in each case, whether now existing or hereafter arising, now due or to become due, direct or indirect, joint, several or joint and several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, or howsoever otherwise arising, incurred, created or evidenced.
(e)
“Partnership” means [___].
(f)
“Partnership Agreement” means that certain [___], as may be, amended, restated, supplemented or modified from time to time.
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(g)
“Securities Act” means the Securities Act of 1933, as amended.
(g)
“UCC” means the Illinois or Delaware Uniform Commercial Code, or such other uniform commercial code, as is applicable, each as amended from time to time
(h)
The meanings given to terms herein are equally applicable to both the singular and plural forms of such terms. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Pledge Agreement will refer to this Pledge Agreement as a whole and not to any particular provision of this Pledge Agreement, and section, schedule and exhibit references are to this Pledge Agreement unless otherwise specified.
·
Pledge. For the prompt payment, performance and other satisfaction in full of all Obligations, Pledgor hereby pledges and grants to Secured Party a security interest in all of its right, title and interest in, to and under the following, whether now owned or existing or hereafter arising or acquired, and wherever located (collectively, the “Pledged Collateral”):
·
100% of Pledgor’s partnership interests in Partnership (the “Pledged Interests”), and the certificates and other instruments or agreements, if any, representing or evidencing the Pledged Interests, and all dividends, distributions, cash, instruments, securities, general intangibles, financial assets, securities entitlements, investment property and all supporting obligations related thereto, and any and all additions, substitutions, replacements, profits, payments, subscription, voting, preferential rights or other rights of any kind received on account of any of the foregoing or accruing with respect thereto or by reason of recapitalization, reclassification, merger, consolidation, liquidation, exchange, renewal, redemption, substitution, or other transaction regarding the Pledged Interests;
·
(1) all rights of Pledgor embodied in or arising out of Pledgor’s status as the [limited/general] partner of Partnership, consisting of: (i) all economic rights, including without limitation, all rights to share in the profits and losses of Partnership and all rights to receive distributions of the assets of Partnership; and (ii) all governance rights, including without limitation, all rights to vote, consent to action and otherwise participate in the management of Partnership, and (2) all other rights and privileges of Pledgor with respect to the interests and assets referred to in clause (a) above and in the Partnership Agreement;
·
any and all property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing; and
·
all books, records, reports and correspondence with respect to the foregoing.
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·
Delivery or Transfer of Pledged Collateral. Secured Party has the right, at any time upon the occurrence and during the continuance of an Event of Default, in its discretion and without notice to Pledgor, to transfer to or to register in the name of Secured Party any or all of the Pledged Collateral. Concurrently with the execution and delivery of this Pledge Agreement, Pledgor is delivering to Secured Party (i) an assignment of partnership interests in blank (the “Assignment of Interest”), in the form set forth on Exhibit A hereto, with respect to the Pledged Interests of Partnership, transferring all of the Pledged Interests in blank, duly executed by Pledgor and undated and (ii) and an acknowledgment to this Pledge Agreement (“Acknowledgment”) for Partnership in the form set forth on Exhibit B hereto. Secured Party shall have the right, at any time in its discretion upon the occurrence and during the continuance of an Event of Default, to transfer to, and to designate on any Assignment of Interest, any person to whom the Pledged Interests are sold in accordance with the provisions hereof. In addition, Secured Party shall have the right at any time to exchange an Assignment of Interest representing or evidencing the Pledged Interests or any portion thereof for one or more additional or substitute Assignments of Interest representing or evidencing smaller or larger percentages of the Pledged Interests represented or evidenced thereby, subject to the terms hereof and thereof.
·
Representations and Warranties. Pledgor represents and warrants to Secured Party that as of the date hereof:
·
Pledgor’s exact legal name is as set forth on the organizational documents recorded with the Secretary of State of the State of Delaware, a recent certified copy of which has been provided to Secured Party.
·
Pledgor has the full right, power and authority to enter into and execute and deliver this Pledge Agreement and to perform and consummate the transactions contemplated hereby.
·
Pledgor’s ownership percentage in Partnership is as set forth on Exhibit C hereto, and Pledgor is the beneficial owner of the Pledged Collateral and has good and marketable title to the Pledged Collateral, free and clear of any security interest, lien, charge or encumbrance thereon or affecting the title thereto, except for the security interests created by this Pledge Agreement. [Pledgor is the sole General Partner of Partnership.]
·
Neither the execution and delivery of this Pledge Agreement or the pledge of the Pledged Collateral hereunder will violate (i) any rule, law, regulation, order, writ, judgment, injunction, decree or award binding on Pledgor or (ii) the provisions of any instrument or agreement to which Pledgor is a party or is subject, including the Bylaws, the Partnership Agreement or any other organizational documents of Pledgor or Partnership, or by which its property may be bound or affected, or conflict with or cause a default thereunder, or result in or require the creation or imposition of any lien in, of or on the property of Pledgor pursuant to the terms of such instrument or agreement.
