EXHIBIT 99.6
Consolidated Financial Statements
Safety and Ecology
Holdings Corporation
June 26, 2011 and June 27, 2010
with Report of Independent Auditors
Safety and Ecology Holdings Corporation
June 26, 2011 and June 27, 2010
Consolidated Financial Statements
| Report of Independent Auditors | 1 |
| Consolidated Balance Sheets | 2 |
| Consolidated Statements of Operations | 4 |
| Consolidated Statements of Shareholder's Equity | 5 |
| Consolidated Statements of Cash Flows | 6 |
| Notes to Consolidated Financial Statements | 8 |
Report of Independent Auditors
Board of Directors
Safety and Ecology Holdings Corporation
We have audited the accompanying consolidated balance sheets of Safety and Ecology Holdings Corporation (the "Company"), a wholly-owned subsidiary of Homeland Security Capital Corporation as of June 26, 2011 and June 27, 2010, and the statements of operations, shareholder's equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting on a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position as of June 26, 2011 and June 27, 2010, of Safety and Ecology Holdings Corporation, a wholly-owned subsidiary of Homeland Security Capital Corporation, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 13 to the financial statements, all of the Company's issued and outstanding stock has been sold subsequent to June 26, 2011.
 |
September 30, 2011 except Note 13,
as to which the date is October 31, 2011 and
except Note 14, as to which the date
is January 17, 2012
1
Safety and Ecology Holdings Corporation
Consolidated Balance Sheets
June 26 2011 | June 27 2010 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 933,611 | $ | - | ||||
| Trade accounts receivable (less allowance for bad debts of $108,332 in 2011 and $76,419 in 2010) | 16,177,646 | 12,853,251 | ||||||
| Trade accounts receivable from related party | 60,908 | 406,018 | ||||||
| Costs and estimated earnings in excess of billings | 3,106,646 | 7,023,835 | ||||||
| Retainages receivable | 1,212,763 | 2,521,414 | ||||||
| Prepaid expenses and other current assets | 179,328 | 376,045 | ||||||
| Income taxes refundable | 321,760 | - | ||||||
| Deferred income taxes | - | 234,484 | ||||||
| Total current assets | 21,992,662 | 23,415,047 | ||||||
| Property and equipment: | ||||||||
| Furniture and fixtures | 325,410 | 274,863 | ||||||
| Machinery and equipment | 3,782,766 | 3,160,819 | ||||||
| Automobiles and trucks | 630,409 | 608,374 | ||||||
| 4,738,585 | 4,044,056 | |||||||
| Less accumulated depreciation | 4,151,165 | 3,192,124 | ||||||
| Net property and equipment | 587,420 | 851,932 | ||||||
| Other assets: | ||||||||
| Assets held for sale | - | 1,455,141 | ||||||
| Deposits and other assets | 22,569 | 291,496 | ||||||
| Intangible assets (less accumulated amortization o $241,232 in 2011 and $196,674 in 2010) | 302,256 | 346,814 | ||||||
| Goodwill | 7,164,501 | 7,164,501 | ||||||
| Loan issue costs, net | - | 8,000 | ||||||
| Total other assets | 7,489,326 | 9,265,952 | ||||||
| Total assets | $ | 30,069,408 | $ | 33,532,931 | ||||
2
Safety and Ecology Holdings Corporation
Consolidated Balance Sheets (continued)
June 26 2011 | June 27 2010 | |||||||
| Liabilities and shareholder's equity | ||||||||
| Current liabilities: | ||||||||
| Outstanding checks in excess of bank balance | $ | 866,599 | $ | 44,085 | ||||
| Trade accounts payable | 8,134,999 | 7,007,544 | ||||||
| Accounts payable to related party | - | 1,399,298 | ||||||
| Accrued compensation | 2,733,597 | 2,568,857 | ||||||
| Other accrued liabilities | 60,359 | 219,633 | ||||||
| Billings in excess of costs and estimated earnings | 1,508,531 | 661,115 | ||||||
| Income taxes payable | - | 449,170 | ||||||
| Current portion of long-term debt | - | 449,612 | ||||||
| Deferred income taxes | 16,116 | - | ||||||
| Total current liabilities | 13,320,201 | 12,799,314 | ||||||
