UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): July 7, 2015
Team, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware | 001-08604 | 74-1765729 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
13131 Dairy Ashford, Suite 600,
Sugar Land, Texas 77478
(Address of Principal Executive Offices and Zip Code)
Registrants telephone number, including area code: (281) 331-6154
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate line below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Explanatory Note
This amendment is being filed to supplement Item 9.01 of the Current Report on Form 8-K filed by Team, Inc. on July 7, 2015, to include the historical financial statements of Qualspec Group (Qualspec) and the unaudited pro forma financial information required pursuant to Article 11 of Regulation S-X.
Item 9.01 | Financial Statements and Exhibits. |
(a) Financial statements of businesses acquired.
(i) The audited consolidated balance sheets of Qualspec as of December 31, 2014, 2013 and 2012 and the related audited consolidated statements of income and comprehensive income, members equity and cash flows for the twelve months ended December 31, 2014, 2013 and 2012 are filed as Exhibit 99.2 to this report and incorporated herein by reference.
(ii) The unaudited interim consolidated balance sheets of Qualspec at March 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive income (loss), members equity and cash flows for the three months ended March 31, 2015 and 2014 are filed as Exhibit 99.1 to this report and are incorporated herein by reference.
(b) Pro forma financial information.
(i) The Team, Inc. unaudited pro forma condensed consolidated statement of income for the twelve months ended May 31, 2015, reflecting the pro forma effect of Team, Inc.s acquisition of Qualspec as if the acquisition had occurred on June 1, 2014, and the unaudited pro forma condensed consolidated balance sheet as of May 31, 2015 are filed with this report as Exhibit 99.3 and incorporated herein by reference.
EXHIBIT INDEX
Exhibit no. |
Description | |
23.1 | Consent of BKD LLP | |
99.1 | Unaudited consolidated balance sheets of Qualspec at March 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive income (loss), members equity and cash flows for the three months ended March 31, 2015 and 2014. | |
99.2 | Audited consolidated balance sheets of Qualspec at December 31, 2014, 2013 and 2012 and the related consolidated statements of income and comprehensive income, members equity and cash flows for the twelve months ended December 31, 2014, 2013 and 2012. | |
99.3 | The Team, Inc. unaudited pro forma condensed consolidated balance sheet as of May 31, 2015 and pro forma condensed consolidated statements of income for the twelve months ended May 31, 2015. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TEAM, INC. | ||
By: | /s/ Greg L.Boane | |
Greg L. Boane | ||
Senior Vice President and Chief Financial | ||
Officer |
Dated: September 21, 2015
Exhibit 23.1
Consent of Independent Public Accountants
We consent to the incorporation by reference in the registration statements (No. 333-184345, No. 333-119346, 333-119344 and No. 333-119341) on Form S-8 of Team, Inc. of our report dated March 27, 2015, relating to our audit of the consolidated financial statements of QualSpec Group, LLC as of December 31, 2014 and 2013, and for each of the years then ended, and our report dated March 25, 2014, relating to our audit of the consolidated financial statements of QualSpec Group, LLC as of December 31, 2013 and 2012, and for each of the years then ended which report appears in this Current Report on Form 8-K/A of Team, Inc.
San Antonio, Texas
September 21, 2015
Exhibit 99.1
QualSpec Group, LLC
Unaudited Consolidated Financial Statements
March 31, 2015 and 2014
QualSpec Group, LLC
March 31, 2015 and 2014
Contents
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Unaudited Consolidated Financial Statements |
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3 | ||||
Unaudited Statements of Operations and Comprehensive Income (Loss) |
4 | |||
5 | ||||
6 | ||||
7 |
Unaudited Consolidated Balance Sheets
March 31, 2015 and 2014
2015 | 2014 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 1,706,122 | $ | 182,765 | ||||
Accounts receivable, net of allowance for doubtful accounts of $836,289 for 2015 and $886,633 for 2014 |
26,892,077 | 22,151,783 | ||||||
Prepaid expenses |
1,467,783 | 993,036 | ||||||
Deferred income tax asset |
416,343 | 304,220 | ||||||
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Total current assets |
30,482,325 | 23,631,804 | ||||||
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Property and Equipment, Net |
12,709,092 | 9,122,523 | ||||||
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Other Assets, Net |
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Goodwill |
19,444,703 | 19,444,703 | ||||||
Intangibles, net |
27,153,413 | 32,242,184 | ||||||
Deferred financing costs, net |
75,762 | 196,768 | ||||||
Note receivablerelated party |
50,000 | 50,000 | ||||||
Other assets |
122,150 | 74,571 | ||||||
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Total other assets |
46,846,028 | 52,008,226 | ||||||
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$ | 90,037,445 | $ | 84,762,553 | |||||
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Liabilities and Members Equity |
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Current Liabilities |
||||||||
Accounts payabletrade |
$ | 3,724,191 | $ | 3,420,183 | ||||
Accounts payablerelated parties |
505,609 | 505,609 | ||||||
Accrued expenses |
20,854,674 | 7,877,656 | ||||||
Revolving line of credit |
| 1,000,000 | ||||||
Income tax payable |
904,000 | 7,539 | ||||||
Current portion of long-term debt |
5,000,000 | 3,000,000 | ||||||
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Total current liabilities |
30,988,474 | 15,810,987 | ||||||
Long-term Debt, Net of Current Portion |
30,342,697 | 33,573,107 | ||||||
Deferred Income Tax Liability |
180,206 | 205,997 | ||||||
Other Long-term Liability |
| 10,065 | ||||||
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Total liabilities |
61,511,377 | 49,600,156 | ||||||
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Members Equity |
||||||||
Member unitspreferred, issued and outstanding, 52,782 in 2015 and 2014, liquidation preference of $2,547,623 for 2015 and $2,152,230 for 2014 |
1,143,997 | 1,143,997 | ||||||
Member unitscommon, issued and outstanding, 1,696,832 in 2015 and 2014 |
36,907,616 | 36,907,616 | ||||||
Additional paid-in capital |
2,026,558 | 1,148,640 | ||||||
Retained deficit |
(12,820,531 | ) | (5,719,890 | ) | ||||
Accumulated other comprehensive loss |
| (10,065 | ) | |||||
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27,257,640 | 33,470,298 | |||||||
Noncontrolling Interest |
1,268,428 | 1,692,099 | ||||||
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Total members equity |
28,526,068 | 35,162,397 | ||||||
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$ | 90,037,445 | $ | 84,762,553 | |||||
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See Notes to Unaudited Consolidated Financial Statements
3
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Month Periods Ended March 31, 2015 and 2014
2015 | 2014 | |||||||
Revenues |
$ | 44,180,902 | $ | 38,234,054 | ||||
Cost of Sales |
29,837,562 | 27,491,190 | ||||||
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Gross Profit |
14,343,340 | 10,742,864 | ||||||
Selling, General and Administrative Expenses |
10,181,081 | 7,970,806 | ||||||
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Income from Operations |
4,162,259 | 2,772,058 | ||||||
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Other Expenses |
||||||||
Interest |
692,303 | 746,701 | ||||||
Management fees |
235,482 | 188,634 | ||||||
Other nonoperating |
10,862,341 | 833,263 | ||||||
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11,790,126 | 1,768,598 | |||||||
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Income (Loss) Before Provision for Income Tax |
(7,627,867 | ) | 1,003,460 | |||||
Provision for Income Tax |
899,109 | 335,654 | ||||||
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Net Income (Loss) |
(8,526,976 | ) | 667,806 | |||||
Other Comprehensive Income |
| 9,568 | ||||||
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Comprehensive Income (Loss) |
$ | (8,526,976 | ) | $ | 677,374 | |||
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Amounts Attributable to Noncontrolling Interests |
||||||||
Net income (loss) |
$ | (8,526,976 | ) | $ | 667,806 | |||
Net (income) loss attributable to noncontrolling interest |
592,895 | (64,312 | ) | |||||
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Net income (loss) attributable to Parent |
$ | (7,934,081 | ) | $ | 603,494 | |||
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Comprehensive income (loss) |
$ | (8,526,976 | ) | $ | 677,374 | |||
Less comprehensive (income) loss attributable to the noncontrolling interest |
592,895 | (64,312 | ) | |||||
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Comprehensive income (loss) attributable to Parent |
$ | (7,934,081 | ) | $ | 613,062 | |||
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See Notes to Unaudited Consolidated Financial Statements
4
Unaudited Consolidated Statements of Members Equity
Three Month Periods Ended March 31, 2015 and 2014
Preferred Member Units |
Common Member Units |
Additional Paid-in Capital |
Retained Deficit |
Other Comprehensive Loss |
Noncontrolling Interest |
Total | ||||||||||||||||||||||
Balance, December 31, 2014 |
$ | 1,143,997 | $ | 36,907,616 | $ | 1,769,005 | $ | (4,886,450 | ) | $ | | $ | 1,861,323 | $ | 36,795,491 | |||||||||||||
Net loss |
| | | (7,934,081 | ) | | (592,895 | ) | (8,526,976 | ) | ||||||||||||||||||
Unit option compensation |
| | 257,553 | | | | 257,553 | |||||||||||||||||||||
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Balance, March 31, 2015 |
$ | 1,143,997 | $ | 36,907,616 | $ | 2,026,558 | $ | (12,820,531 | ) | $ | | $ | 1,268,428 | $ | 28,526,068 | |||||||||||||
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Preferred Member Units |
Common Member Units |
Additional Paid-in Capital |
Retained Deficit |
Other Comprehensive Loss |
Noncontrolling Interest |
Total | ||||||||||||||||||||||
Balance, December 31, 2013 |
$ | 1,143,997 | $ | 36,907,616 | $ | 1,138,297 | $ | (6,323,384 | ) | $ | (19,633 | ) | $ | 1,627,787 | $ | 34,474,680 | ||||||||||||
Net income |
| | | 603,494 | | 64,312 | 667,806 | |||||||||||||||||||||
Change in fair value of interest rate swap |
| | | | 9,568 | | 9,568 | |||||||||||||||||||||
Unit option compensation |
| | 10,343 | | | | 10,343 | |||||||||||||||||||||
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Balance, March 31, 2014 |
$ | 1,143,997 | $ | 36,907,616 | $ | 1,148,640 | $ | (5,719,890 | ) | $ | (10,065 | ) | $ | 1,692,099 | $ | 35,162,397 | ||||||||||||
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See Notes to Unaudited Consolidated Financial Statements
5
Unaudited Consolidated Statements of Cash Flows
Three Month Periods Ended March 31, 2015 and 2014
2015 | 2014 | |||||||
Operating Activities |
||||||||
Net income (loss) before attribution of noncontrolling interest |
$ | (8,526,976 | ) | $ | 667,806 | |||
Net (income) loss attributable to noncontrolling interest |
592,895 | (64,312 | ) | |||||
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Net income (loss) attributable to QualSpec Group, LLC |
(7,934,081 | ) | 603,494 | |||||
Items not requiring (providing) cash |
||||||||
Depreciation and amortization |
2,064,464 | 1,957,677 | ||||||
Amortization of deferred financing costs |
5,808 | 54,296 | ||||||
Unit option compensation |
257,553 | 10,343 | ||||||
Paid-in-kind interest |
| 37,017 | ||||||
Deferred income taxes |
(109,915 | ) | 9,043 | |||||
Noncontrolling interest |
(592,895 | ) | 64,312 | |||||
(Increase) decrease in |
||||||||
Accounts receivable |
(8,204,172 | ) | (6,432,842 | ) | ||||
Prepaid expenses |
439,048 | 514,971 | ||||||
Income tax refund receivable |
| 244,461 | ||||||
Other assets |
(44,121 | ) | (13,117 | ) | ||||
Increase (decrease) in |
||||||||
Accounts payable |
1,176,278 | 937,971 | ||||||
Income tax payable |
904,000 | 7,539 | ||||||
Accrued expenses |
13,529,542 | 2,849,476 | ||||||
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Net cash provided by operating activities |
1,491,509 | 844,641 | ||||||
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Investing Activities |
||||||||
Purchase of property and equipment |
(1,896,862 | ) | (1,350,543 | ) | ||||
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Net cash used in investing activities |
(1,896,862 | ) | (1,350,543 | ) | ||||
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Financing Activities |
||||||||
Borrowings on revolving credit facility |
$ | | $ | 11,000,000 | ||||
Payments on revolving credit facility |
| (10,000,000 | ) | |||||
Long-term debt payments |
(837,016 | ) | (740,110 | ) | ||||
Payments (to) from related partynet |
| (109,524 | ) | |||||
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Net cash provided by (used in) financing activities |
(837,016 | ) | 150,366 | |||||
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Decrease in Cash |
(1,242,369 | ) | (355,536 | ) | ||||
Cash, Beginning of Period |
2,948,491 | 538,301 | ||||||
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Cash, End of Period |
$ | 1,706,122 | $ | 182,765 | ||||
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Supplemental Cash Flows Information |
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Interest paid |
$ | 627,844 | $ | 757,304 | ||||
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Income taxes paid |
$ | 537,790 | $ | | ||||
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Change in fair value of swap contract |
$ | | $ | 9,568 | ||||
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Equipment acquired by capital lease obligations |
$ | 963,470 | $ | 51,880 | ||||
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See Notes to Unaudited Consolidated Financial Statements
6
QualSpec Group, LLC
Notes to Unaudited Consolidated Financial Statements
March 31, 2015 and 2014
Note 1: | Organization and Description of Business |
QualSpec Group, LLC (QualSpec) (Company), was incorporated in October 2008 for the purpose of acquiring 100 percent of the common stock of Altech Inspections, Inc. (Altech). In 2009, the Company acquired certain assets of another business, IESCO, Inc. (IESCO), a California-based company. In 2011, the Company also acquired certain assets of two additional Companies, T.C. Inspections, Inc. and Hawk Rope Access, Inc., both based in California. During 2013, the assets and operations of TC Inspections and Hawk Rope Access were merged into IESCO. Also, in 2013, the Company changed its name to QualSpec Group, LLC, and changed the names of the acquired entities of Altech and IESCO to QualSpec, Inc., and QualSpec, LLC, in order to create one firm with an expanded geographical footprint from which to provide its advanced service offerings.
QualSpec Group, LLC, provides inspection and non-destructive testing services to customers in the refinery, petrochemical and other industries located throughout the United States. Additionally QualSpec also provides specialty access services for industries such as oil platforms, hydroelectric plants, bridges, shipping and other type facilities with difficult to reach locations.
QualSpec, Inc., has facilities in Corpus Christi and Houston, Texas, and Sulphur, Louisiana. QualSpec, LLC, has facilities in Torrance, Nipomo, Bakersfield and Benecia, California, as well as offices in Fairbanks, Alaska; Mount Vernon, Washington; Kenner, Louisiana and Inver Grove Heights, Minnesota.
Note 2: | Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, QualSpec Inc., and its 93.5 percent common ownership interest in QualSpec, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
In accordance with the guidance in FASB ASC 810-10-65, Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, the Company includes the net loss and comprehensive loss attributable to the noncontrolling interest in the consolidated statements of income and members equity. Any losses attributable to the noncontrolling interest will be allocated to the noncontrolling interest even if the carrying amount of the noncontrolling interest is reduced below zero. Any changes in ownership that do not result in a loss of control will be accounted for as equity transactions.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
At March 31, 2015 and 2014, the Companys cash accounts exceeded federal insured limits by approximately $2,137, 000 and $983, 000, respectively.
7
Revenue Recognition
Revenues are recognized when the inspection services are performed.
Accounts Receivable
The Company extends credit to its customers based on an evaluation of its customers financial condition. Accounts receivable represent amounts billed and unbilled for inspection services and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Companys previous loss history, the customers current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company does not require collateral from its customers. As of March 31, 2015 and 2014, the allowance for doubtful accounts was $836,289 and $886,633, respectively.
Property and Equipment
Property and equipment are stated at cost or estimated fair value (if acquired) as of the acquisition date and are depreciated or amortized over the estimated useful life of each asset using the straight-line method. Estimated useful lives are as follows:
Years | ||||
Field equipment |
1 7 | |||
Office equipment |
3 10 | |||
Transportation equipment |
3 10 | |||
Software |
3 5 | |||
Buildings and improvements |
40 |
Maintenance and repairs, which neither add to the value of the property nor appreciably prolong its useful life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in income.
Impairment of Long-lived Assets
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Intangible Assets
Identifiable, amortizable intangible assets are being amortized on a straight-line basis over periods of 5 to 15 years based upon the nature of the identifiable intangible asset. All such assets are periodically evaluated as to recoverability of their carrying values.
Goodwill
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
8
Derivatives
Derivatives are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange-traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.
Income Taxes
The Companys members have elected to have the Companys income taxed as a partnership under provisions of the Internal Revenue Code (IRC) and a similar section of the state income tax law. Therefore, taxable income or loss is reported to the individual members for inclusion in their respective tax returns. QualSpec, Inc., is a C corporation for federal and state income tax purposes and, therefore, income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes. The income tax accounting guidance results in two components of income tax expense, current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. QualSpec, Inc., determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.
Self-Insurance
QualSpec has elected to self-insure certain costs related to its health and dental insurance programs for its employees. Costs resulting from noninsured losses are charged to income when incurred. The Company has purchased insurance that limits its exposure for individual and aggregate claims.
Unit Incentive Plan
At March 31, 2015 and 2014, the Company has a unit-based employee compensation plan, which is described more fully in Note 7.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on the fair value of the derivative financial instruments.
9
Note 3: | Property and Equipment |
A summary of property and equipment as of March 31, 2015 and 2014, is as follows:
2015 | 2014 | |||||||
Land |
$ | 199,226 | $ | 199,226 | ||||
Buildings |
1,993,094 | 1,982,659 | ||||||
Leasehold improvements |
468,193 | 309,329 | ||||||
Inspection equipment |
16,858,858 | 12,743,169 | ||||||
Office equipment and furniture |
1,160,309 | 1,107,789 | ||||||
Software |
1,179,243 | 1,079,841 | ||||||
Vehicles |
4,556,460 | 2,569,698 | ||||||
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26,415,383 | 19,991,711 | |||||||
Less accumulated depreciation |
13,706,291 | 10,869,188 | ||||||
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$ | 12,709,092 | $ | 9,122,523 | |||||
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Depreciation expense for the periods ended March 31, 2015 and 2014, amounted to $788,639 and $677,119, respectively.