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·
No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any person is required (i) in connection with Pledgor’s grant of security interest in the Pledged Collateral or (ii) for the perfection of or the exercise by Secured Party of its rights and remedies hereunder, or if required, (1) such consent, approval, order or authorization has been obtained, (2) such registration, declaration or filing has been accomplished, or (3) such notice has been given prior to the date hereof.
·
This Pledge Agreement has been duly authorized, executed and delivered by Pledgor and constitutes the legal, valid and binding obligation of Pledgor enforceable in accordance with its terms except as enforceability may be limited by the applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or law), and creates a security interest which is enforceable against Pledgor in all Pledged Collateral it now owns or hereafter acquires.
·
The Pledged Interests were duly and validly issued, are fully paid and non-assessable and Pledgor owns the Pledged Interests as set forth in Section 2.
·
Neither the Pledged Collateral nor the Pledged Interests are evidenced by or represented by certificates of any kind and no partnership interests of Partnership are comprised of “securities” (as such term is defined in the UCC).
·
The security interest granted herein (i) will not cause a termination of Partnership under the Internal Revenue Code of 1986, as amended, and (ii) complies with all applicable state and federal security laws and regulations. Pledgor has been provided with all information and agreements that it requires in connection with the security interest granted herein.
·
No uniform commercial code financing statement describing all or any portion of the Pledged Collateral has been filed in any jurisdiction, other than any uniform commercial code financing statement naming Secured Party as secured party with respect to the Pledged Collateral.
·
When a uniform commercial code financing statement, adequately describing the Pledged Collateral, has been filed by Secured Party, in the Delaware Secretary of State’s office against Pledgor with respect to the Pledged Collateral, such Secured Party will have a fully perfected first-priority security interest in the Pledged Collateral.
·
No person has possession or control of any of the Pledged Collateral of such nature that perfection of a security interest is accomplished by control.
The representations and warranties set forth in this Section 4 will survive the execution and delivery of this Pledge Agreement.
·
Covenants. Pledgor covenants and agrees that until the indefeasible payment, performance or other satisfaction in full of the Obligations and termination of this Pledge Agreement as provided herein:
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·
Pledgor will not change its name or address without providing at least thirty (30) days prior written notice to Secured Party.
·
Pledgor will notify Partnership to mark its books and records acknowledging the security interest hereby granted in the Pledged Interests.
·
Without Secured Party’s consent, Pledgor will not sell, assign, transfer, pledge, dispose of, grant any option or warrant with respect to or otherwise encumber any of its rights in or to any Pledged Collateral or any dividends, other distributions, payments or other rights or proceeds with respect thereto or grant a lien, charge, encumbrance or security interest on any thereof.
·
Pledgor will not (i) do anything to impair its or Secured Party’s interests or rights in the Pledged Collateral, or (ii) without Secured Party’s consent, permit, suffer or otherwise consent to any termination of, or amendment, supplement or other modification to, the Bylaws, the Partnership Agreement or any other of its or Partnership’s respective organizational documents.
·
Pledgor will keep and maintain complete, accurate and proper books and records with respect to the Pledged Collateral, and furnish to Secured Party, such reports relating to the Pledged Collateral as Secured Party will from time to time reasonably request. Pledgor will give prompt notice in writing to Secured Party of the occurrence of any Event of Default and of any other development which might materially or adversely affect the Pledged Collateral.
·
Pledgor will pay when due all taxes, assessments and governmental charges imposed upon or with respect to, and all claims against, the Pledged Interests.
·
Pledgor will not suffer to exist or authorize the filing of any uniform commercial code financing statement naming it as debtor covering all or any portion of the Pledged Collateral other than a uniform commercial code financing statement listing Secured Party as secured party.
·
Pledgor will not certificate, or evidence by any other instrument, any of the Pledged Interests.
·
Pledgor will promptly deliver any and all proxies or other instruments as Secured Party may reasonably request in order to permit Secured Party to exercise the rights and remedies provided herein.
·
Without Secured Party’s consent, Pledgor will not (i) vote any Pledged Interests to permit Partnership to issue, or consent to the issuance by Partnership of, any partnership interest, or any right to receive the same or any right to receive the proceeds thereof, (ii) consent to the admittance of any additional [Limited Partner][General Partner or limited partner] to Partnership (other than Secured Party), (iii) withdraw as General Partner, (iv) consent to the treatment or designation of any partnership interests as being comprised of, or deemed to be, “securities” (as such term is defined in the UCC), or (v) vote any
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Pledged Interests to permit Partnership to enter into or effect a merger or consolidation with any other entity, dissolution, liquidation, or retirement or reduction of capital.