| Long-term liabilities: | ||||||||
| Deferred income taxes | 365,094 | 559,156 | ||||||
| Long-term debt, less current portion | - | 609,248 | ||||||
| Note payable | - | 2,162,000 | ||||||
| Total long-term liabilities | 365,094 | 3,330,404 | ||||||
| Total liabilities | 13,685,295 | 16,129,718 | ||||||
| Shareholder's equity: | ||||||||
| Common stock; $0.001 par value: Authorized shares - 50,000,000 Issued and outstanding shares - 20 | 1 | 1 | ||||||
| Series A Preferred stock; $0.001 par value: Authorized shares - 25,000,000 Issued and outstanding shares - 10,550,000 | 10,550 | 10,550 | ||||||
| Additional paid-in capital | 15,231,704 | 15,423,455 | ||||||
| Retained earnings | 2,211,952 | 1,952,595 | ||||||
| Accumulated other comprehensive income-foreign currency translation adjustments | (118,113 | ) | (148,768 | ) | ||||
| 17,336,094 | 17,237,833 | |||||||
| Less payments to parent company | 1,288,219 | - | ||||||
| 16,047,875 | 17,237,833 | |||||||
| Noncontrolling interest | 336,238 | 165,380 | ||||||
| Total shareholder's equity | 16,384,113 | 17,403,213 | ||||||
| Total liabilities and shareholder's equity | $ | 30,069,408 | $ | 33,532,931 | ||||
See accompanying Notes to Consolidated Financial Statements.
3
Safety and Ecology Holdings Corporation
Consolidated Statements of Operations
| Year ended | ||||||||
June 26 2011 | June 27 2010 | |||||||
| Net contract revenues | $ | 98,326,785 | $ | 85,921,532 | ||||
| Contract costs and expenses | 84,532,892 | 68,698,494 | ||||||
| Gross margin on contracts | 13,793,893 | 17,223,038 | ||||||
| General and administrative expenses | 12,918,532 | 11,682,795 | ||||||
| Operating income | 875,361 | 5,540,243 | ||||||
| Other expense: | ||||||||
| Interest expense | 87,823 | 227,486 | ||||||
| Impairment loss on equipment held for sale | - | 425,267 | ||||||
| Total other expense | 87,823 | 652,753 | ||||||
| Income before income taxes | 787,538 | 4,887,490 | ||||||
| Provision for income taxes (benefit): | ||||||||
| Current | 152,906 | 2,642,928 | ||||||
| Deferred | 56,537 | (458,827 | ) | |||||
| Net provision for income tax expense | 209,443 | 2,184,101 | ||||||
| Net income | 578,095 | 2,703,389 | ||||||
| Less net income attributable to noncontrolling interest in subsidiary | 318,738 | 137,380 | ||||||
| Net income attributable to Safety and Ecology Holdings Corporation shareholders | $ | 259,357 | $ | 2,566,009 | ||||
See accompanying Notes to Consolidated Financial Statements.
4
Safety and Ecology Holdings Corporation
Consolidated Statements of Shareholders' Equity
Series A Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Payments to Parent Company | Noncontrolling Interest | Total | |||||||||||||||||||||||||
| Balance at July 1, 2010 | $ | 10,550 | $ | 1 | $ | 15,350,904 | $ | (613,414 | ) | $ | (72,324 | ) | $ | - | $ | - | $ | 14,675,717 | ||||||||||||||
| Net income | - | - | - | 2,566,009 | - | - | 137,380 | 2,703,389 | ||||||||||||||||||||||||
| Noncontrolling interest investment in subsidiary | - | - | - | - | - | - | 28,000 | 28,000 | ||||||||||||||||||||||||
| Stock compensation | - | - | 72,551 | - | - | - | - | 72,551 | ||||||||||||||||||||||||
| Cumulative translation adjustments | - | - | - | - | (76,444 | ) | - | - | (76,444 | ) | ||||||||||||||||||||||
| Balance at June 27, 2010 | $ | 10,550 | $ | 1 | $ | 15,423,455 | $ | 1,952,595 | $ | (148,768 | ) | $ | - | $ | 165,380 | $ | 17,403,213 | |||||||||||||||
| Net income | - | - | - | 259,357 | - | - | 318,738 | 578,095 | ||||||||||||||||||||||||
| Noncontrolling interest investment in subsidiary | - | - | - | - | - | - | (10,500 | ) | (10,500 | ) | ||||||||||||||||||||||
| Member distribution | - | - | - | - | - | - | (137,380 | ) | (137,380 | ) | ||||||||||||||||||||||
| Stock buyout | - | - | (191,751 | ) | - | - | - | - | (191,751 | ) | ||||||||||||||||||||||