Note 4: | Acquired Intangible Assets and Goodwill |
The carrying basis and accumulated amortization of recognized intangible assets and goodwill at March 31, 2015 and 2014, is as follows:
2015 | 2014 | |||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||
Amortizable intangible assets |
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Covenant not to compete |
$ | 800,380 | $ | 786,380 | $ | 800,380 | $ | 753,279 | ||||||||
Customer list |
29,898,340 | 16,117,318 | 29,898,340 | 13,384,840 | ||||||||||||
Trade name |
16,262,381 | 2,903,990 | 16,262,381 | 580,798 | ||||||||||||
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$ | 46,961,101 | $ | 19,807,688 | $ | 46,961,101 | $ | 14,718,917 | |||||||||
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Goodwill |
||||||||||||||||
QualSpec, Inc. |
$ | 9,213,254 | $ | 9,213,254 | ||||||||||||
QualSpec, LLC |
10,231,449 | 10,231,449 | ||||||||||||||
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Goodwill |
$ | 19,444,703 | $ | 19,444,703 | ||||||||||||
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Effective January 1, 2014, the Company determined that the acquired trade names have a finite life due to the transition to the use of the Qualspec names. As a result, the Company decided to amortize the acquired trade names over a seven year life, resulting in amortization expense of the trade name. Prior to 2014, trade names were considered to have indefinite lives and, as such, were considered unamortizable. Amortization expense for the above intangible assets was $1,275,825 and $1,280,558 for the periods ended March 31, 2015 and 2014, respectively. Estimated amortization expense for the next five years is as follows:
Years Ending March 31,
2016 |
$ | 4,923,803 | ||
2017 |
$ | 4,910,783 | ||
2018 |
$ | 4,910,783 | ||
2019 |
$ | 4,910,783 | ||
2020 |
$ | 4,910,783 |
10
2015 | 2014 | |||||||
Goodwill balance at beginning of year |
$ | 19,444,703 | $ | 19,444,703 | ||||
Additional costs capitalized as goodwill |
| | ||||||
|
|
|
|
|||||
Goodwill balance at end of year |
$ | 19,444,703 | $ | 19,444,703 | ||||
|
|
|
|
There was no change in the carrying amount of goodwill for the periods ended March 31, 2015 and 2014.
Note 5: | Long-term Debt |
2015 | 2014 | |||||||
Senior debt |
$ | 19,000,000 | $ | 22,000,000 | ||||
Senior subordinated debt |
9,041,983 | 9,019,227 | ||||||
Sellers notes |
5,500,000 | 5,500,000 | ||||||
Revolving credit facility |
| 1,000,000 | ||||||
Capital lease obligations |
1,800,714 | 53,880 | ||||||
|
|
|
|
|||||
35,342,697 | 37,573,107 | |||||||
Less current maturitiesamortizing |
5,000,000 | 3,000,000 | ||||||
Less revolving credit facility |
| 1,000,000 | ||||||
|
|
|
|
|||||
$ | 30,342,697 | $ | 33,573,107 | |||||
|
|
|
|
Senior Term Loan and Revolving Credit Facility
At March 31, 2015, the Company has a senior secured term credit facility with an amended aggregate term advance amount of $25,000,000 and a $10,000,000 senior secured revolving credit facility that are administered by the senior lender.
The senior secured term credit facility is secured by real and personal property, including accounts receivable, inventory, equipment and intangible assets. The term loan bears interest at a floating rate or LIBOR plus an applicable margin. At March 31, 2015, the Company had elected a LIBOR rate of .24 percent plus the base rate of 4.5 percent with an effective overall rate of 4.76 percent. The loan is payable quarterly with principal due in consecutive quarterly installments of $750,000 through April 5, 2017, at which time all remaining unpaid principal on the term advances will be due and payable.
The $10,000,000 senior secured revolving facility is secured by real and personal property, including accounts receivable, inventory, equipment and intangible assets. Advances on the revolver are limited to a borrowing base of the revolving cap or 85 percent of eligible accounts receivable as defined in the Credit Agreement. The revolving facility bears interest at a floating rate or LIBOR plus an applicable margin with interest payable quarterly. At March 31, 2015, the Company had elected the floating rate of 6.75 percent. The revolving facility matures April 5, 2017.
The senior loan and revolving credit facilities include various covenants which impose a number of financial ratio requirements and restrictive covenants that, among other things, limit the Companys ability to incur additional indebtedness, create liens or pay dividends. In addition, as defined in the agreement, the facilities also require mandatory principal prepayments equal to 75 percent of excess cash flow as defined. The agreement also provides for a 50 percent excess cash flow prepayment if a certain leverage ratio is met at the end of each year and an exemption from an excess cash flow prepayment if the leverage ratio falls below a certain ratio. At March 31, 2015 and 2014, excess cash flow principal payments due, as defined, amounted to $-0- for each period. All voluntary prepayments of debt shall include a premium of $135,000 if paid prior to the third anniversary, unless such prepayment meets certain conditions as defined in the credit facility. The Company was in compliance with the loan covenants at March 31, 2015 and 2014.
11
The loan agreement also requires the Company to pay an Unused Fee that is defined as the product of an annual rate equal to one-half of one percent (0.50 percent) and the daily rate average amount by which the sum of the aggregate revolving commitment exceeds the revolving facility outstanding amount, payable quarterly in arrears. Any Unused Fee remaining unpaid on the revolving commitment termination date shall be due and payable on such date.
Senior Subordinated Debt
The Company has four Senior Subordinated Debt agreements at March 31, 2015 and 2014. Subordinated Debt Series A in the original amount of $6,000,000 was used to fund a portion of the Altech acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $1,034,090 in principal and interest added on this note. As of March 31, 2015, the outstanding balance owed was $3,204,952 of which $65,492 represents interest which has been added to principal pursuant to this option through March 31, 2015. As of March 31, 2014, the outstanding balance owed was $3,199,619 of which $60,160 represents interest which has been added to principal pursuant to this option through March 31, 2014. The principal balance is due in full on October 5, 2017.
The Subordinated Debt Series B in the original amount of $6,000,000 was used to fund a portion of the IESCO acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 12 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $1,025,494 in principal and interest added on this note. As of March 31, 2015, the outstanding balance owed was $3,405,959 of which $67,638 represents interest which has been added to principal pursuant to this option through March 31, 2015. As of March 31, 2014, the outstanding balance owed was $3,386,599 of which $48,278 represents interest which has been added to principal pursuant to this option though March 31, 2014. The principal balance is due in full on October 5, 2017.
The Subordinated Debt Series C-1 in the original amount of $2,375,000 was used to fund a portion of the TC Inspections acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $378,267 in principal and interest added on this note. As of March 31, 2015, the outstanding balance owed was $1,214,489 of which $23,897 represents interest which has been added to principal pursuant to this option through March 31, 2015. As of March 31, 2014, the outstanding balance owed was $1,212,468 of which $21,876 represents interest which has been added to principal pursuant to this option through March 31, 2014. The principal balance is due in full on October 5, 2017.
The Subordinated Debt Series C-2 in the original amount of $2,375,000 was used to fund a portion of the Hawk Rope Access acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $378,298 in principal and interest added on this note. As of March 31, 2015, the outstanding balance owed was $1,216,581 of which $32,675 represents interest which has been added to
12
principal pursuant to this option during 2014. As of March 31, 2014, the outstanding balance owed was $1,212,650 of which $22,329 represents interest which has been added to principal pursuant to this option through March 31, 2014. The principal balance is due in full on October 5, 2017.
The Company had the option to prepay the Subordinated Debt Series A and Series B, in whole or in part, in amounts equal to the lesser of the aggregate amount of the principal amount outstanding on the Subordinated Debt or in an integral multiple of $100,000 with a minimum of $500,000.
There were no such prepayments made on the Series A. Prepayments of Subordinated Debt Series B shall include a premium, unless arising from a sales transaction, equal to the present value of all future interest payments computed using the Treasury 5-year note rate for the week ending prior to the date of payment plus one percent if made by October 4, 2013.
These loans are subject to certain financial and restrictive covenants that, among other things, limit the Companys ability to incur additional indebtedness, create liens and pay dividends. The Company was in compliance with the covenants on these loans at March 31, 2015.
All borrowings pursuant to the Subordinated Debt are secured by the assets of the Company.
Seller Notes
In connection with the Altech acquisition, the Company entered into various note agreements with the selling shareholders of Altech in the aggregate amount of $2,000,000. These notes bear interest at eight percent, payable quarterly in arrears and are due on April 5, 2016.
In connection with the IESCO acquisition, the Company entered into a note agreement with the selling shareholder of IESCO in the amount of $2,000,000. This note bears interest at 10 percent, payable quarterly in arrears and is due on April 5, 2016.
In connection with the TC Inspections and Hawk Rope Access acquisitions, the Company also entered into a note agreement with the selling shareholder of T. C. Inspections, Inc., and Hawk Rope Access, Inc., in the amount of $1,500,000. This note bears interest at eight percent, payable quarterly in arrears and is due on April 5, 2016.
Debt Financing Costs
In connection with the issuance of the senior secured term and revolving credit facility and Subordinated Debt, during 2011, the Company incurred financing costs of $1,079,679, which have been deferred and are being amortized as additional borrowing costs utilizing the interest method over the life of the related borrowings. Amortization expense for the periods ended March 31, 2015 and 2014, was $5,808 and $54,296, respectively.
Senior and Subordinated Debt Amendments
Effective December 19, 2014, QualSpec entered into the Sixth Amendment to Credit Agreement (Sixth Amendment) with it senior lender, which allowed for up to $4,000,000 in capital leases and other indebtedness secured by liens on equipment.
On May 30, 2014, QualSpec entered into the Fifth Amendment to Credit Agreement (Fifth Amendment) with its senior lender, which increased the revolving commitment up to $10,000,000. In addition, the Fifth Amendment allowed for up to $2,000,000 in capital leases and indebtedness secured by liens and capital expenditures up to $5,000,000.
Effective May 8, 2013, QualSpec entered into the Fourth Amendment to Credit Agreement (Fourth Amendment) with its senior lender which increased the aggregate amount of the lenders commitment up to $25,000,000 and provided for the payment of amounts due in connection with the redemption of members units during the year ended December 31, 2013.
13
In connection with the Fourth Amendment to Credit Agreement with its senior lender discussed above, the Company simultaneously entered into a First Amendment To Mezzanine Subordination Agreement with all of its senior subordinated debt holders, which increased the maximum senior debt amount to $41,005,000 and provided for the prepayment of certain principal amounts on the subordinated notes not to exceed $2,861,840. Along with the First Amendment to the Mezzanine Subordination Agreement, the Company also amended the Securities Purchase Agreement which changed the interest rates on all four of the senior subordinated notes to 14 percent per annum.
On May 31, 2012, the Company entered into the Second Amendment to Credit Agreement (Second Amendment) with its senior lender whereby the aggregate amount of the lenders revolving commitment was temporarily increased by $2,500,000 to an aggregate amount equal to $9,500,000 for the period from and including the First Amendment Effective Date but excluding September 30, 2012 (and the aggregate amount of the Lenders Revolving Commitments decreased to $7,000,000 on September 30, 2012). Simultaneously, the Company entered into the Fourth Amendment to Amend and Restated Securities Purchase Agreement and Waiver with its senior subordinated lenders. These Agreements restated the total leverage ratio, the senior leverage ratio and the fixed charge ratio coverage requirements for the Company resetting the financial covenants beginning in the second quarter of 2012.
Capital Lease Obligations
QualSpec maintains a master equity lease agreement with a third-party lender, which has been utilized to acquire vehicles included in fixed assets with a total acquisition cost of $2,034,346. For the period ended March 31, 2015, QualSpec acquired $1,001,470, in vehicles through this master equity lease. QualSpec has financed a total of $1,957,346 under this master lease agreement.
Long-term Debt Maturities
Aggregate annual maturities of long-term debt at March 31, 2015, are:
Period Ending March 31,
Long-term Debt (Excl. Leases) |
Capital Lease Obligations |
|||||||
2016 |
$ | 5,000,000 | $ | 518,773 | ||||
2017 |
6,500,000 | 531,696 | ||||||
2018 |
22,041,981 | 1,001,457 | ||||||
|
|
|
|
|||||
$ | 33,541,981 | |||||||
|
|
|||||||
Less amount representing interest |
(251,212 | ) | ||||||
|
|
|||||||
Present value of future minimum lease payments |
$ | 1,800,714 | ||||||
|
|
Property and equipment include the following property under capital leases:
2015 | ||||
Vehicles |
$ | 2,034,346 | ||
Less accumulated depreciation |
(83,635 | ) | ||
|
|
|||
$ | 1,950,711 | |||
|
|
Note 6: | Derivative Financial Instruments |
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, in 2011, the Company entered into an interest rate swap agreement related to its senior secured term credit facility with the original balance of $20,000,000. The swap agreement was
14
terminated during the year ended December 31, 2014; therefore, the swap value was $-0- at March 31, 2015. The swap agreement provided for the Company to receive interest from the counterparty at LIBOR and to pay interest to the counterparty at a fixed rate of 0.89 percent on a notional amount of $6,067,500 at March 31, 2014.
Management designated the 2011 interest rate swap agreement as cash flow hedging instruments and determined that the agreement did qualify for hedge accounting under the provisions of ASC 815. The liability fair value at March 31, 2014, of the swap agreement amounted to $(10,065).
The following summarizes the location and liability fair value amounts of all derivative contracts in the consolidated financial statements as of and for the three months ended 2014:
2014 |
||||||||
Derivatives |
Location of Derivative Gain (Loss) |
Amount | ||||||
Derivatives designated as hedging contracts |
||||||||
Unrealized loss on interest rate swaps |
Comprehensive income | $ | 9,568 | |||||
|
|
|||||||
$ | 9,568 | |||||||
|
|
2014 |
||||||||
Derivatives |
Balance Sheet Location | Amount | ||||||
Derivatives designated as hedging contracts |
||||||||
Interest rate swap contracts |
Other long-term liabilities | $ | (10,065 | ) | ||||
|
|
|||||||
Total derivatives |
$ | (10,065 | ) | |||||
|
|
Note 7: | Unit Incentive Plan |
The Company has a Unit Incentive Plan (Plan Agreement) under which employees and others may be granted options to purchase membership interests in the Company (Units). The Plan provides for the grant of up to 184,698 Units and can be issued as First Half of the Plan Units (First Half) and Second Half of the Plan Units (Second Half). Options issued pursuant to the Plan (i) expire no later than ten years from the grant date, (ii) vest ratably on the first, second, third and fourth anniversary date or the first, second and third anniversary date of the option grant with options becoming immediately exercisable in full upon a change in control only upon the board of directors of the Company electing to accelerate vesting, as defined in the Plan Agreement, and (iii) terminate upon the earliest of the (a) tenth anniversary date, (b) a violation of business covenants, as defined in option holders employment agreement, (c) an earlier termination in accordance with the terms of the Plan Agreement and (d) a change in control, as defined. All option Unit holders that exercise their options become subject to the terms of the Companys LLC agreement.
15
The fair value of each option award is estimated on the date of grant using a binomial option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of comparable companies that operate in the Companys general industry group. The Company uses historical data to estimate option exercise and employee termination within the valuation model. In addition, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from managements expectation of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
2015 | 2014 | |||||||
Expected volatility |
54 | % | 51 | % | ||||
Expected dividends |
0 | % | 0 | % | ||||
Risk-free rate |
3 | % | 3 | % | ||||
Expected terms (in years) |
5 | 5 |
A summary of option activity under the Plan as of March 31, 2015, and changes during the year then ended, is presented below:
First Half of Plan Units |
Units | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||
Balance, beginning of year |
143,856 | $ | 36.44 | 7.28 | ||||||||
Granted |
| | | |||||||||
Exercised |
| | | |||||||||
Forfeitures |
| | | |||||||||
|
|
|
|
|||||||||
Outstanding, end of year |
143,856 | $ | 36.44 | 6.61 | ||||||||
|
|
|
|
|||||||||
Exercisable, end of year |
68,856 | $ | 21.67 | |||||||||
|
|
|
|
Second Half of Plan Units |
Units | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||
Balance, beginning of year |
24,328 | $ | 34.33 | 5.00 | ||||||||
Granted |
| | | |||||||||
Exercised |
| | | |||||||||
Forfeitures |
| | | |||||||||
|
|
|
|
|||||||||
Outstanding, end of year |
24,328 | $ | 34.33 | 4.00 | ||||||||
|
|
|
|
|||||||||
Exercisable, end of year |
24,328 | $ | 34.33 | |||||||||
|
|
|
|
The unit-based compensation expense for the years ended March 31, 2015 and 2014, was $257,553 and $10,343, respectively.
16
A summary of the status of the Companys nonvested units as of March 31, 2015, is presented below:
First Half of Plan Units |
Units | Weighted Average Grant Date Fair Value |
||||||
Beginning of year |
75,000 | $ | 41.21 | |||||
Granted |
| | ||||||
Vested |
| | ||||||
Cancelled |
| | ||||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Nonvested, end of year |
75,000 | $ | 41.21 | |||||
|
|
|
|
Second Half of Plan Units |
Units | Weighted Average Grant Date Fair Value |
||||||
Beginning of year |
| $ | | |||||
Granted |
| | ||||||
Vested |
| | ||||||
Cancelled |
| | ||||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Nonvested, end of year |
| $ | | |||||
|
|
|
|
As of March 31, 2015 and 2014, there was $2,232,124 and $-0- of total unrecognized compensation cost related to nonvested unit-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of three years. The total fair value of units vested during the period ended March 31, 2015, was $911,237.
Note 8: | Related Party Transactions |
Pursuant to a management fee agreement, the management company of the Companys majority member provides general strategic and business advisory services to the Company for an annual management fee equal to four percent of annual consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) plus reasonable out-of-pocket expenses. During the periods ended March 31, 2015 and 2014, the Company incurred $235,482 and $138,120, respectively, in management fees and expenses pursuant to this agreement.
The Companys Subordinated Debt Agreements, as discussed in Note 5, are with members of the Company. Total interest expense incurred during the periods ended March 31, 2015 and 2014, relating to these agreements was $316,200 and $314,348, respectively.
In 2008 the Company entered into note agreements with the selling shareholders of Altech as discussed in Note 5. These shareholders are also members of the Company. Total interest expense incurred during the periods ended March 31, 2015 and 2014, was $40,000 for each period.
In 2009, the Company entered into a note agreement with the selling shareholder of IESCO, Inc., as discussed in Note 5. This shareholder is also a member of the Company. Total interest expense incurred during the periods ended March 31, 2015 and 2014, was $ $49,998, each period.
In 2011, the Company entered into a note agreement with the selling shareholder of T.C. Inspections, Inc., and Hawk Rope Access, Inc. This shareholder is also a member of the Company. Total interest expense incurred during the periods March 31, 2015 and 2014, was $30,000 for each period.