·
Pledgor will, at its expense, promptly execute, acknowledge and deliver all such instruments and take all such action as Secured Party from time to time may reasonably request in order to ensure to Secured Party the benefits of the liens and first-priority security interests in and to the Pledged Collateral created by this Pledge Agreement, including the delivery to Secured Party of all certificates and other documentation evidencing any of the Pledged Collateral and authorizing Secured Party to file any uniform commercial code financing statements, including amendments and continuations thereto, deemed reasonably necessary by Secured Party.
·
Pledgor will at its sole cost and expense defend the title to the Pledged Collateral and the security interests of Secured Party granted herein against the claim of any person and will maintain and preserve such security interest until the indefeasible payment, performance or other satisfaction in full of the Obligations and termination of this Pledge Agreement as provided herein.
·
No partnership interests of Partnership will be comprised of “securities” (as such term is defined in the UCC).
·
Pledgor hereby consents to Secured Party’s right to become and be admitted as the [Limited/General] Partner of Partnership and to receive distributions and allocations from Partnership upon the exercise of Secured Party’ rights and remedies hereunder without further action, approval or consent following the occurrence and continuance of an Event of Default. Pledgor will do all such things and take all such actions as are necessary in order for Secured Party to become admitted as the [Limited/General] Partner.
·
Pledgor’s and Secured Party’s Rights.
·
So long as no Event of Default has occurred and is continuing, Pledgor has the right, from time to time, to vote and give consents with respect to the Pledged Collateral or any part thereof for all purposes not inconsistent with the provisions of this Pledge Agreement, the Loan Agreement and any other Loan Document.
·
Upon the occurrence and continuance of an Event of Default, all rights of Pledgor to exercise voting and other consensual rights with respect to the Pledged Collateral will cease and Secured Party will have the right, from time to time in, in the Secured Party’s sole discretion, to vote and give consents with respect to the Pledged Collateral and to exercise any other rights incident to control of the Pledged Collateral.
·
So long as no Event of Default has occurred and is continuing, Pledgor may receive cash or property distributions, dividends or proceeds attributable to the Pledged Collateral.
·
Upon the occurrence of an Event of Default, all rights of Pledgor to receive any cash or property distributions or any other proceeds with respect to the Pledged Collateral will cease and Secured Party will instead have the right to receive any such cash or property
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distributions, dividends or proceeds attributable to the Pledged Collateral to be disbursed in its sole discretion. To the extent Pledgor receives any cash or property distributions, dividends or proceeds contrary to this paragraph, Pledgor will hold such cash or property distributions, dividends or proceeds in trust for the benefit of Secured Party separate from other funds of Pledgor and such cash or property distributions, dividends or proceeds will promptly be paid over to Secured Party, as Pledged Collateral in the same form as so received, to be disbursed in Secured Party’s sole discretion.
·
Upon the occurrence and continuance of an Event of Default, Secured Party will have the right to succeed Pledgor as [Limited/General] Partner in Partnership, with all rights attendant to the Pledged Interests, including voting rights.
·
Defaults and Remedies. Failure of Pledgor to comply with this Pledge Agreement, a breach of any representations or warranty made by Pledgor hereunder, or the occurrence of a default or event of default under and/or as defined in the Loan Agreement or any other Loan Document will constitute an “Event of Default” hereunder. Upon the occurrence and continuance of an Event of Default, Secured Party is hereby authorized and empowered to exercise all rights, remedies and privileges (a) hereunder and under the Loan Agreement or any other Loan Document; (b) afforded a “secured party” under the UCC; or (c) otherwise provided by law or in equity, including any and all of the following in a commercially reasonable manner: (i) succeeding Pledgor as [Limited/General] Partner in Partnership; (ii) transferring and registering in its name the whole or any part of the Pledged Collateral; (iii) exchanging certificates or instruments representing or evidencing the Pledged Interests for certificates or instruments of smaller or larger denominations; (iv) voting the Pledged Interests in its commercially reasonable discretion; (v) collecting and receiving all dividends and other distributions made thereon; (vi) selling in one or more sales after ten days written notice is sent to Pledgor of the time and place of any public sale or of the time after which a private sale is to take place (which notice Pledgor agrees is commercially reasonable), but without any previous notice or advertisement, the whole or any part of the Pledged Collateral; (vii) completing by inserting the Effective Date (as defined therein) and the name of the assignee thereunder and deliver to such assignee the Assignment of Interest executed and delivered by Pledgor and (vii) otherwise acting with respect to the Pledged Collateral as though Secured Party were the outright owner thereof; provided, however, Secured Party will not have any duty to exercise any such right of sale or to preserve the same and will not be liable for any failure to do so or for any delay in doing so. Secured Party shall promptly notify Pledgor of any such exercise; provided, however, that providing such notice is not required for Secured Party to exercise any such rights or remedies, nor will the failure to provide such notice by Secured Party result in a breach of this Pledge Agreement or result in a default hereunder by Secured Party. Any sale will be made at a public or private sale at Secured Party’s place of business, or at any public building to be named in the notice of sale, either for cash or upon credit or for future delivery at such price as Secured Party may deem fair and reasonable, and Secured Party may be the purchaser of the whole or any part of the Pledged Collateral so sold and hold the same thereafter in its own right free from any claim of Pledgor or any right of redemption. Secured Party reserves the right to reject
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any and all bids at such sale which, in its commercially reasonable discretion, it deems inadequate. Demands of performance, notices of sale, advertisements and the presence of property at any sale are hereby waived and any sale hereunder may be conducted by an auctioneer or any officer or agent of Secured Party.