| Payments to parent company | - | - | - | - | - | (1,288,219 | ) | - | (1,288,219 | ) | ||||||||||||||||||||||
| Cumulative translation adjustments | - | - | - | - | 30,655 | - | - | 30,655 | ||||||||||||||||||||||||
| Balance at June 26, 2011 | $ | 10,550 | $ | 1 | $ | 15,231,704 | $ | 2,211,952 | $ | (118,113 | ) | $ | (1,288,219 | ) | $ | 336,238 | $ | 16,384,113 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
Safety and Ecology Holdings Corporation
Consolidated Statements of Cash Flows
| Year ended | ||||||||
June 26 2011 | June 27 2010 | |||||||
| Operating activities | ||||||||
| Net income | $ | 578,095 | $ | 2,703,389 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Impairment loss on equipment held for sale | - | 425,267 | ||||||
| Depreciation and amortization | 1,308,016 | 1,995,185 | ||||||
| Deferred income taxes | 56,538 | (458,827 | ) | |||||
| Share-based compensation expense | 658,249 | 72,551 | ||||||
| Gain on sale of assets | (90,584 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (2,015,744 | ) | (3,788,311 | ) | ||||
| Trade accounts receivable from related party | 345,110 | 166,799 | ||||||
| Costs and estimated earnings in excess of billings | 3,917,189 | (3,651,946 | ) | |||||
| Prepaid expenses and other current assets | 168,504 | (196,325 | ) | |||||
| Accounts payable, accrued expenses and other liabilities | 1,132,921 | (819,591 | ) | |||||
| Accounts payable to related party | (1,399,298 | ) | 1,179,100 | |||||
| Income taxes payable | (770,930 | ) | 432,595 | |||||
| Billings in excess of costs and estimated earnings | 847,416 | (37,647 | ) | |||||
| Net cash provided by (used in) operating activities | 4,735,482 | (1,977,761 | ) | |||||
| Investing activities | ||||||||
| Purchases of property and equipment | (693,806 | ) | (353,981 | ) | ||||
| Proceeds from assets held for sale | 1,545,725 | - | ||||||
| Net cash provided by (used in) financing activities | 851,919 | (353,981 | ) | |||||
| Financing activities | ||||||||
| Net (payments) borrowings on line of credit | (2,162,000 | ) | 1,650,000 | |||||
| Principal payments on long-term debt | (1,058,860 | ) | (970,175 | ) | ||||
| Net change in outstanding checks in excess of bank balances | 822,514 | 44,085 | ||||||
| Investment (paid) received for interest in subsidiary | (10,500 | ) | 28,000 | |||||
| Payments to parent company | (1,288,219 | ) | - | |||||
| Distribution to noncontrolling interest in subsidiary | (137,380 | ) | - | |||||
| Buyout of employee stock options | (850,000 | ) | - | |||||
| Net cash (used in) provided by financing activities | (4,684,445 | ) | 751,910 | |||||
| Effect of exchange rate changes on cash and cash equivalents | 30,655 | (76,444 | ) | |||||
6
Safety and Ecology Holdings Corporation
Consolidated Statements of Cash Flows
| Year ended | ||||||||
June 26 2011 | June 27 2010 | |||||||
| Net increase (decrease) in cash and cash equivalents | $ | 933,611 | $ | (1,656,276 | ) | |||
| Cash and cash equivalents at beginning of year | - | 1,656,276 | ||||||
| Cash and cash equivalents at end of year | $ | 933,611 | $ | - | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for interest | $ | 97,903 | $ | 202,089 | ||||
| Net cash paid for income taxes | 923,836 | 49,514 | ||||||
See accompanying Notes to Consolidated Financial Statements.
7
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements
June 26, 2011
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company is a wholly owned subsidiary of Homeland Security Capital Corporation. The Company is primarily engaged in the business of providing project management and consulting services in the environmental and waste management field and has customers throughout the United States. Safety and Ecology Corporation Limited ("SECL"), a wholly owned subsidiary, provides a comprehensive range of specialist environmental engineering consulting services in the United Kingdom.