The Company also leases two of its office facilities under different operating leases from certain of the selling shareholders of IESCO and T.C. Inspections, Inc. The lease with the selling shareholder of IESCO
17
expires December 31, 2015, and the lease with the selling shareholder of T.C. Inspections, Inc., expired during the year ended December 31, 2014. Total rent expense for the periods ended March 31, 2015 and 2014, amounted to $49,500. The lease payments due to the related party in 2016 total $148,500.
The acquisition of T.C. Inspections, Inc., and Hawk Rope Access, Inc., included a contingent amount based upon the attainment of a minimum working capital balance, as adjusted, as of the closing date. The final working capital requirement was achieved and resulted in additional consideration due of $1,105,609 of which $600,000 was deposited into an escrow account at closing. The resulting net working capital adjustment payable at March 31, 2015 and 2014, amounted to $505,609 which is due to the seller shareholder of T.C. Inspections, Inc., and Hawk Rope Access, Inc
The note receivable related party includes a $50,000 secured promissory note. The note is secured by a pledged interest in the borrowers ownership units in the Company, with interest at six percent payable on a quarterly basis. The note matures on the earlier of August 2017 or the occurrence of a liquidity event affecting the Company.
Note 9: | Commitments |
Employment Agreements
The Company had entered into employment contracts with certain employees who are also Unit holders of the Company. Under the terms of these contracts, the Company will pay salaries for the performance of the employees duties and responsibilities as specified in the respective agreements. Future minimum obligations relating to these agreements aggregate approximately $1,788,000. Total expense recorded in the accompanying statements of operations and comprehensive income (loss) for these agreements during 2015, was approximately $210,000.
Self-Insurance
QualSpec self-insures individual claims for amounts up to $140,000. Any amounts claimed above these limits are covered by a reinsurance policy up to maximum claim amounts of $2,000,000 per individual. Provisions for losses incurred but not reported expected under these programs totaled $285,000 and $160,000 as of March 31, 2015 and 2014, respectively.
Note 10: | Income Taxes |
The Company and each of its subsidiaries files separate income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2011.
The income tax expense (benefit) attributable to the years ended March 31, 2015 and 2014, consists of the following components:
2015 | 2014 | |||||||
Current |
||||||||
Federal |
$ | 845,649 | $ | 252,000 | ||||
State |
163,375 | 74,611 | ||||||
|
|
|
|
|||||
1,009,024 | 326,611 | |||||||
|
|
|
|
|||||
Deferred |
||||||||
Federal |
(109,915 | ) | 9,043 | |||||
|
|
|
|
|||||
(109,915 | ) | 9,043 | ||||||
|
|
|
|
|||||
$ | 899,109 | $ | 335,654 | |||||
|
|
|
|
18
The reconciliation between the federal U.S. corporate tax rate of 34 percent and the Companys effective tax rate for the period ended March 31, 2015 and 2014, is as follows:
2015 | 2014 | |||||||
Expected tax (benefit) |
$ | (2,593,475 | ) | $ | 341,176 | |||
Non-deductible Company expenses |
207,000 | 218,800 | ||||||
Nondeductible expenses |
2,969 | 4,964 | ||||||
State income taxes, net of federal benefit |
57,785 | 22,382 | ||||||
(Income) losses reported by pass-through entities |
3,177,165 | (333,182 | ) | |||||
State income taxes reported by pass-through entities |
75,822 | 40,713 | ||||||
Other |
(28,157 | ) | 40,801 | |||||
|
|
|
|
|||||
Income tax |
$ | 899,109 | $ | 335,654 | ||||
|
|
|
|
The tax effect of temporary differences which give rise to deferred tax assets and liabilities at March 31, 2015 and 2014, is as follows:
2015 | 2014 | |||||||
Deferred tax assetscurrent |
||||||||
Accrued wages and bonuses |
$ | 325,287 | $ | 194,504 | ||||
Allowance for doubtful accounts |
91,056 | 109,716 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
416,343 | 304,220 | ||||||
|
|
|
|
|||||
Deferred tax liabilitieslong-term |
||||||||
Depreciation |
(149,761 | ) | (175,551 | ) | ||||
Other |
(30,445 | ) | (30,446 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(180,206 | ) | (205,997 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 236,137 | $ | 98,223 | ||||
|
|
|
|
The above net deferred tax liability is presented on the balance sheets as follows:
2015 | 2014 | |||||||
Deferred income tax asset |
$ | 416,343 | $ | 304,220 | ||||
Deferred income tax liability |
(180,206 | ) | (205,997 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 236,137 | $ | 98,223 | ||||
|
|
|
|
Note 11: | Members Equity |
Preferred Member Units
On August 1, 2010, the QualSpec Group authorized and issued 36,284 shares of Class A-1 and 30,698 shares of Class A-2 preferred member units for $1,500,000 in contributed cash. Both Class A-1 and Class A-2 preferred shares are entitled to an 18 percent return compounded annually on such members unrecovered capital account, as defined. The undistributed preferred return at March 31, 2015 and 2014, amounted to approximately $1,403,626 and $1,008,233 respectively. The preferred shares are also entitled to distribution preferences equal to the aggregate excess of the preferred return over previous distributions and any remaining unrecovered capital. Once the preferred shares unreturned capital accounts are reduced to zero, the shares cease to be preferred.
19
Note 12: | Significant Customers |
During the periods ended March 31, 2015 and 2014, revenue from the Companys five largest customers represented 74 percent and 68 percent of total revenue, respectively. The Companys accounts receivable from customers with the five largest balances at March 31, 2015 and 2014, represented 72 percent and 77 percent, respectively, of total accounts receivable.
Note 13: | Benefit Plan |
The Company has a 401(k) retirement plan covering all eligible employees. Participants in the plan may contribute up to 50 percent of their compensation, subject to Internal Revenue Service (IRS) limitations. A discretionary matching contribution can be made as established by the Company subject to IRS limitations. Total expense charged to operations during the years ended March 31, 2015 and 2014, amounted to $454,135 and $322,874, respectively.
Note 14: | Operating Leases |
Non-cancellable operating leases for offices expire in various years through 2023. These leases generally contain renewal options for periods ranging from one-to-six years and require the Company to pay all executory costs (property taxes, maintenance and insurance). Rental payments include minimum rentals.
Future minimum lease payments at March 31, 2015, were:
2016 |
$ | 735,092 | ||
2017 |
$ | 591,712 | ||
2018 |
$ | 597,193 | ||
2019 |
$ | 588,242 | ||
2020 |
$ | 538,110 | ||
Thereafter |
$ | 1,056,452 |
Rental expense for all operating leases for the periods ended March 31, 2015 and 2014, amounted to $203,855 and $172,386, respectively.
Note 15: | Disclosures About Fair Values of Assets and Liabilities |
The Company has adopted ASC Topic 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 |
Quoted prices in active markets for identical assets or liabilities | |
Level 2 |
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities | |
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
20
Interest Rate Swap
The fair value liability of the interest rate swap was $(10,065) for March 31, 2014, and is estimated using forward-looking interest rate curves and discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.
The following table presents the fair value measurements of assets and (liabilities) recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2014:
Fair Value | 2014 | |||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||
Interest rate swap |
||||||||||||||||
Huntington National Bank |
$ | (10,065 | ) | $ | | $ | (10,065 | ) | $ | | ||||||
|
|
|
|
|
|
|
|
|||||||||
$ | (10,065 | ) | $ | | $ | (10,065 | ) | $ | | |||||||
|
|
|
|
|
|
|
|
The following methods and assumptions were used to estimate the fair values of all other classes of financial instruments:
Cash
The fair value of cash approximates the carrying amount.
Receivables
The fair value of receivables approximates the carrying amount because of the short-term maturity of these instruments.
Note Receivable Related Party
The fair value of the note receivable approximates the carrying amount because the stated rate on the note approximates the rate for similar notes.
Debt
The fair value of debt is based on the discounted future cash flows using the Companys incremental borrowing rate for each type of financing. At March 31, 2015 and 2014, the stated rate on the debt approximates the incremental borrowing rate.
Note 16: | Subsequent Events |
In April 2013, a customer notified Qualspec of a potential claim relating to its inspections of certain pipelines. Because the risk of liability and the amount of the claim were uncertain, Qualspec and the customer worked together to determine their share of any liability and the extent and cost of the claim. This process culminated in an April 2015 mediation session during which the parties reached agreement on the terms of a settlement, which included a mutual and general release of all related claims. In June 2015,
21
Qualspec fulfilled its settlement payment obligation, the amount of which is confidential and reflected in the March 31, 2015, consolidated financial statements. Qualspec was sold in July 2015. The settlement payment is subject to additional insurance recovery which cannot be estimated at this time. Any future recoveries from insurance will be paid to the predecessor owner.
Subsequent events have been evaluated through the date of the Accountants Compilation Report on the consolidated financial statements, which is the date the consolidated financial statements were available to be issued.
22
Exhibit 99.2
QualSpec Group, LLC
Independent Auditors Report and
Consolidated Financial Statements
December 31, 2014 and 2013
QualSpec Group, LLC
December 31, 2014 and 2013
Contents
Independent Auditors Report |
3 | |||
Consolidated Financial Statements |
||||
Consolidated Balance Sheets |
4 | |||
Statements of Income and Comprehensive Income |
5 | |||
Statements of Members Equity |
6 | |||
Statements of Cash Flows |
7 | |||
Notes to Consolidated Financial Statements |
8 |
Independent Auditors Report
To the Members
QualSpec Group, LLC
We have audited the accompanying consolidated financial statements of QualSpec Group, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of income and comprehensive income, members equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QualSpec Group, LLC and its subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
San Antonio, Texas
March 27, 2015
QualSpec Group, LLC
Consolidated Balance Sheets
December 31, 2014 and 2013
2014 | 2013 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 2,948,491 | $ | 538,301 | ||||
Accounts receivable, net of allowance for doubtful accounts of $897,202 for 2014 and $987,061 for 2013 |
18,687,905 | 15,718,941 | ||||||
Prepaid expenses |
1,906,831 | 1,508,007 | ||||||
Income tax refund receivable |
| 244,461 | ||||||
Deferred income tax asset |
279,283 | 249,177 | ||||||
|
|
|
|
|||||
Total current assets |
23,822,510 | 18,258,887 | ||||||
|
|
|
|
|||||
Property and Equipment, Net |
10,637,400 | 8,397,219 | ||||||
|
|
|
|
|||||
Other Assets, Net |
||||||||
Goodwill |
19,444,703 | 19,444,703 | ||||||
Intangibles, net |
28,429,238 | 33,522,742 | ||||||
Deferred financing costs, net |
81,570 | 251,064 | ||||||
Note receivablerelated party |
50,000 | 50,000 | ||||||
Other assets |
78,029 | 61,454 | ||||||
|
|
|
|
|||||
Total other assets |
48,083,540 | 53,329,963 | ||||||
|
|
|
|
|||||
$ | 82,543,450 | $ | 79,986,069 | |||||
|
|
|
|
|||||
Liabilities and Members Equity |
||||||||
Current Liabilities |
||||||||
Accounts payabletrade |
$ | 2,547,913 | $ | 2,482,212 | ||||
Accounts payablerelated parties |
505,609 | 615,133 | ||||||
Accrued expenses |
6,729,012 | 5,028,180 | ||||||
Income tax payable |
596,120 | | ||||||
Current portion of long-term debt |
5,221,472 | 3,854,215 | ||||||
|
|
|
|
|||||
Total current liabilities |
15,600,126 | 11,979,740 | ||||||
Long-term Debt, Net of Current Portion |
29,994,772 | 33,370,105 | ||||||
Deferred Income Tax Liability |
153,061 | 141,911 | ||||||
Other Long-term Liability |
| 19,633 | ||||||
|
|
|
|
|||||
Total liabilities |
45,747,959 | 45,511,389 | ||||||
|
|
|
|
|||||
Members Equity |
||||||||
Member unitspreferred, issued and outstanding, 52,782 in 2014 and 2013, liquidation preference of $2,436,500 for 2014 and $2,057,473 for 2013 |
1,143,997 | 1,143,997 | ||||||
Member unitscommon, issued and outstanding, 1,696,832 in 2014 and 2013 |
36,907,616 | 36,907,616 | ||||||
Additional paid-in capital |
1,769,005 | 1,138,297 | ||||||
Retained deficit |
(4,886,450 | ) | (6,323,384 | ) | ||||
Accumulated other comprehensive loss |
| (19,633 | ) | |||||
|
|
|
|
|||||
34,934,168 | 32,846,893 | |||||||
Noncontrolling Interest |
1,861,323 | 1,627,787 | ||||||
|
|
|
|
|||||
Total members equity |
36,795,491 | 34,474,680 | ||||||
|
|
|
|
|||||
$ | 82,543,450 | $ | 79,986,069 | |||||
|
|
|
|
See Notes to Consolidated Financial Statements
4
QualSpec Group, LLC
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 2014 and 2013
2014 | 2013 | |||||||
Revenues |
$ | 164,478,339 | $ | 140,015,262 | ||||
Cost of Sales |
114,058,843 | 99,181,640 | ||||||
|
|
|
|
|||||
Gross Profit |
50,419,496 | 40,833,622 | ||||||
Selling, General and Administrative Expenses |
37,815,765 | 29,230,771 | ||||||
|
|
|
|
|||||
Income from Operations |
12,603,731 | 11,602,851 | ||||||
|
|
|
|
|||||
Other Expenses |
||||||||
Interest |
2,934,536 | 3,186,963 | ||||||
Management fees |
673,014 | 624,225 | ||||||
Other nonoperating |
2,531,818 | 1,819,391 | ||||||
|
|
|
|
|||||
6,139,368 | 5,630,579 | |||||||
|
|
|
|
|||||
Income Before Provision for Income Tax |
6,464,363 | 5,972,272 | ||||||
Provision for Income Tax |
1,065,590 | 495,349 | ||||||
|
|
|
|
|||||
Net Income |
5,398,773 | 5,476,923 | ||||||
Other Comprehensive Income |
19,633 | 37,733 | ||||||
|
|
|
|
|||||
Comprehensive Income |
$ | 5,418,406 | $ | 5,514,656 | ||||
|
|
|
|
|||||
Amounts Attributable to Noncontrolling Interests |
||||||||
Net income |
$ | 5,398,773 | $ | 5,476,923 | ||||
Net income attributable to noncontrolling interest |
(468,569 | ) | (466,626 | ) | ||||
|
|
|
|
|||||
Net income attributable to Parent |
$ | 4,930,204 | $ | 5,010,297 | ||||
|
|
|
|
|||||
Comprehensive income |
$ | 5,418,406 | $ | 5,514,656 | ||||
Less comprehensive (income) loss attributable to the noncontrolling interest |
(468,569 | ) | (466,626 | ) | ||||
|
|
|
|
|||||
Comprehensive income attributable to Parent |
$ | 4,949,837 | $ | 5,048,030 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements
5
QualSpec Group, LLC
Consolidated Statements of Members Equity
Years Ended December 31, 2014 and 2013
Preferred Member Units |
Common Member Units |
Additional Paid-in Capital |
Retained Deficit |
Other Comprehensive Loss |
Noncontrolling Interest |
Total | ||||||||||||||||||||||
Balance, December 31, 2012 |
$ | 1,451,768 | $ | 43,643,005 | $ | 804,129 | $ | (8,909,963 | ) | $ | (57,366 | ) | $ | 1,349,625 | $ | 38,281,198 | ||||||||||||
Net income |
| | | 5,010,297 | | 466,626 | 5,476,923 | |||||||||||||||||||||
Redemption of member units |
(307,771 | ) | (6,735,389 | ) | | | | | (7,043,160 | ) | ||||||||||||||||||
Member distributions |
(2,423,718 | ) | (188,464 | ) | (2,612,182 | ) | ||||||||||||||||||||||
Change in fair value of interest rate swap |
| | | | 37,733 | | 37,733 | |||||||||||||||||||||
Unit option compensation |
| | 334,168 | | | | 334,168 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, December 31, 2013 |
1,143,997 | 36,907,616 | 1,138,297 | (6,323,384 | ) | (19,633 | ) | 1,627,787 | 34,474,680 | |||||||||||||||||||
Net income |
| | | 4,930,204 | | 468,569 | 5,398,773 | |||||||||||||||||||||
Member distributions |
| | | (3,493,270 | ) | | (235,033 | ) | (3,728,303 | ) | ||||||||||||||||||
Change in fair value of interest rate swap |
| | | | 19,633 | | 19,633 | |||||||||||||||||||||
Unit option compensation |
| | 630,708 | | | | 630,708 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, December 31, 2014 |
$ | 1,143,997 | $ | 36,907,616 | $ | 1,769,005 | $ | (4,886,450 | ) | $ | | $ | 1,861,323 | $ | 36,795,491 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statement
6
QualSpec Group, LLC
Consolidated Statements of Cash Flows
Years Ended December 31, 2014 and 2013
2014 | 2013 | |||||||
Operating Activities |
||||||||
Net income before attribution of noncontrolling interest |
$ | 5,398,773 | $ | 5,476,923 | ||||
Net (income) attributable to noncontrolling interest |
(468,569 | ) | (466,626 | ) | ||||
|
|
|
|
|||||
Net income attributable to QualSpec Group, LLC |
4,930,204 | 5,010,297 | ||||||
Items not requiring (providing) cash |
||||||||
Depreciation and amortization |
7,756,389 | 5,377,280 | ||||||
Amortization of deferred financing costs |
165,540 | 244,864 | ||||||
Unit option compensation |
630,708 | 334,168 | ||||||
Paid-in-kind interest |
67,662 | 286,476 | ||||||
Deferred income taxes |
(18,956 | ) | (23,630 | ) | ||||
Noncontrolling interest |
468,569 | 466,626 | ||||||
(Increase) decrease in |
||||||||
Accounts receivable |
(2,968,964 | ) | (1,711,861 | ) | ||||
Prepaid expenses |
(398,824 | ) | (30,040 | ) | ||||
Income tax refund receivable |
244,461 | 18,311 | ||||||
Other assets |
(12,448 | ) | (11,445 | ) | ||||
Increase (decrease) in |
||||||||
Accounts payable |
65,701 | (940,645 | ) | |||||
Income tax payable |
596,120 | | ||||||
Accrued expenses |
1,700,832 | 683,676 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
13,226,994 | 9,704,077 | ||||||
|
|
|
|
|||||
Investing Activities |
||||||||
Purchase of property and equipment |
(3,909,363 | ) | (3,989,275 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(3,909,363 | ) | (3,989,275 | ) | ||||
|
|
|
|
|||||
Financing Activities |
||||||||
Net borrowings (payments) on revolving credit facility |
$ | | $ | | ||||
Redemption of member units |
| (7,043,160 | ) | |||||
Member distributions |
(3,728,303 | ) | (2,612,182 | ) | ||||
Proceeds from issuance of long-term debt |
| 10,005,000 | ||||||
Long-term debt payments |
(3,069,614 | ) | (5,911,684 | ) | ||||
Payments (to) from related party net |
(109,524 | ) | 6,138 | |||||
|
|
|
|
|||||
Net cash used in financing activities |
(6,907,441 | ) | (5,555,888 | ) | ||||
|
|
|
|
|||||
Increase in Cash |
2,410,190 | 158,914 | ||||||
Cash, Beginning of Year |
538,301 | 379,387 | ||||||
|
|
|
|
|||||
Cash, End of Year |
$ | 2,948,491 | $ | 538,301 | ||||
|
|
|
|
|||||
Supplemental Cash Flow Information |
||||||||
Interest paid |
$ | 2,866,874 | $ | 2,901,973 | ||||
|
|
|
|
|||||
Income taxes paid |
$ | 233,507 | $ | 328,220 | ||||
|
|
|
|
|||||
Change in fair value of swap contract |
$ | 19,633 | $ | 37,733 | ||||
|
|
|
|
|||||
Equipment acquired by capital lease obligations |
$ | 993,877 | $ | | ||||
|
|
|
|
See Notes to Consolidated Financial Statements
7
QualSpec Group, LLC
Notes to Consolidated Financial Statements
December 31, 2014 and 2013
Note 1: | Organization and Description of Business |
QualSpec Group, LLC (QualSpec) (Company), was incorporated in October 2008 for the purpose of acquiring 100 percent of the common stock of Altech Inspections, Inc. (Altech). In 2009, the Company acquired certain assets of another business, IESCO, Inc. (IESCO), a California-based company. In 2011, the Company also acquired certain assets of two additional Companies, T.C. Inspections, Inc. and Hawk Rope Access, Inc., both based in California. During 2013, the assets and operations of TC Inspections and Hawk Rope Access were merged into IESCO. Also, in 2013, the Company changed its name to QualSpec Group, LLC, and changed the names of the acquired entities of Altech and IESCO to QualSpec, Inc., and QualSpec, LLC, in order to create one firm with an expanded geographical footprint from which to provide its advanced service offerings.