·
In the event of any sales hereunder or any receipt of distributions, dividends or proceeds by Secured Party hereunder, Secured Party will, after deducting all costs or expenses of every kind (including reasonable attorneys’ fees and disbursements) for care, safekeeping, collection, sale, delivery or otherwise, apply the residue of the proceeds of the foregoing to the payment or reduction, either in whole or in part, of the Obligations, in such order as Secured Party shall determine in its sole discretion.
·
If, at any time when Secured Party determines to exercise its right to sell the whole or any part of the Pledged Collateral hereunder, such Pledged Collateral or the part thereof to be sold will not, for any reason whatsoever, be effectively registered under the Securities Act, Secured Party may, in its discretion (subject only to applicable requirements of law), sell such Pledged Collateral or part thereof by private sale in such manner and under such circumstances as is commercially reasonable and will not be required to effect such registration or to cause the same to be effected. Without limiting the generality of the foregoing, in any such event Secured Party may either, in accordance with applicable securities laws, (i) proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Collateral or part thereof could be or will have been filed under the Securities Act (or similar statute); (ii) approach and negotiate with a single possible purchaser to effect such sale; or (iii) restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment and not with a view to the distribution or sale of such Pledged Collateral or part thereof. In addition to a private sale as provided above in this Section 7, if any of the Pledged Collateral will not be freely distributable to the public without registration under the Securities Act (or similar statute) at the time of any proposed sale pursuant to this Section 7, then Secured Party will not be required to effect such registration or cause the same to be effected but, subject to applicable requirements of law, may proceed with such sale provided that Secured Party requires any such sale hereunder (including a sale at auction) be conducted subject to restrictions (i) as to the financial sophistication and ability of any person permitted to bid or purchase at any such sale; (ii) as to the content of legends to be placed upon any certificates or other written evidence of title representing the Pledged Collateral sold in such sale, including restrictions on future transfer thereof; (iii) as to the representations required to be made by each person bidding or purchasing at such sale relating to that person’s access to financial information about Partnership, and such person’s intentions as to the holding of the Pledged Collateral so sold for investment, for its own account, and not with a view to the distribution thereof; and (iv) as to such other matters necessary or appropriate in order that such sale (notwithstanding any failure so to register) may be effected in compliance with the UCC and other laws affecting the enforcement of creditors’ rights and the Securities Act and all applicable state securities laws.
·
Pledgor recognizes that Secured Party may be unable to effect a public sale of any or all the Pledged Collateral and may be compelled to resort to one or more private sales
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thereof. Pledgor also acknowledges that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale. Pledgor agrees that such sale will not be deemed to have been made in a commercially unreasonable manner merely because it was conducted as a private sale. Secured Party will be under no obligation to delay a sale of any of the Pledged Collateral for the period of time necessary to permit the registrant to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if Pledgor and the Partnership would agree to do so.
·
Pledgor agrees, to the extent not prohibited by applicable law, that upon the occurrence and during the continuance of an Event of Default, it will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium or redemption law now or hereafter in force in order to prevent or delay the enforcement of this Pledge Agreement, or the absolute sale of the whole or any part of the Pledged Collateral or the possession thereof by any purchaser at any sale hereunder, and Pledgor waives the benefit of all such laws to the extent not prohibited by applicable law. No failure or delay on the part of Secured Party to exercise any such right, power or remedy and no notice or demand which may be given to or made upon Secured Party with respect to any such remedies will operate as a waiver thereof, or limit or impair Secured Party’s right to take any action or to exercise any power or remedy hereunder, without notice or demand, or prejudice its rights as against Pledgor.
·
Pledgor further agrees that each and every covenant contained herein is specifically enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that (i) any of the Obligations are not then due and payable in accordance with the agreements and instruments governing and evidencing such Obligations or (ii) the Obligations have been paid in full.