QualSpec Group, LLC, provides inspection and non-destructive testing services to customers in the refinery, petrochemical and other industries located throughout the United States. Additionally QualSpec also provides specialty access services for industries such as oil platforms, hydroelectric plants, bridges, shipping and other type facilities with difficult to reach locations.
QualSpec, Inc., has facilities in Corpus Christi and Houston, Texas, and Sulphur, Louisiana. QualSpec, LLC, has facilities in Torrance, Nipomo, Bakersfield and Benecia, California, as well as offices in Fairbanks, Arkansas; Mount Vernon, Washington; Kenner, Louisiana and Inver Grove Heights, Minnesota.
Note 2: | Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, QualSpec Inc., and its 93.5 percent common ownership interest in QualSpec, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
In accordance with the guidance in FASB ASC 810-10-65, Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, the Company includes the net loss and comprehensive loss attributable to the noncontrolling interest in the consolidated statements of income and members equity. Any losses attributable to the noncontrolling interest will be allocated to the noncontrolling interest even if the carrying amount of the noncontrolling interest is reduced below zero. Any changes in ownership that do not result in a loss of control will be accounted for as equity transactions.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
At December 31, 2014 and 2013, the Companys cash accounts exceeded federal insured limits by approximately $3,167,000 and $1,190,000, respectively.
8
Revenue Recognition
Revenues are recognized when the inspection services are performed.
Accounts Receivable
The Company extends credit to its customers based on an evaluation of its customers financial condition. Accounts receivable represent amounts billed and unbilled for inspection services and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Companys previous loss history, the customers current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company does not require collateral from its customers. As of December 31, 2014 and 2013, the allowance for doubtful accounts was $897,202 and $987,061, respectively.
Property and Equipment
Property and equipment are stated at cost or estimated fair value (if acquired) as of the acquisition date and are depreciated or amortized over the estimated useful life of each asset using the straight-line method. Estimated useful lives are as follows:
Years | ||||
Field equipment |
1 7 | |||
Office equipment |
3 10 | |||
Transportation equipment |
3 10 | |||
Software |
3 5 | |||
Buildings and improvements |
40 |
Maintenance and repairs, which neither add to the value of the property nor appreciably prolong its useful life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in income.
Impairment of Long-lived Assets
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Intangible Assets
Identifiable, amortizable intangible assets are being amortized on a straight-line basis over periods of 5 to 15 years based upon the nature of the identifiable intangible asset. All such assets are periodically evaluated as to recoverability of their carrying values.
Goodwill
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
9
Derivatives
Derivatives are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange-traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.
Income Taxes
The Companys members have elected to have the Companys income taxed as a partnership under provisions of the Internal Revenue Code (IRC) and a similar section of the state income tax law. Therefore, taxable income or loss is reported to the individual members for inclusion in their respective tax returns. QualSpec, Inc., is a C corporation for federal and state income tax purposes and, therefore, income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes. The income tax accounting guidance results in two components of income tax expense, current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. QualSpec, Inc., determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.
Self-Insurance
QualSpec has elected to self-insure certain costs related to its health and dental insurance programs for its employees. Costs resulting from noninsured losses are charged to income when incurred. The Company has purchased insurance that limits its exposure for individual and aggregate claims.
Unit Incentive Plan
At December 31, 2014 and 2013, the Company has a unit-based employee compensation plan, which is described more fully in Note 7.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on the fair value of the derivative financial instruments.
10
Note 3: | Property and Equipment |
A summary of property and equipment as of December 31, 2014 and 2013, is as follows:
2014 | 2013 | |||||||
Land |
$ | 199,226 | $ | 199,226 | ||||
Buildings |
1,982,659 | 1,982,659 | ||||||
Leasehold improvements |
433,630 | 303,228 | ||||||
Inspection equipment |
15,093,637 | 11,482,532 | ||||||
Office equipment and furniture |
1,136,486 | 1,098,100 | ||||||
Software |
1,155,425 | 1,079,841 | ||||||
Vehicles |
3,553,990 | 2,507,918 | ||||||
|
|
|
|
|||||
23,555,053 | 18,653,504 | |||||||
Less accumulated depreciation |
12,917,653 | 10,256,285 | ||||||
|
|
|
|
|||||
$ | 10,637,400 | $ | 8,397,219 | |||||
|
|
|
|
Depreciation expense for the years ended December 31, 2014 and 2013, amounted to $2,662,885 and $2,503,392, respectively.
Note 4: | Acquired Intangible Assets and Goodwill |
The carrying basis and accumulated amortization of recognized intangible assets and goodwill at December 31, 2014 and 2013, is as follows:
2014 | 2013 | |||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||
Amortizable intangible assets |
||||||||||||||||
Covenant not to compete |
$ | 800,380 | $ | 779,205 | $ | 800,380$ | 735,111 | |||||||||
Customer list |
29,898,340 | 15,429,466 | 29,898,340 | 12,703,248 | ||||||||||||
Trade name |
16,262,381 | 2,323,192 | 16,262,381 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 46,961,101 | $ | 18,531,863 | $ | 46,961,101$ | 13,438,359 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Goodwill |
||||||||||||||||
QualSpec, Inc. |
$ | 9,213,254 | $ | 9,213,254 | ||||||||||||
QualSpec, LLC |
10,231,449 | 10,231,449 | ||||||||||||||
|
|
|
|
|||||||||||||
Goodwill |
$ | 19,444,703 | $ | 19,444,703 | ||||||||||||
|
|
|
|
11
Effective January 1, 2014, the Company determined that acquired trade names have a finite life due to the transition to the use of the Qualspec names. As a result, the Company will amortize the acquired trade names over a seven year life, resulting in amortization expense of trade name for 2014 of $2,323,192. Prior to 2014, trade names were considered to have indefinite lives and, as such, were considered unamortizable. Amortization expense for the above intangible assets was $5,093,504 and $2,873,888 for the years ended December 31, 2014 and 2013, respectively. Estimated amortization expense for the next five years is as follows:
Years Ending December 31,
2015 |
$ | 4,923,803 | ||
2016 |
$ | 4,914,038 | ||
2017 |
$ | 4,910,783 | ||
2018 |
$ | 4,910,783 | ||
2019 |
$ | 4,910,781 |
2014 | 2013 | |||||||
Goodwill balance at beginning of year |
$ | 19,444,703 | $ | 19,444,703 | ||||
Additional costs capitalized as goodwill |
| | ||||||
|
|
|
|
|||||
Goodwill balance at end of year |
$ | 19,444,703 | $ | 19,444,703 | ||||
|
|
|
|
There was no change in the carrying amount of goodwill for the years ended December 31, 2014 and 2013.
Note 5: | Long-term Debt |
2014 | 2013 | |||||||
Senior debt |
$ | 19,750,000 | $ | 22,750,000 | ||||
Senior subordinated debt |
9,041,981 | 8,974,320 | ||||||
Sellers notes |
5,500,000 | 5,500,000 | ||||||
Revolving credit facility |
| | ||||||
Capital lease obligations |
924,263 | | ||||||
|
|
|
|
|||||
35,216,244 | 37,224,320 | |||||||
Less current maturitiesamortizing |
5,221,472 | 3,000,000 | ||||||
Less current maturitiesexcess cash flow |
| 854,215 | ||||||
|
|
|
|
|||||
$ | 29,994,772 | $ | 33,370,105 | |||||
|
|
|
|
Senior Term Loan and Revolving Credit Facility
At December 31, 2014, the Company has a senior secured term credit facility with an amended aggregate term advance amount of $25,000,000 and a $10,000,000 senior secured revolving credit facility that are administered by the senior lender.
The senior secured term credit facility is secured by real and personal property, including accounts receivable, inventory, equipment and intangible assets. The term loan bears interest at a floating rate or LIBOR plus an applicable margin. At December 31, 2014, the Company had elected a LIBOR rate of .24 percent plus the base rate of 4.5 percent with an effective overall rate of 4.76 percent. The loan is payable quarterly with principal due in consecutive quarterly installments of $750,000 through April 5, 2017, at which time all remaining unpaid principal on the term advances will be due and payable.
The $10,000,000 senior secured revolving facility is secured by real and personal property, including accounts receivable, inventory, equipment and intangible assets. Advances on the revolver are limited to a
12
borrowing base of the revolving cap or 85 percent of eligible accounts receivable as defined in the Credit Agreement. The revolving facility bears interest at a floating rate or LIBOR plus an applicable margin with interest payable quarterly. At December 31, 2014, the Company had elected the floating rate of 6.75 percent. The revolving facility matures April 5, 2017.
The senior loan and revolving credit facilities include various covenants which impose a number of financial ratio requirements and restrictive covenants that, among other things, limit the Companys ability to incur additional indebtedness, create liens or pay dividends. In addition, as defined in the agreement, the facilities also require mandatory principal prepayments equal to 75 percent of excess cash flow as defined. The agreement also provides for a 50 percent excess cash flow prepayment if a certain leverage ratio is met at the end of each year and an exemption from an excess cash flow prepayment if the leverage ratio falls below a certain ratio. At December 31, 2014 and 2013, excess cash flow principal payments due, as defined, amount to $-0- and $854,215, respectively; these are classified as current maturities in the accompanying consolidated financial statements. All voluntary prepayments of debt shall include a premium of $135,000 if paid prior to the third anniversary, unless such prepayment meets certain conditions as defined in the credit facility. The Company was in compliance with the loan covenants at December 31, 2014 and 2013.
The loan agreement also requires the Company to pay an Unused Fee that is defined as the product of an annual rate equal to one-half of one percent (0.50 percent) and the daily rate average amount by which the sum of the aggregate revolving commitment exceeds the revolving facility outstanding amount, payable quarterly in arrears. Any Unused Fee remaining unpaid on the revolving commitment termination date shall be due and payable on such date.
Senior Subordinated Debt
The Company has four Senior Subordinated Debt agreements at December 31, 2014 and 2013. Subordinated Debt Series A in the original amount of $6,000,000 was used to fund a portion of the Altech acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $1,034,090 in principal and interest added on this note. As of December 31, 2014, the outstanding balance owed was $3,204,952 of which $65,492 represents interest which has been added to principal pursuant to this option during 2014. As of December 31, 2013, the outstanding balance owed was $3,183,675 of which $44,215 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on October 5, 2017.
The Subordinated Debt Series B in the original amount of $6,000,000 was used to fund a portion of the IESCO acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 12 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $1,025,494 in principal and interest added on this note. As of December 31, 2014, the outstanding balance owed was $3,405,959 of which $67,638 represents interest which has been added to principal pursuant to this option during 2013. As of December 31, 2013, the outstanding balance owed was $3,384,027 of which $45,706 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on October 5, 2017.
The Subordinated Debt Series C-1 in the original amount of $2,375,000 was used to fund a portion of the TC Inspections acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance
13
of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $378,267 in principal and interest added on this note. As of December 31, 2014, the outstanding balance owed was $1,214,489 of which $23,897 represents interest which has been added to principal pursuant to this option during 2013. As of December 31, 2013, the outstanding balance owed was $1,206,426 of which $15,834 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on October 5, 2017.
The Subordinated Debt Series C-2 in the original amount of $2,375,000 was used to fund a portion of the Hawk Rope Access acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $378,298 in principal and interest added on this note. As of December 31, 2014, the outstanding balance owed was $1,216,581 of which $32,675 represents interest which has been added to principal pursuant to this option during 2014. As of December 31, 2013, the outstanding balance owed was $1,200,192 of which $16,286 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on October 5, 2017.
The Company had the option to prepay the Subordinated Debt Series A and Series B, in whole or in part, in amounts equal to the lesser of the aggregate amount of the principal amount outstanding on the Subordinated Debt or in an integral multiple of $100,000 with a minimum of $500,000.
There were no such prepayments made on the Series A. Prepayments of Subordinated Debt Series B shall include a premium, unless arising from a sales transaction, equal to the present value of all future interest payments computed using the treasury 5-year note rate for the week ending prior to the date of payment plus one percent if made by October 4, 2013.
These loans are subject to certain financial and restrictive covenants that, among other things, limit the Companys ability to incur additional indebtedness, create liens and pay dividends. The Company was in compliance with the covenants on these loans at December 31, 2014.
All borrowings pursuant to the Subordinated Debt are secured by the assets of the Company.
Seller Notes
In connection with the Altech acquisition, the Company entered into various note agreements with the selling shareholders of Altech in the aggregate amount of $2,000,000. These notes bear interest at eight percent, payable quarterly in arrears and are due on April 5, 2016.
In connection with the IESCO acquisition, the Company entered into a note agreement with the selling shareholder of IESCO in the amount of $2,000,000. This note bears interest at ten percent, payable quarterly in arrears and is due on April 5, 2016.
In connection with the TC Inspections and Hawk Rope Access acquisitions, the Company also entered into a note agreement with the selling shareholder of T. C. Inspections, Inc., and Hawk Rope Access, Inc., in the amount of $1,500,000. This note bears interest at eight percent, payable quarterly in arrears and is due on April 5, 2016.
Debt Financing Costs
In connection with the issuance of the senior secured term and revolving credit facility and Subordinated Debt, during 2011, the Company incurred financing costs of $1,079,679, which have been deferred and are being amortized as additional borrowing costs utilizing the interest method over the life of the related borrowings. Amortization expense for the years ended December 31, 2014 and 2013, was $165,540 and $244,864, respectively.
14
Senior and Subordinated Debt Amendments
Effective December 19, 2014, QualSpec entered into the Sixth Amendment to Credit Agreement (Sixth Amendment) with it senior lender, which allowed for up to $4,000,000 in capital leases and other indebtedness secured by liens on equipment.
On May 30, 2014, QualSpec entered into the Fifth Amendment to Credit Agreement (Fifth Amendment) with its senior lender, which increased the revolving commitment up to $10,000,000. In addition, the Fifth Amendment allowed for up to $2,000,000 in capital leases and indebtedness secured by liens and capital expenditures up to $5,000,000.
Effective May 8, 2013, QualSpec entered into the Fourth Amendment to Credit Agreement (Fourth Amendment) with its senior lender which increased the aggregate amount of the lenders commitment up to $25,000,000 and provided for the payment of amounts due in connection with the redemption of members units during 2013 as disclosed in Note 11.
In connection with the Fourth Amendment to Credit Agreement with its senior lender discussed above, the Company simultaneously entered into a First Amendment To Mezzanine Subordination Agreement with all of its senior subordinated debt holders, which increased the maximum senior debt amount to $41,005,000 and provided for the prepayment of certain principal amounts on the subordinated notes not to exceed $2,861,840. Along with the First Amendment to the Mezzanine Subordination Agreement, the Company also amended the Securities Purchase Agreement which changed the interest rates on all four of the senior subordinated notes to 14 percent per annum.
On May 31, 2012, the Company entered into the Second Amendment to Credit Agreement (Second Amendment) with its senior lender whereby the aggregate amount of the lenders revolving commitment was temporarily increased by $2,500,000 to an aggregate amount equal to $9,500,000 for the period from and including the First Amendment Effective Date but excluding September 30, 2012 (and the aggregate amount of the Lenders Revolving Commitments decreased to $7,000,000 on September 30, 2012). Simultaneously, the Company entered into the Fourth Amendment to Amend and Restated Securities Purchase Agreement and Waiver with its senior subordinated lenders. These Agreements restated the total leverage ratio, the senior leverage ratio and the fixed charge ratio coverage requirements for the Company resetting the financial covenants beginning in the second quarter of 2012.
Capital Lease Obligations
QualSpec maintains a master equity lease agreement with a third party lender, which was utilized during the year ended December 31, 2014, to acquire vehicles included in fixed assets with a total acquisition cost of $1,032,877. QualSpec financed a total of $993,877 under this master lease agreement.
Long-term Debt Maturities
Aggregate annual maturities of long-term debt at December 31, 2014, are:
Year Ending December 31,
Long-term Debt (Excl. Leases) |
Capital Lease Obligations |
|||||||
2015 |
$ | 5,000,000 | $ | 269,170 | ||||
2016 |
6,500,000 | 269,170 | ||||||
2017 |
22,791,981 | 514,721 | ||||||
|
|
|
|
|||||
$ | 34,291,981 | |||||||
|
|
|||||||
Less amount representing interest |
(128,798 | ) | ||||||
|
|
|||||||
Present value of future minimum lease payments |
$ | 924,263 | ||||||
|
|
15
Property and equipment include the following property under capital leases:
2014 | ||||
Vehicles |
$ | 1,032,877 | ||
Less accumulated depreciation |
(68,317 | ) | ||
|
|
|||
$ | 964,560 | |||
|
|
Note 6: | Derivative Financial Instruments |
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, in 2011, the Company entered into an interest rate swap agreement related to its senior secured term credit facility with the original balance of $20,000,000. The swap agreement was terminated during 2014 and $19,633 was recognized in comprehensive income. The swap agreement provided for the Company to receive interest from the counterparty at LIBOR and to pay interest to the counterparty at a fixed rate of 0.89 percent on a notional amount of $6,425,000 at December 31, 2013.
Management designated the 2011 interest rate swap agreement as cash flow hedging instruments and determined that the agreement did qualify for hedge accounting under the provisions of ASC 815. The liability fair value at December 31, 2013, of the swap agreement amounted to $(19,633).
The following summarizes the location and liability fair value amounts of all derivative contracts in the consolidated financial statements as of and for the years ended December 31, 2014 and 2013:
2014 |
||||||
Derivatives |
Location of Derivative Gain (Loss) |
Amount | ||||
Derivatives designated as hedging contracts |
||||||
Unrealized gain on interest rate swaps |
Comprehensive income | $ | 19,633 | |||
|
|
|||||
$ | 19,633 | |||||
|
|
|||||
Derivatives not designated as hedging contracts |
||||||
Realized gain on interest rate swaps |
Interest expense, net | $ | | |||
|
|
2013 |
||||||
Derivatives |
Location of Derivative Gain (Loss) |
Amount | ||||
Derivatives designated as hedging contracts |
||||||
Unrealized loss on interest rate swaps |
Comprehensive income | $ | 37,733 | |||
|
|
|||||
$ | 37,733 | |||||
|
|
|||||
Derivatives not designated as hedging contracts |
||||||
Realized loss on interest rate swaps |
Interest expense, net | $ | | |||
|
|
2013 |
||||||||
Derivatives |
Balance Sheet Location | Amount | ||||||
Derivatives designated as hedging contracts |
||||||||
Interest rate swap contracts |
Other long-term liabilities | $ | (19,633 | ) | ||||
|
|
|||||||
Total derivatives |
$ | (19,633 | ) | |||||
|
|
16
Note 7: | Unit Incentive Plan |
The Company has a Unit Incentive Plan (Plan Agreement) under which employees and others may be granted options to purchase membership interests in the Company (Units). The Plan provides for the grant of up to 184,698 Units and can be issued as First Half of the Plan Units (First Half) and Second Half of the Plan Units (Second Half). Options issued pursuant to the Plan (i) expire no later than ten years from the grant date, (ii) vest ratably on the first, second, third and fourth anniversary date or the first, second and third anniversary date of the option grant with options becoming immediately exercisable in full upon a change in control only upon the board of directors of the Company electing to accelerate vesting, as defined in the Plan Agreement, and (iii) terminate upon the earliest of the (a) tenth anniversary date, (b) a violation of business covenants, as defined in option holders employment agreement, (c) an earlier termination in accordance with the terms of the Plan Agreement and (d) a change in control, as defined. All option Unit holders that exercise their options become subject to the terms of the Companys LLC agreement.
The fair value of each option award is estimated on the date of grant using a binomial option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of comparable companies that operate in the Companys general industry group. The Company uses historical data to estimate option exercise and employee termination within the valuation model. In addition, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from managements expectation of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant.
2014 | 2013 | |||||||
Expected volatility |
54 | % | 51 | % | ||||
Expected dividends |
0 | % | 0 | % | ||||
Risk-free rate |
3 | % | 3 | % | ||||
Expected terms (in years) |
5 | 5 |
A summary of option activity under the Plan as of December 31, 2014, and changes during the year then ended, is presented below:
First Half of Plan Units |
Units | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||
Balance, beginning of year |
94,548 | $ | 23.98 | 5.56 | ||||||||
Granted |
75,000 | 50.00 | 9.50 | |||||||||
Exercised |
| | ||||||||||
Forfeitures |
(25,692 | ) | 30.16 | 7.43 | ||||||||
|
|
|
|
|||||||||
Outstanding, end of year |
143,856 | $ | 36.44 | 7.28 | ||||||||
|
|
|
|
|||||||||
Exercisable, end of year |
68,856 | $ | 21.67 | |||||||||
|
|
|
|
17
Second Half of Plan Units |
Units | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||
Balance, beginning of year |
30,020 | $ | 34.33 | 7.30 | ||||||||
Granted |
| | | |||||||||
Exercised |
| | | |||||||||
Forfeitures |
(5,692 | ) | 50.50 | 7.20 | ||||||||
|
|
|
|
|||||||||
Outstanding, end of year |
24,328 | $ | 34.33 | 7.32 | ||||||||
|
|
|
|
|||||||||
Exercisable, end of year |
24,328 | $ | 31.10 | |||||||||
|
|
|
|
The unit-based compensation expense for the years ended December 31, 2014 and 2013, was $630,708 and $334,166 respectively.
A summary of the status of the Companys nonvested units as of December 31, 2014, is presented below:
First Half of Plan Units |
Units | Weighted Average Grant Date Fair Value |
||||||
Beginning of year |
3,630 | $ | 10.34 | |||||
Granted |
75,000 | 41.21 | ||||||
Vested |
(3,630 | ) | 10.34 | |||||
Cancelled |
| |||||||
Forfeited |
| | ||||||
|
|
|||||||
Nonvested, end of year |
75,000 | $ | 41.21 | |||||
|
|
Second Half of Plan Units |
Units | Weighted Average Grant Date Fair Value |
||||||
Beginning of year |
3,631 | $ | 8.19 | |||||
Granted |
| | ||||||
Vested |
(3,631 | ) | 8.19 | |||||
Cancelled |
| | ||||||
Forfeited |
| | ||||||
|
|
|||||||
Nonvested, end of year |
| $ | | |||||
|
|
As of December 31, 2014 and 2013, there was $2,486,790 and $39,690 of total unrecognized compensation cost related to nonvested unit-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of three years. The total fair value of units vested during the year ended December 31, 2014, was $1,076,584.
Note 8: | Related Party Transactions |
Pursuant to a management fee agreement, the management company of the Companys majority member provides general strategic and business advisory services to the Company for an annual management fee equal to four percent of annual consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) plus reasonable out-of-pocket expenses. During 2014 and 2013, the Company incurred $673,014 and $624,225, respectively, in management fees and expenses pursuant to this agreement of which $-0- and $13,923 was payable at December 31, 2014 and 2013.
18
The Companys Subordinated Debt Agreements, as discussed in Note 5, are with members of the Company. Total interest expense incurred during 2014 and 2013 relating to these agreements was $1,281,471 and $1,489,292, respectively.
In 2008 the Company entered into note agreements with the selling shareholders of Altech as discussed in Note 5. These shareholders are also members of the Company. Total interest expense incurred during 2014 and 2013 was $160,000 for each year.
In 2009, the Company entered into a note agreement with the selling shareholder of IESCO, Inc., as discussed in Note 5. This shareholder is also a member of the Company. Total interest expense incurred during 2014 and 2013, was $199,992 and $169,995, respectively.
In 2011, the Company entered into a note agreement with the selling shareholder of T.C. Inspections, Inc., and Hawk Rope Access, Inc. This shareholder is also a member of the Company. Total interest expense incurred during 2014 and 2013 was $120,000 for each year.
The Company also leases two of its office facilities under different operating leases from certain of the selling shareholders of IESCO and T.C. Inspections, Inc. The lease with the selling shareholder of IESCO expires December 31, 2015, and the lease with the selling shareholder of T.C. Inspections, Inc., expired in 2014. Total rent expense for 2014 and 2013 amounted to $224,400. The lease payments due to the related party in 2015 total $198,000.
The acquisition of T.C. Inspections, Inc., and Hawk Rope Access, Inc., included a contingent amount based upon the attainment of a minimum working capital balance, as adjusted, as of the closing date. The final working capital requirement was achieved and resulted in additional consideration due of $1,105,609 of which $600,000 was deposited into an escrow account at closing. The resulting net working capital adjustment payable at December 31, 2014 and 2013, amounted to $505,609 which is due to the seller shareholder of T.C. Inspections, Inc., and Hawk Rope Access, Inc. In addition, the Company had various transactions with T.C. Inspections, Inc., and Hawk Rope Access, Inc., resulting in an additional amount due of $-0- and $95,601 as of December 31, 2014 and 2013, respectively.
The note receivable related party includes a $50,000 secured promissory note. The note is secured by a pledged interest in the borrowers ownership units in the Company, with interest at six percent payable on a quarterly basis. The note matures on the earlier of August 2017 or the occurrence of a liquidity event affecting the Company.
Note 9: | Commitments |
Employment Agreements
The Company had entered into employment contracts with certain employees who are also Unit holders of the Company. Under the terms of these contracts, the Company will pay salaries for the performance of the employees duties and responsibilities as specified in the respective agreements. Future minimum obligations relating to these agreements aggregate approximately $1,998,000. Total expense recorded in the accompanying statements of income and comprehensive loss for these agreements during 2014 and 2013, was approximately $1,113,000 and $1,961,000, respectively.
Self-Insurance
QualSpec self-insures individual claims for amounts up to $140,000. Any amounts claimed above these limits are covered by a reinsurance policy up to maximum claim amounts of $2,000,000 per individual. Provisions for losses incurred but not reported expected under these programs totaled $285,000 and $160,000 as of December 31, 2014 and 2013, respectively.
19
Note 10: | Income Taxes |
The Company and each of its subsidiaries files separate income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2011.
The income tax expense (benefit) attributable to the years ended December 31, 2014 and 2013, consists of the following components:
2014 | 2013 | |||||||
Current |
||||||||
Federal |
$ | 747,751 | $ | 275,000 | ||||
State |
336,795 | 243,979 | ||||||
|
|
|
|
|||||
1,084,546 | 518,979 | |||||||
|
|
|
|
|||||
Deferred |
||||||||
Federal |
(18,956 | ) | (23,630 | ) | ||||
|
|
|
|
|||||
(18,956 | ) | (23,630 | ) | |||||
|
|
|
|
|||||
$ | 1,065,590 | $ | 495,349 | |||||
|
|
|
|
The reconciliation between the federal U.S. corporate tax rate of 34 percent and the Companys effective tax rate for the period ended December 31, 2014 and 2013, is as follows:
Expected tax (benefit) |
$ | 2,197,883 | $ | 2,030,572 | ||||
Non-deductible Company expenses |
807,740 | 519,590 | ||||||
Nondeductible expenses |
10,785 | 34,407 | ||||||
State income taxes, net of federal benefit |
76,043 | 34,726 | ||||||
(Income) losses reported by pass-through entities |
(2,261,905 | ) | (2,259,978 | ) | ||||
State income taxes reported bypass-through entities |
221,578 | 141,845 | ||||||
Other |
13,466 | (5,813 | ) | |||||
|
|
|
|
|||||
Income tax |
$ | 1,065,590 | $ | 495,349 | ||||
|
|
|
|
The tax effect of temporary differences which give rise to deferred tax assets and liabilities at December 31, 2014 and 2013, is as follows:
2014 | 2013 | |||||||
Deferred tax assets current |
||||||||
Accrued wages and bonuses |
$ | 167,514 | $ | 139,460 | ||||
Allowance for doubtful accounts |
111,769 | 109,717 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
279,283 | 249,177 | ||||||
|
|
|
|
|||||
Deferred tax liabilities long-term |
||||||||
Depreciation |
(145,429 | ) | (141,188 | ) | ||||
Other |
(7,632 | ) | (723 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(153,061 | ) | (141,911 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 126,222 | $ | 107,266 | ||||
|
|
|
|
20
The above net deferred tax liability is presented on the balance sheets as follows:
2014 | 2013 | |||||||
Deferred income tax asset |
$ | 279,283 | $ | 249,177 | ||||
Deferred income tax liability |
(153,061 | ) | (141,911 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 126,222 | $ | 107,266 | ||||
|
|
|
|
Note 11: | Members Equity |
Preferred Member Units
On August 1, 2010, the QualSpec Group authorized and issued 36,284 shares of Class A-1 and 30,698 shares of Class A-2 preferred member units for $1,500,000 in contributed cash. Both Class A-1 and Class A-2 preferred shares are entitled to an 18 percent return compounded annually on such members unrecovered capital account, as defined. The undistributed preferred return at December 31, 2014 and 2013, amounted to approximately $1,292,503 and $913,476 respectively. The preferred shares are also entitled to distribution preferences equal to the aggregate excess of the preferred return over previous distributions and any remaining unrecovered capital. Once the preferred shares unreturned capital accounts are reduced to zero, the shares cease to be preferred.
Redemption of Member Units
During 2013, QualSpec re-acquired 310,760.90 shares of its common units, 7,414.18 shares of the Class A-1 and 6,785.92 shares of the Class A-2 preferred member units from two members in exchange for cash in the amount of $7,043,160 and an additional payment of $100,000 to one certain member that was the former selling shareholder of IESCO, Inc., to secure a non-compete and non-solicitation agreement.
Member Distributions
During the years ended December 31, 2014 and 2013, member distributions amounting to $3,728,303 and $2,612,182, respectively, were made as tax distributions in accordance with the terms of the limited liability company agreement.
Note 12: | Significant Customers |
During the years ended December 31, 2014 and 2013, revenue from the Companys five largest customers represented 70 percent of total revenue. The Companys accounts receivable from customers with the five largest balances at December 31, 2014 and 2013, represented 66 percent and 58 percent, respectively, of total accounts receivable.
Note 13: | Benefit Plan |
The Company has a 401(k) retirement plan covering all eligible employees. Participants in the plan may contribute up to 50 percent of their compensation, subject to Internal Revenue Service (IRS) limitations. A discretionary matching contribution can be made as established by the Company subject to IRS limitations. Total expense charged to operations during the years ended December 31, 2014 and 2013, amounted to $1,395,802 and $985,438, respectively.
Note 14: | Operating Leases |
Non-cancellable operating leases for offices expire in various years through 2023. These leases generally contain renewal options for periods ranging from one-to-six years and require the Company to pay all executory costs (property taxes, maintenance and insurance). Rental payments include minimum rentals.
21
Future minimum lease payments at December 31, 2014, were:
2015 |
$ | 783,258 | ||
2016 |
$ | 590,595 | ||
2017 |
$ | 595,063 | ||
2018 |
$ | 603,854 | ||
2019 |
$ | 541,405 | ||
Thereafter |
$ | 1,207,374 |
Rental expense for all operating leases for 2014 and 2013 amounted to $726,277 and $562,655, respectively.
Note 15: | Disclosures About Fair Values of Assets and Liabilities |
The Company has adopted ASC Topic 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 |
Quoted prices in active markets for identical assets or liabilities | |
Level 2 |
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities | |
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Interest Rate Swap
The fair value liability of the interest rate swap was $19,633 for 2013, and is estimated using forward-looking interest rate curves and discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.
The following table presents the fair value measurements of assets and (liabilities) recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013:
2013 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Interest rate swap |
||||||||||||||||
Huntington National Bank |
$ | (19,633 | ) | $ | | $ | (19,633 | ) | $ | | ||||||
|
|
|
|
|
|
|
|
|||||||||
$ | (19,633 | ) | $ | | $ | (19,633 | ) | $ | | |||||||
|
|
|
|
|
|
|
|
22
The following methods and assumptions were used to estimate the fair values of all other classes of financial instruments:
Cash
The fair value of cash approximates the carrying amount.
Receivables
The fair value of receivables approximates the carrying amount because of the short-term maturity of these instruments.
Note Receivable Related Party
The fair value of the note receivable approximates the carrying amount because the stated rate on the note approximates the rate for similar notes.
Debt
The fair value of debt is based on the discounted future cash flows using the Companys incremental borrowing rate for each type of financing. At December 31, 2014 and 2013, the stated rate on the debt approximates the incremental borrowing rate.
Note 16: | Contingency |
The Company has been notified by a customer of a potential claim resulting from its inspection of certain pipelines and has put its insurance carriers on notice of such claim. The Company and customer have been working together to determine the extent and cost of the claim as well as to correct the deficiencies and allocate what management believes to be a shared liability amongst the Company and the claimant. At this point, the cost is not estimable and as such, no liability has been recorded in the consolidated financial statements of the Company. It is the opinion of management that any resulting claim, after sharing the liability with the customer, should be adequately covered by insurance and that the ultimate disposition or resolution of this claim will not have a material adverse effect on the consolidated financial position or results of operations and cash flows of the Company.
Note 17: | Subsequent Events |
Subsequent events have been evaluated through the date of the Independent Auditors Report on the consolidated financial statements and supplementary information, which is the date the consolidated financial statements were available to be issued.