The rights and remedies of Secured Party under this Pledge Agreement are cumulative and not exclusive of any other rights or remedies available to such Secured Party at law or equity. All costs and expenses (including reasonable attorneys’ fees, expenses and costs) incurred by the Secured Party in enforcing or protecting the security interest hereby granted or any of the rights or remedies under this Pledge Agreement will be payable on demand, will bear interest at the highest rate provided in the Loan Agreement, and will be secured by the Pledged Interests.
·
Power of Attorney; Proxy. Pledgor irrevocably designates, makes, constitutes and appoints Secured Party as its true and lawful attorney- (and agent-) in-fact. Upon the occurrence and continuance of an Event of Default and without notice to Pledgor, Secured Party may, as Pledgor’s attorney-in-fact, in the name, place and stead of Pledgor, file any claims, take any actions or institute any proceedings which Secured Party may deem to be necessary or advisable in connection with the Pledge Collateral, including (i) request that Partnership transfer any or all of the Pledged Collateral on its books to Secured Party, with full power of substitution in the premises; (ii) endorse the name of Pledgor upon any checks, notes, acceptance, money orders, certificates, drafts or other forms of payment of security that come into
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Secured Party’s possession; and (iii) vote or grant any consent in respect of the Pledged Collateral. After deducting all costs and expenses of every kind (including reasonable attorneys’ fees and disbursements), Secured Party shall apply all proceeds of the Pledged Collateral to the payment or reduction of the Obligations in such order as Secured Party shall determine in its sole discretion. The appointment set forth herein is deemed to be coupled with an interest and therefore irrevocable. Pledgor hereby waives and releases any and all claims or causes of action which Pledgor might have against such attorney-in-fact acting under the terms of authority which Pledgor has granted herein.
·
Waiver. No delay on the behalf of Secured Party in exercising any power of sale, lien, option or other right or remedy hereunder, and no notice or demand which may be given to or made upon Pledgor by Secured Party with respect to any power of sale, lien, option or other right or remedy hereunder, constitutes a waiver thereof, or limits or impairs Secured Party’s right to take any action or to exercise any power of sale, lien, option, or any other right or remedy hereunder or prejudice Secured Party’s rights as against Pledgor in any respect.
·
Termination. This Pledge Agreement will terminate and be of no further force or effect at such time as the Obligations are indefeasibly paid, performed or otherwise satisfied in full. Upon the occurrence of the foregoing, Secured Party will deliver to Pledgor the Pledged Collateral at the time subject to this Pledge Agreement and then in such Secured Party’s possession or control and all instruments of assignment executed in connection therewith, free and clear of the liens hereof and, except as otherwise provided herein, all of Pledgor’s obligations hereunder will at such time terminate. Notwithstanding any prior revocation, termination, surrender or discharge of this Pledge Agreement, the effectiveness of this Pledge Agreement will automatically continue or be reinstated, as the case may be, in the event that any payment received or credit received by Secured Party in respect of the Obligations is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, diversion of trust funds, or otherwise under any applicable state or federal law, including laws pertaining to bankruptcy or insolvency, in which case this Pledge Agreement will be enforceable as if the returned, disgorged or rescinded payment or credit had not been received or given, whether or not Secured Party relied upon this payment or credit or changed its position as a consequence of it.
·
Lien Absolute. All rights of Secured Party hereunder, and all obligations of Pledgor hereunder, are absolute and unconditional irrespective of:
·
any lack of validity or enforceability of the Loan Agreement, any other Loan Document or any other agreement or instrument governing or evidencing any Obligations;
·
any change in the time, manner or place of payment of, or in any other term of, all or any part of the Obligations, or any other amendment or waiver of or any consent to any departure from the Loan Agreement, any other Loan Documents or any other agreement or instrument governing or evidencing any Obligations;
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·
any exchange, release or non-perfection of any other collateral, including any real property, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations or
·
any other circumstance which might otherwise constitute a defense available to, or a discharge of, Pledgor, except payment in full of the Obligations.
·
Release. Pledgor hereby waives notice of acceptance of this Pledge Agreement, and also presentment, demand, protest and notice of dishonor of any and all of the Obligations, and promptness in commencing suit against any party hereto or liable hereon, and in giving any notice to or of making any claim or demand hereunder upon Pledgor.