23
QualSpec Group, LLC formerly Clearview Altech
Acquisition Company, LLC
Independent Auditors Report and
Consolidated Financial Statements
December 31, 2013 and 2012
QualSpec Group, LLC formerly Clearview Altech Acquisition
Company, LLC
December 31, 2013 and 2012
Contents
Independent Auditors Report |
26 | |||
Consolidated Financial Statements |
||||
Consolidated Balance Sheets |
27 | |||
Statements of Income and Comprehensive Income |
28 | |||
Statements of Members Equity |
29 | |||
Statements of Cash Flows |
30 | |||
Notes to Consolidated Financial Statements |
31 |
Independent Auditors Report
To the Members
QualSpec Group, LLC
We have audited the accompanying consolidated financial statements of QualSpec Group, LLC formerly Clearview Altech Acquisition Company, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, members equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QualSpec Group, LLC formerly Clearview Altech Acquisition Company, LLC and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
San Antonio, Texas
March 25, 2014
QualSpec Group, LLC formerly Clearview Altech Acquisition Company, LLC
Consolidated Balance Sheets
December 31, 2013 and 2012
2013 | 2012 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 538,301 | $ | 379,387 | ||||
Accounts receivable, net of allowance for doubtful accounts of $987,061 for 2013 and $986,755 for 2012 |
15,718,941 | 14,007,080 | ||||||
Prepaid expenses |
1,508,007 | 1,477,967 | ||||||
Income tax refund receivable |
244,461 | 262,772 | ||||||
Other current assets |
| 1,500 | ||||||
Deferred income tax asset |
249,177 | 269,415 | ||||||
|
|
|
|
|||||
Total current assets |
18,258,887 | 16,398,121 | ||||||
|
|
|
|
|||||
Property and Equipment, Net |
8,397,219 | 6,909,767 | ||||||
|
|
|
|
|||||
Other Assets, Net |
||||||||
Goodwill |
19,444,703 | 19,444,703 | ||||||
Intangibles, net |
33,522,742 | 36,390,254 | ||||||
Deferred financing costs, net |
251,064 | 495,928 | ||||||
Note receivablerelated party |
50,000 | 50,000 | ||||||
Other assets |
61,454 | 56,454 | ||||||
|
|
|
|
|||||
Total other assets |
53,329,963 | 56,437,339 | ||||||
|
|
|
|
|||||
$ | 79,986,069 | $ | 79,745,227 | |||||
|
|
|
|
|||||
Liabilities and Members Equity |
||||||||
Current Liabilities |
||||||||
Accounts payabletrade |
$ | 2,482,212 | $ | 3,422,857 | ||||
Accounts payablerelated parties |
615,133 | 608,995 | ||||||
Accrued expenses |
5,028,180 | 4,014,437 | ||||||
Other current liabilities |
| 330,067 | ||||||
Current portion of long-term debt |
3,854,215 | 6,885,163 | ||||||
|
|
|
|
|||||
Total current liabilities |
11,979,740 | 15,261,519 | ||||||
Long-term Debt, Net of Current Portion |
33,370,105 | 25,959,365 | ||||||
Deferred Income Tax Liability |
141,911 | 185,779 | ||||||
Other Long-term Liability |
19,633 | 57,366 | ||||||
|
|
|
|
|||||
Total liabilities |
45,511,389 | 41,464,029 | ||||||
|
|
|
|
|||||
Members Equity |
||||||||
Member unitspreferred, issued and outstanding, 52,782 in 2013 and 66,982 in 2012 |
1,143,997 | 1,451,768 | ||||||
Member unitscommon, issued and outstanding, 1,696,832 in 2013 and 2,007,593 in 2012 |
36,907,616 | 43,643,005 | ||||||
Additional paid-in capital |
1,138,297 | 804,129 | ||||||
Retained deficit |
(6,323,384 | ) | (8,909,963 | ) | ||||
Accumulated other comprehensive loss |
(19,633 | ) | (57,366 | ) | ||||
|
|
|
|
|||||
32,846,893 | 36,931,573 | |||||||
Noncontrolling Interest |
1,627,787 | 1,349,625 | ||||||
|
|
|
|
|||||
Total members equity |
34,474,680 | 38,281,198 | ||||||
|
|
|
|
|||||
$ | 79,986,069 | $ | 79,745,227 | |||||
|
|
|
|
See Notes to Consolidated Financial Statements
27
QualSpec Group, LLC formerly Clearview Altech Acquisition Company, LLC
Consolidated Statements of Income and Comprehensive Income
Years Ended December 31, 2013 and 2012
2013 | 2012 | |||||||
Revenues |
$ | 140,015,262 | $ | 110,046,765 | ||||
Cost of Sales |
99,181,640 | 76,620,929 | ||||||
|
|
|
|
|||||
Gross Profit |
40,833,622 | 33,425,836 | ||||||
Selling, General and Administrative Expenses |
29,230,771 | 25,700,206 | ||||||
|
|
|
|
|||||
Income from Operations |
11,602,851 | 7,725,630 | ||||||
|
|
|
|
|||||
Other Expenses |
||||||||
Interest |
3,186,963 | 3,452,386 | ||||||
Management fees |
624,225 | 544,123 | ||||||
Other nonoperating |
1,819,391 | 3,134,118 | ||||||
|
|
|
|
|||||
5,630,579 | 7,130,627 | |||||||
|
|
|
|
|||||
Income Before Provision for Income Tax |
5,972,272 | 595,003 | ||||||
Provision for Income Tax |
495,349 | 5,348 | ||||||
|
|
|
|
|||||
Net Income |
5,476,923 | 589,655 | ||||||
Other Comprehensive Income (Loss) |
37,733 | (31,051 | ) | |||||
|
|
|
|
|||||
Comprehensive Income |
$ | 5,514,656 | $ | 558,604 | ||||
|
|
|
|
|||||
Amounts Attributable to Noncontrolling Interests |
||||||||
Net income |
$ | 5,476,923 | $ | 589,655 | ||||
Net income attributable to noncontrolling interest |
(466,626 | ) | (145,199 | ) | ||||
|
|
|
|
|||||
Net income attributable to Parent |
$ | 5,010,297 | $ | 444,456 | ||||
|
|
|
|
|||||
Comprehensive income |
$ | 5,514,656 | $ | 558,604 | ||||
Less comprehensive (income) loss attributable to the noncontrolling interest |
(466,626 | ) | (145,199 | ) | ||||
|
|
|
|
|||||
Comprehensive income attributable to Parent |
$ | 5,048,030 | $ | 413,405 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements
28
QualSpec Group, LLC formerly Clearview Altech Acquisition Company, LLC
Consolidated Statements of Members Equity
Years Ended December 31, 2013 and 2012
Preferred Member Units |
Common Member Units |
Additional Paid-in Capital |
Retained Deficit |
Other Comprehensive Loss |
Noncontrolling Interest |
Total | ||||||||||||||||||||||
Balance, December 31, 2011 |
$ | 1,451,768 | $ | 43,643,005 | $ | 368,014 | $ | (9,354,419 | ) | $ | (26,315 | ) | $ | 1,204,426 | $ | 37,286,479 | ||||||||||||
Net income |
| | | 444,456 | | 145,199 | 589,655 | |||||||||||||||||||||
Change in fair value of interest rate swap |
| | | | (31,051 | ) | | (31,051 | ) | |||||||||||||||||||
Unit option compensation |
| | 436,115 | | | | 436,115 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, December 31, 2012 |
1,451,768 | 43,643,005 | 804,129 | (8,909,963 | ) | (57,366 | ) | 1,349,625 | 38,281,198 | |||||||||||||||||||
Net income |
| | | 5,010,297 | | 466,626 | 5,476,923 | |||||||||||||||||||||
Redemption of member units |
(307,771 | ) | (6,735,389 | ) | | | | | (7,043,160 | ) | ||||||||||||||||||
Member distributions |
| | | (2,423,718 | ) | | (188,464 | ) | (2,612,182 | ) | ||||||||||||||||||
Change in fair value of interest rate swap |
| | | | 37,733 | | 37,733 | |||||||||||||||||||||
Unit option compensation |
| | 334,168 | | | | 334,168 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, December 31, 2013 |
$ | 1,143,997 | $ | 36,907,616 | $ | 1,138,297 | $ | (6,323,384 | ) | $ | (19,633 | ) | $ | 1,627,787 | $ | 34,474,680 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statement
29
QualSpec Group, LLC formerly Clearview Altech Acquisition Company, LLC
Consolidated Statements of Cash Flows
Years Ended December 31, 2013 and 2012
2013 | 2012 | |||||||
Operating Activities |
||||||||
Net income before attribution of noncontrolling interest |
$ | 5,476,923 | $ | 589,655 | ||||
Net (income) attributable to noncontrolling interest |
(466,626 | ) | (145,199 | ) | ||||
|
|
|
|
|||||
Net income attributable to QualSpec Group LLC |
5,010,297 | 444,456 | ||||||
Items not requiring (providing) cash |
||||||||
Depreciation and amortization |
5,377,280 | 5,182,641 | ||||||
Amortization of deferred financing costs |
244,864 | 202,560 | ||||||
Unit option compensation |
334,168 | 436,115 | ||||||
Paid-in-kind interest |
286,476 | 458,499 | ||||||
Loss on sale of property and equipment |
| 88,339 | ||||||
Deferred income taxes |
(23,630 | ) | (174,052 | ) | ||||
Noncontrolling interest |
466,626 | 145,199 | ||||||
(Increase) decrease in |
||||||||
Accounts receivable |
(1,711,861 | ) | (2,335,490 | ) | ||||
Prepaid expenses |
(30,040 | ) | (78,367 | ) | ||||
Income tax refund receivable |
18,311 | (150,940 | ) | |||||
Other assets |
(11,445 | ) | 2,940 | |||||
Increase (decrease) in |
||||||||
Accounts payable |
(940,645 | ) | 452,183 | |||||
Other liabilities |
| 149,108 | ||||||
Accrued expenses |
683,676 | 2,123,912 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
9,704,077 | 6,947,103 | ||||||
|
|
|
|
|||||
Investing Activities |
||||||||
Proceeds from sales of property and equipment |
| 342,264 | ||||||
Purchase of property and equipment |
(3,989,275 | ) | (1,929,605 | ) | ||||
Loan to related party |
| (50,000 | ) | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(3,989,275 | ) | (1,637,341 | ) | ||||
|
|
|
|
|||||
Financing Activities |
||||||||
Net borrowings (payments) on revolving credit facility |
$ | | $ | (2,800,000 | ) | |||
Redemption of member units |
(7,043,160 | ) | | |||||
Member distributions |
(2,612,182 | ) | | |||||
Proceeds from issuance of long-term debt |
10,005,000 | | ||||||
Long-term debt payments |
(5,911,684 | ) | (2,871,350 | ) | ||||
Payments (to) from related partynet |
6,138 | (13,805 | ) | |||||
Deferred financing costs |
| (135,000 | ) | |||||
|
|
|
|
|||||
Net cash used in financing activities |
(5,555,888 | ) | (5,820,155 | ) | ||||
|
|
|
|
|||||
Increase (Decrease) in Cash |
158,914 | (510,393 | ) | |||||
Cash, Beginning of Year |
379,387 | 889,780 | ||||||
|
|
|
|
|||||
Cash, End of Year |
$ | 538,301 | $ | 379,387 | ||||
|
|
|
|
|||||
Supplemental Cash Flow Information |
||||||||
Interest paid |
$ | 2,901,973 | $ | 2,994,293 | ||||
|
|
|
|
|||||
Income taxes paid |
$ | 328,220 | $ | 54,085 | ||||
|
|
|
|
|||||
Change in fair value of swap contract |
$ | 37,733 | $ | (31,051 | ) | |||
|
|
|
|
|||||
Equipment purchased with debt |
$ | | $ | 141,060 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements
30
QualSpec Group, LLC formerly Clearview Altech Acquisition Company, LLC
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Note 1: | Organization and Description of Business |
QualSpec Group, LLC (QualSpec) formerly Clearview Altech Acquisition Company, LLC (Company) was incorporated in October 2008 for the purpose of acquiring 100 percent of the common stock of Altech Inspections, Inc. (Altech). In 2009, the Company acquired certain assets of another business, IESCO, Inc. (IESCO), a California based company. In 2011, the Company also acquired certain assets of two additional Companies, T.C. Inspections, Inc. and Hawk Rope Access, Inc., both based in California. During 2013, the assets and operations of TC Inspections and Hawk Rope Access were merged into IESCO. Also, in 2013, the Company changed its name to QualSpec Group, LLC and changed the names of the acquired entities of Altech and IESCO to QualSpec, Inc. and QualSpec, LLC in order to create one firm with an expanded geographical footprint from which to provide its advanced service offerings.
QualSpec Group, LLC provides inspection and non-destructive testing services to customers in the refinery, petrochemical and other industries located throughout the United States. Additionally QualSpec also provides specialty access services for industries such as oil platforms, hydroelectric plants, bridges, shipping and other type facilities with difficult to reach locations.
QualSpec, Inc., has facilities in Corpus Christi and Houston, Texas, and Sulphur and New Orleans, Louisiana. QualSpec, LLC has facilities in Torrance, Nipomo, Bakersfield and Rodeo, California.
Note 2: | Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, QualSpec Inc., and its 93.5 percent common ownership interest in QualSpec, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
In accordance with the guidance in FASB ASC 810-10-65, Transition Related to FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, the Company includes the net loss and comprehensive loss attributable to the noncontrolling interest in the consolidated statements of income and members equity. Any losses attributable to the noncontrolling interest will be allocated to the noncontrolling interest even if the carrying amount of the noncontrolling interest is reduced below zero. Any changes in ownership that do not result in a loss of control will be accounted for as equity transactions.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
31
Pursuant to legislation enacted in 2010, the FDIC fully insured all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDIC-insured institutions. This legislation expired on December 31, 2012. Beginning January 1, 2013, noninterest-bearing transaction accounts are subject to the $250,000 limit on FDIC insurance per covered institution. At December 31, 2013, the Companys cash accounts exceeded federal insured limits by approximately $1,190,000.
Revenue Recognition
Revenues are recognized when the inspection services are performed.
Accounts Receivable
The Company extends credit to its customers based on an evaluation of its customers financial condition. Accounts receivable represent amounts billed and unbilled for inspection services and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Companys previous loss history, the customers current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company does not require collateral from its customers. As of December 31, 2013 and 2012, the allowance for doubtful accounts was $987,061 and $986,755, respectively.
Property and Equipment
Property and equipment are stated at cost or estimated fair value (if acquired) as of the acquisition date and are depreciated or amortized over the estimated useful life of each asset using the straight-line method. Estimated useful lives are as follows:
Years | ||||
Field equipment |
1 - 7 | |||
Office equipment |
3 - 10 | |||
Transportation equipment |
3 - 10 | |||
Software |
3 - 5 | |||
Buildings and improvements |
40 |
Maintenance and repairs, which neither add to the value of the property nor appreciably prolong its useful life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in income.
Impairment of Long-lived Assets
The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Intangible Assets
Identifiable, amortizable intangible assets are being amortized on a straight-line basis over periods of 5 to 15 years based upon the nature of the identifiable intangible asset. All such assets are periodically evaluated as to recoverability of their carrying values.
32
Goodwill
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
Derivatives
Derivatives are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For nonexchange-traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.
Income Taxes
The Companys members have elected to have the Companys income taxed as a partnership under provisions of the Internal Revenue Code (IRC) and a similar section of the state income tax law. Therefore, taxable income or loss is reported to the individual members for inclusion in their respective tax returns. QualSpec, Inc., is a C corporation for federal and state income tax purposes and, therefore, income taxes are accounted for in accordance with ASC 740, Accounting for Income Taxes. The income tax accounting guidance results in two components of income tax expense, current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. QualSpec, Inc., determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.
Self-Insurance
QualSpec has elected to self-insure certain costs related to its health and dental insurance programs for its employees. Costs resulting from noninsured losses are charged to income when incurred. The Company has purchased insurance that limits its exposure for individual and aggregate claims.
Unit Incentive Plan
At December 31, 2013 and 2012, the Company has a unit-based employee compensation plan, which is described more fully in Note 7.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on the fair value of the derivative financial instruments.
Reclassifications
Certain reclassifications have been made to the 2012 consolidated financial statements to conform to the 2013 financial statement presentation. These reclassifications had no effect on net loss or comprehensive loss.
33
Note 3: | Property and Equipment |
A summary of property and equipment as of December 31, 2013 and 2012, is as follows:
2013 | 2012 | |||||||
Land |
$ | 199,226 | $ | 199,226 | ||||
Buildings |
1,982,659 | 1,958,233 | ||||||
Leasehold improvements |
303,228 | 200,814 | ||||||
Inspection equipment |
11,482,532 | 7,853,326 | ||||||
Office equipment and furniture |
1,098,100 | 1,046,677 | ||||||
Software |
1,079,841 | 957,058 | ||||||
Vehicles |
2,507,918 | 2,456,803 | ||||||
|
|
|
|
|||||
18,653,504 | 14,672,137 | |||||||
Less accumulated depreciation |
10,256,285 | 7,762,370 | ||||||
|
|
|
|
|||||
$ | 8,397,219 | $ | 6,909,767 | |||||
|
|
|
|
Depreciation expense for the years ended December 31, 2013 and 2012, amounted to $2,503,392 and $2,297,420, respectively.
Note 4: | Acquired Intangible Assets and Goodwill |
The carrying basis and accumulated amortization of recognized intangible assets and goodwill at December 31, 2013 and 2012, is as follows:
2013 | 2012 | |||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||
Amortizable intangible assets |
||||||||||||||||
Covenant not to compete |
$ | 800,380 | $ | 735,111 | $ | 800,380 | $ | 585,905 | ||||||||
Customer list |
30,773,340 | 12,703,248 | 30,773,340 | 9,984,942 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
31,573,720 | 13,438,359 | 31,573,720 | 10,570,847 | |||||||||||||
Unamortizable intangible assets |
||||||||||||||||
Trade name |
15,387,381 | | 15,387,381 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 46,961,101 | $ | 13,438,359 | $ | 46,961,101 | $ | 10,570,847 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Goodwill |
||||||||||||||||
QualSpec, Inc. |
$ | 9,213,254 | $ | 9,213,254 | ||||||||||||
QualSpec, LLC |
10,231,449 | 10,231,449 | ||||||||||||||
|
|
|
|
|||||||||||||
Goodwill |
$ | 19,444,703 | $ | 19,444,703 | ||||||||||||
|
|
|
|
Amortization expense for the above intangible assets was $2,873,888 and $2,885,221 for the years ended December 31, 2013 and 2012, respectively. Estimated amortization expense for the next five years is as follows:
Years Ending December 31, |
||||
2014 |
$ | 2,712,586 | ||
2015 |
$ | 2,712,586 | ||
2016 |
$ | 2,712,586 | ||
2017 |
$ | 2,712,586 | ||
2018 |
$ | 2,712,586 |
34
2013 | 2012 | |||||||
Goodwill balance at beginning of year |
$ | 19,444,703 | $ | 19,444,703 | ||||
Additional costs capitalized as goodwill |
| | ||||||
|
|
|
|
|||||
Goodwill balance at end of year |
$ | 19,444,703 | $ | 19,444,703 | ||||
|
|
|
|
There was no change in the carrying amount of goodwill for the years ended December 31, 2013 and 2012.
Note 5: | Long-term Debt |
2013 | 2012 | |||||||
Senior debt |
$ | 22,750,000 | $ | 15,710,000 | ||||
Senior subordinated debt |
8,974,320 | 11,504,818 | ||||||
Sellers notes |
5,500,000 | 5,500,000 | ||||||
Revolving credit facility |
| | ||||||
Installment note |
| 129,710 | ||||||
|
|
|
|
|||||
37,224,320 | 32,844,528 | |||||||
Less current maturitiesamortizing |
3,000,000 | 2,916,002 | ||||||
Less current maturitiesexcess cash flow |
854,215 | 3,969,161 | ||||||
|
|
|
|
|||||
$ | 33,370,105 | $ | 25,959,365 | |||||
|
|
|
|
Senior Term Loan and Revolving Credit Facility
At December 31, 2013, the Company has a senior secured term credit facility with an amended aggregate term advance amount of $25,000,000 and a $7,000,000 senior secured revolving credit facility that are administered by the senior lender. At December 31, 2012, the secured term credit agreement had an original balance of $20,000,000.
The senior secured term credit facility is secured by real and personal property, including accounts receivable, inventory, equipment and intangible assets. The term loan bears interest at a floating rate or LIBOR plus an applicable margin. At December 31, 2013, the Company had elected a LIBOR rate of .24 percent plus the base rate of 4.5 percent with an effective overall rate of 4.74 percent. The loan is payable quarterly with principal due in consecutive quarterly installments of $750,000, through April 5, 2015, at which time all remaining unpaid principal on the term advances will be due and payable.
The $7,000,000 senior secured revolving facility is secured by real and personal property, including accounts receivable, inventory, equipment and intangible assets. Advances on the revolver are limited to a borrowing base of the revolving cap or 85 percent of eligible accounts receivable as defined in the Credit Agreement. The revolving facility bears interest at a floating rate or LIBOR plus an applicable margin with interest payable quarterly. At December 31, 2013, the Company had elected the floating rate of 6.75 percent. The revolving facility matures April 5, 2015.
The senior loan and revolving credit facilities include various covenants which impose a number of financial ratio requirements and restrictive covenants that, among other things, limit the Companys ability to incur additional indebtedness, create liens, or pay dividends. In addition, as defined in the agreement, the facilities also require mandatory principal prepayments equal to 75 percent of excess cash flow as defined. The agreement also provides for a 50 percent excess cash flow prepayment if a certain leverage ratio is met at the end of each year. At December 31, 2013 and 2012, excess cash flow principal payments due, as defined, amount to $854,215 and $3,969,161, respectively; these are classified as current maturities in the accompanying consolidated financial statements. All voluntary prepayments of debt shall include a premium of $135,000 if paid prior to the third anniversary, unless such prepayment meets certain conditions as defined in the credit facility. The Company was in compliance with the loan covenants at December 31, 2013.
35
The loan agreement also requires the Company to pay an Unused Fee that is defined as the product of an annual rate equal to one-half of one percent (0.50 percent) and the daily rate average amount by which the sum of the aggregate revolving commitment exceeds the revolving facility outstanding amount, payable quarterly in arrears. Any Unused Fee remaining unpaid on the revolving commitment termination date shall be due and payable on such date.
Senior Subordinated Debt
The Company has four Senior Subordinated Debt agreements at December 31, 2013 and 2012. Subordinated Debt Series A in the original amount of $6,000,000 was used to fund a portion of the Altech acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $1,034,090 in principal and interest added on this note. As of December 31, 2013, the outstanding balance owed was $3,183,675 of which $44,218 represents interest which has been added to principal pursuant to this option during 2013. As of December 31, 2012, the outstanding balance owed was $4,132,070 of which $194,725 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on November 5, 2015.
The Subordinated Debt Series B in the original amount of $6,000,000 was used to fund a portion of the IESCO acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 12 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $1,025,494 in principal and interest added on this note. As of December 31, 2013, the outstanding balance owed was $3,384,027 of which $45,706 represents interest which has been added to principal pursuant to this option during 2013. As of December 31, 2012, the outstanding balance owed was $4,287,665 of which $317,987 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on November 5, 2015.
The Subordinated Debt Series C-1 in the original amount of $2,375,000 was used to fund a portion of the TC Inspections acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $378,267 in principal and interest added on this note. As of December 31, 2013, the outstanding balance owed was $1,206,426 of which $15,834 represents interest which has been added to principal pursuant to this option during 2013. As of December 31, 2012, the outstanding balance owed was $1,538,381 of which $90,925 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on November 5, 2015.
The Subordinated Debt Series C-2 in the original amount of $2,375,000 was used to fund a portion of the Hawk Rope Access acquisition, which now bears interest at 14 percent, payable in arrears. On each interest payment date, the Company has the option to either pay the entire interest amount in cash or pay in cash an amount which would have accrued as if the interest rate was 12 percent and then add to the principal balance of the note the portion of accrued interest not paid in cash. Amounts added to principal, if any, bear interest at 14 percent. In connection with the First Amendment to Mezzanine Subordination Agreement, the Company prepaid $378,298 in principal and interest added on this note. As of December 31, 2013, the outstanding balance owed was $1,200,192 of which $16,286 represents interest which has been added to
36
principal pursuant to this option during 2013. As of December 31, 2012, the outstanding balance owed was $1,546,702 of which $91,242 represents interest which has been added to principal pursuant to this option. The principal balance is due in full on November 5, 2015.
The Company had the option to prepay the Subordinated Debt Series A and Series B, in whole or in part, in amounts equal to the lesser of the aggregate amount of the principal amount outstanding on the Subordinated Debt or in an integral multiple of $100,000 with a minimum of $500,000.
There were no such prepayments made on the Series A. Prepayments of Subordinated Debt Series B shall include a premium, unless arising from a sales transaction, equal to the present value of all future interest payments computed using the treasury 5-year note rate for the week ending prior to the date of payment plus 1 percent if made by October 4, 2013.
These loans are subject to certain financial and restrictive covenants that, among other things, limit the Companys ability to incur additional indebtedness, create liens and pay dividends. The Company was in compliance with the covenants on these loans at December 31, 2013.
All borrowings pursuant to the Subordinated Debt are secured by the assets of the Company.
Seller Notes
In connection with the Altech acquisition, the Company entered into various note agreements with the selling shareholders of Altech in the aggregate amount of $2,000,000. These notes bear interest at 8 percent, payable quarterly in arrears and are due on April 29, 2015.
In connection with the IESCO acquisition, the Company entered into a note agreement with the selling shareholder of IESCO in the amount of $2,000,000. This note bears interest at 10 percent, payable quarterly in arrears and is due on April 5, 2016.
In connection with the TC Inspections and Hawk Rope Access acquisitions, the Company also entered into a note agreement with the selling shareholder of T. C. Inspections, Inc., and Hawk Rope Access, Inc., in the amount of $1,500,000. This note bears interest at 8 percent, payable quarterly in arrears and is due on April 5, 2016.
Installment Note
The installment note payable balance outstanding at December 31, 2012, was $129,710. This note was to finance equipment and was due in monthly payments of $4,667 which included interest calculated at 6 percent, the note was paid off during 2013.
Debt Financing Costs
In connection with the issuance of the senior secured term and revolving credit facility, and Subordinated Debt, during 2011, the Company incurred financing costs of $1,079,679, which have been deferred and are being amortized as additional borrowing costs utilizing the interest method over the life of the related borrowings. Amortization expense for the years ended December 31, 2013 and 2012, was $244,864 and $202,560, respectively.
Senior and Subordinated Debt Amendments
Effective May 8, 2013, QualSpec entered into the Fourth Amendment to Credit Agreement (Fourth Amendment) with its senior lender which increased the aggregate amount of the lenders commitment up to $25,000,000 and provided for the payment of amounts due in connection with the redemption of members units disclosed in Note 11.
37
In connection with the Fourth Amendment to Credit Agreement with its senior lender discussed above, the Company simultaneously entered into a First Amendment To Mezzanine Subordination Agreement with all of its senior subordinated debt holders, which increased the maximum senior debt amount to $41,005,000 and provided for the prepayment of certain principal amounts on the subordinated notes not to exceed $2,861,840. Along with the First Amendment to the Mezzanine Subordination Agreement, the Company also amended the Securities Purchase Agreement which changed the interest rates on all four of the senior subordinated notes to 14 percent per annum.
On May 31, 2012, the Company entered into the Second Amendment to Credit Agreement (Second Amendment) with its senior lender whereby the aggregate amount of the lenders revolving commitment was temporarily increased by $2,500,000 to an aggregate amount equal to $9,500,000 for the period from and including the First Amendment Effective Date but excluding September 30, 2012 (and the aggregate amount of the Lenders Revolving Commitments decreased to $7,000,000 on September 30, 2012). Simultaneously, the Company entered into the Fourth Amendment to Amend and Restated Securities Purchase Agreement and Waiver with its senior subordinated lenders. These Agreements restated the total leverage ratio, the senior leverage ratio and the fixed charge ratio coverage requirements for the Company resetting the financial covenants beginning in the second quarter of 2012.
Long-term Debt Maturities
Aggregate annual maturities of long-term debt at December 31, 2013, are:
Year Ending December 31, |
||||
2014 |
$ | 3,854,215 | ||
2015 |
29,870,105 | |||
2016 |
3,500,000 | |||
|
|
|||
$ | 37,224,320 | |||
|
|
Note 6: | Derivative Financial Instruments |
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, in 2011, the Company entered into an interest rate swap agreement related to its senior secured term credit facility with the original balance of $20,000,000. The swap agreement provides for the Company to receive interest from the counterparty at LIBOR and to pay interest to the counterparty at a fixed rate of 0.89 percent on a notional amount of $6,425,000 and $9,285,000 at December 31, 2013 and 2012 respectively.
Management has designated the 2011 interest rate swap agreement as cash flow hedging instruments and determined that the agreement did qualify for hedge accounting under the provisions of ASC 815. The liability fair value at December 31, 2013 and 2012, of the swap agreement amounted to $(19,633) and $(57,366), respectively.
38
The following summarizes the location and liability fair value amounts of all derivative contracts in the consolidated financial statements as of and for the years ended December 31, 2013 and 2012:
2013 |
||||||
Derivatives |
Location of |
Amount | ||||
Derivatives designated as hedging contracts |
||||||
Unrealized gain on interest rate swaps |
Comprehensive income | $ | 37,733 | |||
|
|
|||||
$ | 37,733 | |||||
|
|
|||||
Derivatives not designated as hedging contracts |
||||||
Realized gain on interest rate swaps |
Interest expense, net | $ | | |||
|
|
|||||
2012 |
||||||
Derivatives |
Location of |
Amount | ||||
Derivatives designated as hedging contracts |
||||||
Unrealized loss on interest rate swaps |
Comprehensive income | $ | (31,051 | ) | ||
|
|
|||||
$ | (31,051 | ) | ||||
|
|
|||||
Derivatives not designated as hedging contracts |
||||||
Realized loss on interest rate swaps |
Interest expense, net | $ | | |||
|
|
2013 |
||||||||
Derivatives |
Balance Sheet Location |
Amount | ||||||
Derivatives designated as hedging contracts |
||||||||
Interest rate swap contract |
Other long-term liabilities | $ | (19,633 | ) | ||||
|
|
|||||||
Total derivatives |
$ | (19,633 | ) | |||||
|
|
|||||||
2012 |
||||||||
Derivatives |
Balance Sheet Location |
Amount | ||||||
Derivatives designated as hedging contracts |
||||||||
Interest rate swap contracts |
Other long-term liabilities | $ | (57,366 | ) | ||||
|
|
|||||||
Total derivatives |
$ | (57,366 | ) | |||||
|
|
Note 7: | Unit Incentive Plan |
The Company has a Unit Incentive Plan (Plan Agreement) under which employees and others may be granted options to purchase membership interests in the Company (Units). The Plan provides for the grant of up to 184,567 Units and can be issued as First Half of the Plan Units (First Half) and Second Half of the Plan Units (Second Half). Options issued pursuant to the Plan (i) expire no later than ten years from the grant date, (ii) vest ratably on the first, second, third and fourth anniversary date of the option grant with options becoming immediately exercisable in full upon a change in control only upon the board of directors of the Company electing to accelerate vesting, as defined in the Plan Agreement, and (iii) terminate upon the earliest of the (a) tenth anniversary date, (b) a violation of business covenants, as defined in option holders employment agreement, (c) an earlier termination in accordance with the terms of the Plan Agreement and (d) a change in control, as defined. All option Unit holders that exercise their options become subject to the terms of the Companys LLC agreement.
39
The fair value of each option award is estimated on the date of grant using a binomial option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of comparable companies that operate in the Companys general industry group. The Company uses historical data to estimate option exercise and employee termination within the valuation model. In addition, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from managements expectation of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant.
2013 | 2012 | |||||||
Expected volatility |
51 | % | 51 | % | ||||
Expected dividends |
0 | % | 0 | % | ||||
Risk-free rate |
3 | % | 3 | % | ||||
Expected terms (in years) |
5 | 5 |
A summary of option activity under the Plan as of December 31, 2013, and changes during the year then ended, is presented below:
First Half of Plan Units |
Units | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||
Balance, beginning of year |
144,548 | $ | 26.20 | 6.58 | ||||||||
Granted |
| | ||||||||||
Exercised |
| | ||||||||||
Forfeitures |
(50,000 | ) | 30.39 | 8.50 | ||||||||
|
|
|
|
|||||||||
Outstanding, end of year |
94,548 | $ | 23.98 | 5.56 | ||||||||
|
|
|
|
|||||||||
Exercisable, end of year |
90,918 | $ | 24.07 | |||||||||
|
|
|
|
Second Half of Plan Units |
Units | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||
Balance, beginning of year |
40,020 | $ | 38.37 | 7.60 | ||||||||
Granted |
| | | |||||||||
Exercised |
| | | |||||||||
Forfeitures |
(10,000 | ) | 50.50 | 8.50 | ||||||||
|
|
|
|
|||||||||
Outstanding, end of year |
30,020 | $ | 34.33 | 7.30 | ||||||||
|
|
|
|
|||||||||
Exercisable, end of year |
26,959 | $ | 34.70 | |||||||||
|
|
|
|
The unit-based compensation expense for the years ended December 31, 2013 and 2012, was $334,166 and $436,115, respectively.
40
A summary of the status of the Companys nonvested units as of December 31, 2013, is presented below:
First Half of Plan Units |
Units | Weighted Average Grant Date Fair Value |
||||||
Beginning of year |
98,603 | $ | 8.54 | |||||
Granted |
| | ||||||
Vested |
(44,973 | ) | 9.39 | |||||
Cancelled |
| |||||||
Forfeited |
(50,000 | ) | 7.89 | |||||
|
|
|||||||
Nonvested, end of year |
3,630 | $ | 10.34 | |||||
|
|
Second Half of Plan Units |
Units | Weighted Average Grant Date Fair Value |
||||||
Beginning of year |
23,761 | $ | 6.05 | |||||
Granted |
| | ||||||
Vested |
(10,130 | ) | 6.98 | |||||
Cancelled |
| | ||||||
Forfeited |
(10,000 | ) | 5.04 | |||||
|
|
|||||||
Nonvested, end of year |
3,631 | $ | 8.19 | |||||
|
|
As of December 31, 2013 and 2012, there was $39,690 and $797,643 of total unrecognized compensation cost related to nonvested unit-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years. The total fair value of units vested during the year ended December 31, 2013, was $856,778.
Note 8: | Related Party Transactions |
Pursuant to a management fee agreement, the management company of the Companys majority member provides general strategic and business advisory services to the Company for an annual management fee equal to 4 percent of annual consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) plus reasonable out-of-pocket expenses. During 2013 and 2012, the Company incurred $624,225 and $523,945, respectively, in management fees and expenses pursuant to this agreement of which $13,923 and $28,104 was payable at December 31, 2013 and 2012.
The Companys Subordinated Debt Agreements, as discussed in Note 6, are with members of the Company. Total interest expense incurred during 2013 and 2012 relating to these agreements was $1,489,292 and $1,851,965, respectively.
In 2008 the Company entered into note agreements with the selling shareholders of Altech as discussed in Note 6. These shareholders are also members of the Company. Total interest expense incurred during 2013 and 2012 was $160,000 for each year.
In 2009, the Company entered into a note agreement with the selling shareholder of IESCO, Inc., as discussed in Note 6. This shareholder is also a member of the Company. Total interest expense incurred during 2013 and 2012, was $169,995 and $160,000, respectively.
In 2011, the Company entered into a note agreement with the selling shareholder of T.C. Inspections, Inc., and Hawk Rope Access, Inc. This shareholder is also a member of the Company. Total interest expense incurred during 2013 and 2012 was $120,000 for each year.
The Company also leases two of its office facilities under different operating leases from certain of the selling shareholders of IESCO and T.C. Inspections, Inc. Both leases expire in 2014. Total rent expense for 2013 and 2012 amounted to $224,400. The lease payments due to related parties in 2014 totals $166,100.
41
The acquisition of T.C. Inspections, Inc., and Hawk Rope Access, Inc., included a contingent amount based upon the attainment of a minimum working capital balance, as adjusted, as of the closing date. The final working capital requirement was achieved and resulted in additional consideration due of $1,105,610 of which $600,000 was deposited into an escrow account at closing. The resulting net working capital adjustment payable at December 31, 2013 and 2012, amounted to $505,609 which is due to the seller shareholder of T.C. Inspections, Inc., and Hawk Rope Access, Inc. In addition, the Company had various transactions with T.C. Inspections, Inc., and Hawk Rope Access, Inc., resulting in an additional amount due of $95,601 and $75,281 as of December 31, 2013 and 2012, respectively.
The note receivable related party includes a $50,000 secured promissory note. The note is secured by a pledged interest in the borrowers ownership units in the Company, with interest at 6 percent payable on a quarterly basis. The note matures on the earlier of August 2017 or the occurrence of a liquidity event affecting the Company.
Note 9: | Commitments |
Employment Agreements
The Company had entered into employment contracts with certain employees who are also Unit holders of the Company. Under the terms of these contracts, the Company will pay salaries for the performance of the employees duties and responsibilities as specified in the respective agreements. Future minimum obligations relating to these agreements aggregate approximately $2,295,000. Total expense recorded in the accompanying statement of income and comprehensive loss for these agreements during 2013 and 2012, was approximately $1,961,000 and $1,719,000, respectively.
Self-Insurance
QualSpec self-insures individual claims for amounts up to $140,000. Any amounts claimed above these limits are covered by a reinsurance policy up to maximum claim amounts of $2,000,000 per individual. Provisions for losses incurred but not reported expected under these programs totaled $160,000 and $62,510 as of December 31, 2013 and 2012, respectively.
Note 10: | Income Taxes |
The Company and each of its subsidiaries files separate income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2010.