·
Indemnity; Liability. Pledgor agrees to indemnify and hold Secured Party harmless from all liability, loss, damage or expense which Secured Party may incur under or by reason of this Pledge Agreement, or for any action taken by Secured Party under this Pledge Agreement, or by reason or in defense of any and all claims and demands asserted against Secured Party arising out of the Pledged Collateral, except to the extent such claims and demands arise from the gross negligence or willful misconduct of the Lender as determined by a final, nonappealable judgment by a court of competent jurisdiction. Should Secured Party incur any such liability, loss, damage or expense, the amount thereof (including reasonable attorneys’ fees), with interest thereon at the rate set forth in the Loan Agreement will be payable by Pledgor immediately, without demand. Secured Party has no duty to protect, insure, collect or realize upon the Pledged Collateral or preserve rights in it against prior parties. Secured Party is not responsible or liable for any shortage, discrepancy, damage, loss or destruction of any part of the Pledged Collateral regardless of the cause thereof, except to the extent arising from the gross negligence or willful misconduct of the Lender as determined by a final, nonappealable judgment by a court of competent jurisdiction.
·
Miscellaneous. This Pledge Agreement is binding upon Pledgor and its successors and assigns, and inures to the benefit of, and is enforceable by Secured Party and its respective successors and assigns. None of the terms or provisions of this Pledge Agreement may be waived, altered, modified or amended except in writing duly signed for and on behalf of Secured Party and Pledgor.
·
Severability. If for any reason any provision or provisions hereof are determined to be invalid and contrary to any existing or future law, such invalidity will not impair the operation of or affect those portions of this Pledge Agreement which are valid.
·
Notices. All notices and other communications provided to any party hereto under this Pledge Agreement will be given in accordance with the Loan Agreement.
·
Section Titles. The Section titles contained in this Pledge Agreement are and will be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto.
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·
Counterparts. This Pledge Agreement may be executed in any number of counterparts, which, collectively and separately, constitutes one agreement. The delivery of an executed counterpart of a signature page to this Pledge Agreement by telecopier or by electronic mail in pdf format is effective as delivery of a manually executed counterpart of this Pledge Agreement.
·
GOVERNING LAW; FORUM; WAIVER OF JURY TRIAL. THIS PLEDGE AGREEMENT IS GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF ILLINOIS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF ILLINOIS. ANY LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO THIS PLEDGE AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT RELATED THERETO MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS IN THE COUNTY OF COOK OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND APPELLATE COURTS THEREOF, AND, BY EXECUTION AND DELIVERY OF THIS PLEDGE AGREEMENT, PLEDGOR HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION, SUIT OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. PLEDGOR WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS PLEDGE AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, VERBAL OR WRITTEN STATEMENT OR OTHER ACTION OF THE PARTIES HERETO.
[Signatures contained on following page]
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IN WITNESS WHEREOF, this Pledge Agreement has been duly executed as of the date first written above.
PLEDGOR:
PERNIX GROUP, INC.
By: ______________________________
Name:
Title:
SECURED PARTY:
BARRINGTON BANK & TRUST COMPANY, NATIONAL ASSOCIATION
By:
Name:
Title:
CONSENTED TO AND APPROVED BY:
[___], as the [Limited/General Partner] of [Partnership]
By:____________________________________
Name:
Title:
Signature Page to Partnership Interest Pledge Agreement
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EXHIBIT A
FORM OF ASSIGNMENT OF PARTNERSHIP INTEREST
This ASSIGNMENT OF PARTNERSHIP INTEREST dated as of _______________________, made by PERNIX GROUP, INC. (together with its successors and assigns, the “Assignor”) to _______________________________________________ (the “Assignee”).
RECITALS
·
The undersigned has entered into that certain Partnership Interest Pledge Agreement, dated as of November 10, 2014 (as amended, restated, supplemented, or modified from time to time, the “Pledge Agreement”), with Barrington Bank & Trust Company, National Association (together with its successors and assigns, the “Lender”), and consented to and approved by the other parties thereto. Unless otherwise noted, terms defined in the Pledge Agreement are used herein as defined therein.
·
The Assignor is a [limited/general] partner of [__], a [___] limited partnership (the “Company”) evidenced by that certain [PARTNERSHIP AGREEMENT], as may be amended, restated, supplemented, or otherwise modified from time to time, the "Partnership Agreement”).
·
Lender has required that the Assignor shall have executed and delivered this Assignment of Partnership Interest.
NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto agree as follows:
·
Assignment and Acceptance of Collateral. As of the Effective Date (as defined in Section(vii), the Assignor hereby sells, transfers, conveys, and assigns (without recourse and, except as set forth herein, representation or warranty) (collectively, the “Assignment”) to the Assignee all of its right, title, and interest, in, to, and under the “Pledged Interests” (as such term is defined in the Pledge Agreement) of the Company (the “Transferred Interests”). The Assignee, upon the execution of this Assignment of Partnership Interest, hereby accepts from the Assignor the Transferred Interests and agrees to become a successor [limited/general] partner of the Company in the place and stead of the Assignor to the extent of the Transferred Interests and to be bound by the terms and provisions of the Partnership Agreement.
·
Filings. On or as soon as practicable after the Effective Date, the Assignee shall file and record or cause to be filed and recorded with all proper offices or agencies all documents and instruments required to effect the terms herein, if any, including (a) this Assignment of Partnership Interest and (b) any partnership and assumed or fictitious name certificate or certificates and any amendments thereto.
·
Future Assurances. Each of the Assignor and the Assignee mutually agrees to cooperate at all times from and after the date hereof with respect to any of the matters described herein, and to execute such further deeds, bills of sale, assignments, releases, assumptions, notifications or
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other documents as may be reasonably requested for the purpose of giving effect to, evidencing, or giving notice of the assignment evidenced hereby.
·
Successors and Assigns. This Assignment of Partnership Interest shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.
·
Modification and Waiver. No supplement, modification, waiver, or termination of this Assignment of Partnership Interest or any provisions hereof shall be binding unless executed in writing by all parties.
·
Counterparts. Any number of counterparts of this Assignment of Partnership Interest may be executed. Each counterpart will be deemed to be an original instrument and all counterparts taken together will constitute one agreement. Delivery of an executed counterpart of a signature page to this Assignment of Partnership Interest by facsimile or in pdf format shall be as effective as delivery of a manually executed counterpart of this Assignment of Partnership Interest.
·
Execution; Effective Date. This Assignment of Partnership Interest will be binding and effective and will result in the assignment of the Transferred Interests on the date first written above (the “Effective Date”).
·
Governing Law. This Assignment of Partnership Interest will be governed by the laws of the State of Illinois.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed and delivered.
Assignor
PERNIX GROUP, INC.
By: ______________________________
Name:
Title:
Assignee
By:
______________________________
Name:
Title:
CONSENTED TO AND APPROVED BY:
[___], as the [Limited/General Partner] of [Partnership]
By:____________________________________
Name:
Title:
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EXHIBIT B
FORM OF ACKNOWLEDGMENT OF PLEDGE
[Partnership Letterhead]
ACKNOWLEDGMENT OF PLEDGE
[DATE]
Barrington Bank & Trust Company, National Association
201 South Hough Street
Barrington, Illinois 60010
Attn: William Dierking
Dear Mr. Dierking:
Reference is made to the Partnership Interest Pledge Agreement dated as November 10, 2014 (as amended, restated, supplemented or modified from time to time, the “Pledge Agreement”) by and between the Pernix Group, Inc. (the “Pledgor”), and Barrington Bank & Trust Company, National Association, as Secured Party, and consented to and approved by other parties thereto. Capitalized terms used but not defined herein have the meanings provided in the Pledge Agreement.
In connection with the pledge of the Pledged Collateral to Barrington Bank & Trust Company, National Association by the Pledgor, the undersigned hereby represents, warrants and agrees with Barrington Bank & Trust Company, National Association as follows:
(a)
It acknowledges the security interest granted to Barrington Bank & Trust Company, National Association pursuant to the Pledge Agreement in the Pledged Interests issued by the undersigned (for the purposes of this Acknowledgment of Pledge, the “Pledged Interest”);
(b)
In accordance with the Pledgor’s instructions, the undersigned has registered on its books and records Barrington Bank & Trust Company, National Association’s security interest in the Pledged Interests; and that no other lien on such Pledged Interests is registered on the books and records of the undersigned;
(c)
The undersigned shall deliver directly to Barrington Bank & Trust Company, National Association at Barrington Bank & Trust Company, National Association’s address set forth above (or such other address as Barrington Bank & Trust Company, National Association provides), any and all instruments and/or certificates evidencing any right, option or
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warrant, and all new, additional or substituted securities issued to, or to be received by, Pledgor by virtue of its ownership of the Pledged Interests issued by the undersigned or upon exercise by Pledgor of any option, warrant or right attached to such Pledged Interest;
(d)
To the extent within the control of the undersigned, the undersigned will not issue any additional partnership interests or securities without the prior written consent of Secured Party;
(e)
The undersigned has not entered into an agreement with any third party to act on such third party’s instructions without further consent of Pledgor with respect to the Pledged Interests; and agrees that it will not enter into any such agreement with any third party concerning any Pledged Interests;
(f)
After the occurrence and during the continuance of an Event of Default, the undersigned shall pay directly to Barrington Bank & Trust Company, National Association any and all cash distributions which might be declared and payable (including any unpaid distributions accrued prior to the date hereof) on any of the Pledged Interests or any of the other Pledged Collateral issued by the undersigned, and which but for the provisions of this letter would be paid to Pledgor;
(g)
At any time upon and during the continuance of an Event of Default, and upon Barrington Bank & Trust Company, National Association’s exercise of applicable remedies pursuant to the Pledge Agreement, upon written instructions from Barrington Bank & Trust Company, National Association, the undersigned shall register the transfer of such Pledged Interests to Barrington Bank & Trust Company, National Association or Barrington Bank & Trust Company, National Association’s nominee, as applicable;
(h)
The Pledged Interests have been duly authorized and validly issued and are not subject to, nor (to the extent within the control of the undersigned) will the undersigned at any time permit it to become subject to, any restrictions governing its issuance, transfer, ownership or control other than those currently set forth in its operating agreement; and
(i)
The undersigned will comply with Barrington Bank & Trust Company, National Association’s instructions relating to the Pledged Interests without the need for further consent from Pledgor provided such instructions are in accordance with the Loan Documents.