The income tax expense (benefit) attributable to the years ended December 31, 2013 and 2012, consists of the following components:
2013 | 2012 | |||||||
Current |
||||||||
Federal |
$ | 275,000 | $ | (90,643 | ) | |||
State |
243,979 | 270,043 | ||||||
|
|
|
|
|||||
518,979 | 179,400 | |||||||
|
|
|
|
|||||
Deferred |
||||||||
Federal |
(23,630 | ) | (174,052 | ) | ||||
|
|
|
|
|||||
(23,630 | ) | (174,052 | ) | |||||
|
|
|
|
|||||
$ | 495,349 | $ | 5,348 | |||||
|
|
|
|
42
The reconciliation between the federal U.S. corporate tax rate of 34 percent and the Companys effective tax rate for the period ended December 31, 2013 and 2012, is as follows:
2013 | 2012 | |||||||
Expected tax (benefit) |
$ | 2,030,572 | $ | 202,300 | ||||
Non-deductible Company expenses |
519,590 | 519,590 | ||||||
Nondeductible expenses |
34,407 | 41,626 | ||||||
State income taxes, net of federal benefit |
34,726 | 33,654 | ||||||
(Income) losses reported by pass-through entities |
(2,259,978 | ) | (972,263 | ) | ||||
State income taxes reported by pass-through entities |
141,845 | 171,060 | ||||||
Other |
(5,813 | ) | 9,381 | |||||
|
|
|
|
|||||
Income tax |
$ | 495,349 | $ | 5,348 | ||||
|
|
|
|
The tax effect of temporary differences which give rise to deferred tax assets and liabilities at December 31, 2013 and 2012, is as follows:
2013 | 2012 | |||||||
Deferred tax assets current |
||||||||
Accrued wages and bonuses |
$ | 139,460 | $ | 208,586 | ||||
Allowance for doubtful accounts |
109,717 | 60,132 | ||||||
Other |
| 697 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
249,177 | 269,415 | ||||||
|
|
|
|
|||||
Deferred tax liabilities long-term |
||||||||
Other |
(723 | ) | (10,642 | ) | ||||
Depreciation |
(141,188 | ) | (175,137 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(141,911 | ) | (185,779 | ) | ||||
|
|
|
|
|||||
Net deferred tax liability |
$ | 107,266 | $ | 83,636 | ||||
|
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Note 11: | Members Equity |
Preferred Member Units
On August 1, 2010, the QualSpec Group formerly Clearview Altech Acquisition Company authorized and issued 36,284 shares of Class A-1 and 30,698 shares of Class A-2 preferred member units for $1,500,000 in contributed cash. Both Class A-1 and Class A-2 preferred shares are entitled to an 18 percent return compounded annually on such members unrecovered capital account, as defined. The undistributed preferred return at December 31, 2013 and 2012, amounted to approximately $1,149,000 and $744,000, respectively. The preferred shares are also entitled to distribution preferences equal to the aggregate excess of the preferred return over previous distributions and any remaining unrecovered capital. Once the preferred shares unreturned capital accounts are reduced to zero, the shares cease to be preferred.
Redemption of Member Units
During 2013, QualSpec re-acquired 310,760.90 shares of its common units, 7,414.18 shares of the Class A-1 and 6,785.92 shares of the Class A-2 preferred member units from two members in exchange for cash in the amount of $7,043,160 and an additional payment of $100,000 to one certain member that was the former selling shareholder of IESCO, Inc., to secure a non-compete and non-solicitation agreement.
43
Member Distributions
Member distributions amounting to $2,612,182 were made as tax distributions in accordance with the terms of the limited liability company agreement.
Note 12: | Significant Customers |
During the years ended December 31, 2013 and 2012, revenue from the Companys five largest customers represented 70 percent and 59 percent, respectively, of total revenue. The Companys accounts receivable from customers with the five largest balances at December 31, 2013 and 2012, represented 58 percent and 36 percent, respectively, of total accounts receivable.
Note 13: | Benefit Plans |
The Company has a 401(k) retirement plan covering all eligible employees. Participants in the plans may contribute up to 50 percent of their compensation, subject to Internal Revenue Service (IRS) limitations. A discretionary matching contribution can be made as established by the Company subject to IRS limitations. Total expense charged to operations during the years ended December 31, 2013 and 2012, amounted to $985,438 and $634,856, respectively.
Note 14: | Operating Leases |
Non-cancellable operating leases for offices expire in various years through 2023. These leases generally contain renewal options for periods ranging from one-to-six years and require the Company to pay all executory costs (property taxes, maintenance and insurance). Rental payments include minimum rentals.
Future minimum lease payments at December 31, 2013, were:
2014 |
$ | 567,144 | ||
2015 |
$ | 372,911 | ||
2016 |
$ | 378,153 | ||
2017 |
$ | 381,504 | ||
2018 |
$ | 389,150 | ||
Thereafter |
$ | 1,359,821 |
Rental expense for all operating leases for 2013 and 2012 amounted to $562,655 and $507,143, respectively.
Note 15: | Disclosures About Fair Values of Assets and Liabilities |
The Company has adopted ASC Topic 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 |
Quoted prices in active markets for identical assets or liabilities | |
Level 2 |
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities | |
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
44
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Interest Rate Swap
The fair value liability of the interest rate swap was $19,633 and $57,366 for 2013 and 2012, respectively, and is estimated using forward-looking interest rate curves and discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.
The following table presents the fair value measurements of assets and (liabilities) recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013 and 2012:
2013 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Interest rate swap |
||||||||||||||||
Huntington National Bank |
$ | (19,633 | ) | $ | | $ | (19,633 | ) | $ | | ||||||
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$ | (19,633 | ) | $ | | $ | (19,633 | ) | $ | | |||||||
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2012 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Interest rate swap |
||||||||||||||||
Huntington National Bank |
$ | (57,366 | ) | $ | | $ | (57,366 | ) | $ | | ||||||
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$ | (57,366 | ) | $ | | $ | (57,366 | ) | $ | | |||||||
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The following methods and assumptions were used to estimate the fair values of all other classes of financial instruments:
Cash
The fair value of cash approximates the carrying amount.
Receivables
The fair value of receivables approximates the carrying amount because of the short-term maturity of these instruments.
Note Receivable Related Party
The fair value of the note receivable approximates the carrying amount because the stated rate on the note approximates the rate for similar notes.
45
Debt
The fair value of debt is based on the discounted future cash flows using the Companys incremental borrowing rate for each type of financing. At December 31, 2013 and 2012, the stated rate on the debt approximates the incremental borrowing rate.
Note 16: | Contingency |
The Company has been notified of a potential claim resulting from its inspection of certain utility pipelines and has put its insurance carriers on notice of such assertions. Management has been cooperating in the re-inspection and assessment of this potential claim, however, no determination of any potential liability related to this potential claim can be made. It is the opinion of management that any resulting claim will be adequately covered by insurance and that the ultimate disposition or resolution of such claim will not have a material adverse effect on the consolidated financial position or results of operations and cash flows of the Company.
Note 17: | Subsequent Events |
Subsequent events have been evaluated through the date of the Independent Auditors Report on the consolidated financial statements and supplementary information, which is the date the consolidated financial statements were available to be issued.
46
Exhibit 99.3
TEAM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
Team Historical As of May 31, 2015 |
Qualspec Historical As of March 31, 2015 |
Pro Forma Adjustments Qualspec Acquisition |
Team Pro Forma As of May 31, 2015 |
|||||||||||||||
ASSETS | ||||||||||||||||||
Current Assets: |
||||||||||||||||||
Cash and cash equivalents |
$ | 33,211 | $ | 1,706 | $ | | $ | 34,917 | ||||||||||
Receivables, net of allowance |
212,934 | 26,892 | | 239,826 | ||||||||||||||
Inventories |
26,005 | | | 26,005 | ||||||||||||||
Deferred income taxes |
5,926 | 416 | | 6,342 | ||||||||||||||
Prepaid expenses and other current assets |
10,620 | 1,468 | | 12,088 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total Current Assets |
288,696 | 30,482 | | 319,178 | ||||||||||||||
Property, plant and equipment, net |
97,926 | 12,709 | 2,531 | b | 113,166 | |||||||||||||
Assets held for sale |
5,207 | | | 5,207 | ||||||||||||||
Intangible assets, net of accumulated amortization |
20,268 | 27,153 | 47,547 | b | 94,968 | |||||||||||||
Goodwill |
107,773 | 19,445 | 135,125 | b | 262,343 | |||||||||||||
Deferred financing costs, net |
| 76 | 1,747 | a,b | 1,823 | |||||||||||||
Note receivable - related party |
| 50 | (50 | ) | b | | ||||||||||||
Other assets, net |
467 | 122 | | 589 | ||||||||||||||
Deferred income taxes |
3,496 | | | 3,496 | ||||||||||||||
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|
|||||||||||
Total Assets |
$ | 523,833 | $ | 90,037 | $ | 186,900 | $ | 800,770 | ||||||||||
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|||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||
Current Liabilities: |
||||||||||||||||||
Current portion of long-term debt |
$ | | $ | 5,000 | $ | (5,000 | ) | c | $ | | ||||||||
Accounts payable |
32,854 | 3,724 | | 36,578 | ||||||||||||||
Accounts payable - related parties |
| 506 | (506 | ) | c | | ||||||||||||
Other accrued liabilities |
54,185 | 20,855 | (9,865 | ) | d | 65,175 | ||||||||||||
Current income taxes payable |
4,185 | 904 | | 5,089 | ||||||||||||||
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|||||||||||
Total Current Liabilities |
91,224 | 30,989 | (15,371 | ) | 106,842 | |||||||||||||
Deferred income taxes |
15,631 | 180 | 851 | b | 16,662 | |||||||||||||
Long-term debt |
78,484 | 30,342 | 229,946 | c,e | 338,772 | |||||||||||||
Other long-term liabilities |
3,119 | | | 3,119 | ||||||||||||||
|
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|
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|
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|
|
|||||||||||
Total Liabilities |
188,458 | 61,511 | 215,426 | 465,395 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||
Equity: |
||||||||||||||||||
Preferred stock |
| 1,144 | (1,144 | ) | f | | ||||||||||||
Common stock |
6,273 | 36,908 | (36,908 | ) | f | 6,273 | ||||||||||||
Additional paid-in capital |
115,642 | 2,027 | (2,027 | ) | f | 115,642 | ||||||||||||
Retained earnings |
242,102 | (12,821 | ) | 12,821 | f | 242,102 | ||||||||||||
Accumulated other comprehensive loss |
(13,538 | ) | | | (13,538 | ) | ||||||||||||
Treasury stock at cost |
(21,138 | ) | | | (21,138 | ) | ||||||||||||
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Total Team shareholders equity |
329,341 | 27,258 | (27,258 | ) | 329,341 | |||||||||||||
Non-controlling interest |
6,034 | 1,268 | (1,268 | ) | f | 6,034 | ||||||||||||
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Total equity |
335,375 | 28,526 | (28,526 | ) | 335,375 | |||||||||||||
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|
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|
|||||||||||
Total liabilities and equity |
$ | 523,833 | $ | 90,037 | $ | 186,900 | $ | 800,770 | ||||||||||
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|
See notes to unaudited pro forma condensed consolidated financial statements.
TEAM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Team Historical Twelve Months Ended May 31, 2015 |
Qualspec Historical Twelve Months Ended March 31, 2015 |
Pro Forma Adjustments Qualspec Acquisition |
Team Pro Forma Twelve Months Ended May 31, 2015 |
|||||||||||||||||
Revenues |
$ | 842,047 | $ | 170,425 | $ | | $ | 1,012,472 | ||||||||||||
Operating expenses |
584,054 | 116,405 | | 700,459 | ||||||||||||||||
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|||||||||||||
Gross margin |
257,993 | 54,020 | | 312,013 | ||||||||||||||||
Selling, general and administrative expenses |
189,528 | 40,026 | 1,563 | g | 231,117 | |||||||||||||||
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|
|
|
|||||||||||||
Operating income |
68,465 | 13,994 | (1,563 | ) | 80,896 | |||||||||||||||
Interest expense, net |
2,489 | 2,880 | 2,874 | h | 8,243 | |||||||||||||||
Management fees |
| 720 | (720 | ) | k | | ||||||||||||||
Other non-operating expenses |
| 12,561 | (10,500 | ) | l | 2,061 | ||||||||||||||
Loss on investment in Venezuela |
1,177 | | | 1,177 | ||||||||||||||||
Foreign currency loss |
1,509 | | | 1,509 | ||||||||||||||||
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Earnings (loss) before income taxes |
63,290 | (2,167 | ) | 6,783 | 67,906 | |||||||||||||||
Less: Provision for income taxes |
22,793 | 1,629 | 33 | i | 24,455 | |||||||||||||||
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Net income (loss) |
40,497 | (3,796 | ) | 6,750 | 43,451 | |||||||||||||||
Less: Income (loss) attributable to non-controlling interest |
427 | (189 | ) | 189 | j | 427 | ||||||||||||||
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Net income available to Team shareholders |
$ | 40,070 | $ | (3,607 | ) | $ | 6,561 | $ | 43,024 | |||||||||||
Net income per share: |
||||||||||||||||||||
Basic |
$ | 1.95 | $ | 2.10 | ||||||||||||||||
Diluted |
$ | 1.85 | $ | 1.99 | ||||||||||||||||
Weighted averages shares outstanding: |
||||||||||||||||||||
Basic |
20,500 | 20,500 | ||||||||||||||||||
Diluted |
21,651 | 21,651 |
See notes to unaudited pro forma condensed consolidated financial statements.
TEAM, INC
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
1. | Basis of Presentation: |
Included in this report are a pro forma balance sheet and statement of operations reflecting the pro forma effect of Team, Inc.s (Team, we, our, us or the Company) acquisition of Qualspec Group, LLC (Qualspec), as if the transactions had occurred on June 1, 2014.
The unaudited pro forma condensed consolidated statement of income and balance sheet, are derived from:
| the historical consolidated financial statement (audited) of Team as of and for the 12 months ended May 31, 2015; and |
| the historical consolidated financial statements (audited) of Qualspec as of and for the 12 month period ended December 31, 2014; and |
| the historical consolidated financial statements (unaudited) of Qualspec as of and for the 3 month period ended March 31, 2015 and 2014. |
The Companys historical statement of operations does not include the results of Qualspec as of May 31, 2015. Accordingly, the pro forma adjustments represent the period from June 1, 2014 to May 31, 2015, with pro forma adjustments based on assumptions we have deemed appropriate.
The acquisition and the related adjustments are described in the accompanying notes. In the opinion of Company management, all adjustments have been made that are necessary to present fairly, in accordance with Regulation S-X, the pro forma condensed combined balance sheet and statement of income.
The unaudited pro forma condensed consolidated balance sheet and statement of income is presented for illustrative purposes only, and does not purport to be indicative of the results that would actually have occurred if the acquisition had occurred as presented in such statement or that may be obtained in the future. In addition, future results may vary significantly from the results reflected in such statement due to factors described in Item 1A Risk Factors included in our Annual Report on Form 10-K for the year ended May 31, 2015 filed with the Securities and Exchange Commission. The unaudited pro forma condensed combined balance sheet and statement of income should be read in conjunction with our historical consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended May 31, 2015.
The pro forma statements should also be read in conjunction with the historical combined statements of income and combined balance sheet for Qualspec incorporated by reference herein at Exhibit 99.1 and Exhibit 99.2.
2. | Acquisition Date: |
The acquisition of Qualspec was completed and effective on July 7, 2015 for approximately $260.3 million.
3. | Preliminary Purchase Price Allocation: |
We are in the early stages of determining the fair values of the assets and liabilities assumed. The following table presents the preliminary purchase price for Qualspec:
Cash |
$ | 1,706 | ||
Accounts receivable |
26,892 | |||
Current deferred tax asset |
416 | |||
Prepaid expenses |
1,468 | |||
Plant, property and equipment, net |
15,240 | |||
Intangible assets |
74,700 | |||
Other |
1,945 | |||
Goodwill |
154,570 | |||
|
|
|||
Total assets acquired |
$ | 276,937 | ||
|
|
|||
Accounts payable |
$ | 3,724 | ||
Other accrued liabilities |
10,990 | |||
Current income taxes payable |
904 | |||
Noncurrent deferred tax liability |
1,031 | |||
|
|
|||
Total liabilities assumed |
16,649 | |||
|
|
|||
Net assets acquired |
$ | 260,288 | ||
|
|
4. | Pro Forma Adjustments: |
As noted above, the results of Qualspec are included in the results of the Company effective June 1, 2015. The pro forma statement of income includes adjustments to reflect the acquisition as if it had occurred on June 1, 2014. The unaudited pro forma condensed consolidated balance sheet and statements of income has been adjusted to:
a | Record deferred financing costs related to the underlying debt. |
b | Record fair value allocation for assets and liabilities acquired. |
c | Reflect repayment of existing debt with proceeds. |
d | Record accrued liabilities for estimated professional fees and other costs associated with the transaction and eliminate legal accrual not acquired in transaction. |
e | Reflect incremental increase in long-term debt utilized to fund the acquisition. |
f | Purchase of Qualspec shares. |
g | Adjust for depreciation and amortization of acquired assets and elimination of transaction related expenses. |
h | Record incremental interest expense of $2.9 million based on annual interest expense associated with incremental Team debt of approximately $260.3 million less Qualspec debt paid off at acquisition of $45.5 million. |
i | Adjust the overall pro-forma effective tax rate to reflect the Team effective rate of 36%. |
j | Eliminate loss associated with non-controlling interest purchased at acquisition. |
k | Adjust for management fees paid by Qualspec to previous ownership. |
l | Adjust for settlement of non-routine legal costs. |
We do not expect to incur any significant incremental increase in general and administrative expense as a result of this acquisition.
5. | Calculation of Adjusted EBITDA: |
Team Historical Twelve Months Ended May 31, 2015 |
Qualspec Historical Twelve Months Ended March 31, 2015 |
Pro Forma Adjustments Qualspec Acquisition |
Team Pro Forma Twelve Months Ended May 31, 2015 |
|||||||||||||
Operating income (EBIT) |
$ | 68,465 | $ | 13,994 | $ | (1,563 | ) | $ | 80,896 | |||||||
Non-routine acquisition costs |
486 | | | 486 | ||||||||||||
Non-routine fixed asset write-down |
383 | | | 383 | ||||||||||||
Non-routine acquisition costs |
164 | | | 164 | ||||||||||||
Non-routine legal fees |
1,524 | | | 1,524 | ||||||||||||
Non-routine ERP costs |
609 | | | 609 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted EBIT |
71,631 | 13,994 | (1,563 | ) | 84,062 | |||||||||||
Depreciation and amortization |
22,787 | 7,980 | 2,196 | 32,963 | ||||||||||||
Non-cash compensation |
4,838 | | | 4,838 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted EBITDA |
$ | 99,256 | $ | 21,974 | $ | 633 | $ | 121,863 | ||||||||
|
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