The undersigned agrees that, if at any time Barrington Bank & Trust Company, National Association shall determine to exercise its right to sell all or any of the Pledged Collateral issued by the undersigned, the undersigned will, upon Barrington Bank & Trust Company, National Association’s request and at Pledgor’s expense:
(a)
provide Barrington Bank & Trust Company, National Association with such other information and projections as may be necessary or, in Barrington Bank & Trust Company, National Association’s reasonable opinion, advisable to enable Barrington Bank & Trust Company, National Association to effect the sale of such Pledged Collateral;
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(b)
do or cause to be done all such other acts and things as may be necessary to make the sale of such Pledged Collateral or any part thereof valid and binding and in compliance with applicable law; and
(c)
do or cause to be done all such other acts and things as may be necessary to constitute Barrington Bank & Trust Company, National Association or Barrington Bank & Trust Company, National Association’s designees or transferees a [limited/general] partner of the undersigned.
Barrington Bank & Trust Company, National Association is hereby authorized, in connection with any sale of the Pledged Collateral issued by the undersigned, to deliver or otherwise disclose to any prospective purchaser of such Pledged Collateral (i) any information and projections provided to Barrington Bank & Trust Company, National Association pursuant to subsection (a) above and (ii) any other information in Barrington Bank & Trust Company, National Association’s possession relating to the undersigned or such Pledged Collateral.
[Remainder of Page Intentionally Left Blank]
Very truly yours,
[PARTNERSHIP]
By:_________________________________
Name:_______________________________
Title:________________________________
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Exhibit C
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![[prnx_ex10z11002.gif]](prnx_ex10z11002.gif)
![[prnx_ex10z11004.gif]](prnx_ex10z11004.gif)
Exhibit 21.0 |
List of Subsidiaries and Jurisdictions |
Name of Subsidiary | | Jurisdiction of Organization |
| | |
Pernix-Niger | | Niger, Africa |
Pernix-Serka Joint Venture- legal Limited Partnership | | United States, Illinois, |
Pernix/SHBC Joint Venture | | United States |
Pernix Techical Works | | Dubai, United Arab Emirates |
Pernix (Fiji), Limited | | Fiji |
Vanuatu Utilities and Infrastructure Limited | | Vanuatu |
Pernix-Serka Azerbaijan LLC | | Azerbaijan |
Pernix-Serka JV LLC, Sierre Leone | | Sierra Leone |
Pernix Group, Inc. Kurdistan | | Kurdistan Region of Iraq |
Pernix Guam LLC | | Guam |
Pernix LTC LLC | | United States, Illinois |
Pernix RE, LLC | | United States, Illinois |
Pernix DCK, LLC (inactive) | | United States, Delaware |
Pernix Solomon Islands Limited | | Solomon Islands |
Pernix Tishman LLC (inactive) | | United States, Delaware |
Consent of Independent Registered Public Accounting Firm
Pernix Group, Inc.
Lombard, Illinois
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-196460) of Pernix Group, Inc. of our report dated March 20, 2015, relating to the consolidated financial statements which appear in this Form 10-K.
/s/ BDO USA, LLP
Chicago, Illinois
Mach 20, 2015
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Nidal Z Zayed, certify that:
1.I have reviewed this annual report on Form 10-K of Pernix Group, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b)b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| | |
| Date: March 20, 2015 | /s/ Nidal Z Zayed |
| | President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Patrick Gainer, certify that:
1.I have reviewed this annual report on Form 10-K of Pernix Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| |
Date: March 20, 2015 | /s/ Patrick Gainer |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, Nidal Z Zayed, President and Chief Executive Officer, in connection with the Report on 10-K of Pernix Group, Inc. for the fiscal year ended December 31, 2014, (the “Report”) hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Pernix Group, Inc.
| |
/s/ Nidal Z Zayed | |
Nidal Zayed | |
President and Chief Executive Officer | |
Dated: March 20, 2015 | |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, Patrick Gainer, Chief Financial Officer, in connection with the Report on 10-K of Pernix Group, Inc. for the fiscal year ended December 31, 2014, (the “Report”) hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Pernix Group, Inc.
| |
/s/ Patrick Gainer | |
Patrick Gainer | |
Chief Financial Officer | |
Dated: March 20, 2015 | |
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