The Company's fiscal year is the last Sunday in June, or June 26, 2011 and June 27, 2010, respectively. All references in these financial statements are to the fiscal year-end unless otherwise specified.
Principles of Consolidation
The consolidated financial statements include the accounts of Safety and Ecology Holdings Corporation and its majority-owned subsidiaries, Safety and Ecology Corporation ("SECL"), a United Kingdom corporation, and SEC Radcon Alliance, LLC ("SECRA") which began operations in February 2010. During 2010, the Company owed 60% of SECRA. During 2011, the Company purchased an additional 15% of SECRA for $10,500 and owns 75% of SECRA as of December 31, 2011. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amount of items included in working capital approximates fair value because of the short maturity of those instruments. The carrying value of the Company's debt approximates fair value because it bears interest at rates that are similar to current borrowing rates for loans of comparable terms, maturity and credit risk that are available to the Company.
Revenues and Cost Recognition
Revenues are derived primarily from services performed under fixed fee and time and materials contracts. Revenues and costs derived from fixed price contracts are recognized using the percentage of completion (efforts expended) method.
8
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
Revenues and Cost Recognition (continued)
Contract costs include all direct labor, materials, and other non-labor costs and those indirect costs related to contract support, such as fringe benefits, overhead labor, depreciation, supplies, tools, repairs and equipment rental. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Because of inherent uncertainties in estimating costs, it is at least reasonably possible the estimates used will change within the near term.
The asset, "costs and estimated earnings in excess of billings", represents revenues recognized in excess of billed amounts and approximately $2,391,000 in unbilled claims for costs incurred in excess of contracted amounts for which the Company believes they have a legal right to recover. However, the ultimate realization is subject to the change in the near term. The liability, "billings in excess of costs and estimated earnings", represents billings in excess of revenues recognized and accrued costs to jobs.
The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. Cash consists of cash on hand and deposits in banks.
Trade accounts receivable are recorded at their estimated net realizable values using the allowance method. The Company generally does not require collateral from customers. Management periodically reviews accounts for collectability, including accounts determined to be delinquent based on contractual terms. An allowance for doubtful accounts is maintained at the level management deems necessary to reflect anticipated credit losses. When accounts are determined to be uncollectible, they are charged off against the allowance for bad debts.
Property and equipment is stated at cost. Major renewals and improvements are capitalized, while replacements, maintenance and repairs, which do not improve or extend the life of the respective assets, are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
9
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
During 2010, the Company completed a contract and began to seek buyers for certain equipment used for the completed contract. The equipment was classified as held for sale on the accompanying consolidated balance sheet at fair value and an impairment loss of $425,267 was recognized on the accompanying consolidated statement of operations in 2010. During 2011, the equipment was sold for approximately $1,510,000 and the related equipment note of $1,058,860 was satisfied with the proceeds from the sale.
Goodwill and Other Intangible Assets
Intangible assets consist of goodwill, non-compete agreements, contracts and trademarks. Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired. Goodwill is an indefinite lived asset and is not amortized. Other intangibles, excluding trademarks, are amortized on a straight-line basis over their estimated useful lives. Trademarks were determined to have indefinite useful lives and accordingly are not subject to amortization.
The Company reviews the carrying amounts of goodwill and intangible assets at least annually and impairment losses are recognized if the carrying value of the intangible exceeds its fair value. The Company did not incur any charges for impairment in 2011 or 2010.
Loan Issue Costs
Loan issue costs are amortized on a straight line basis over the term of the related debt. These unamortized costs amounted to $8,000 as of June 27, 2010, and were fully amortized as of June 26, 2011. Amortization expense totaled $8,000 in 2011 and $74,526 in 2010.
Income Taxes
The amount provided for income taxes is based upon the amounts of current and deferred taxes payable or refundable at the date of the financial statements as a result of all events recognized in the financial statements as measured by the provisions of enacted tax laws.
10
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Summary of Significant Accounting Policies (continued)
Income Taxes (continued)
The Company evaluates its uncertain tax positions and a loss would be recognized when it is probable that a liability has been incurred as of the date of the financial statements and the amount of the loss can be reasonably estimated. The amount that would be recognized is subject to estimate and management's assessment of relevant risks, facts and circumstances for each uncertain tax position. To the extent the Company's assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company reports any tax-related interest and penalties as a component of income tax expense. The Company is subject to federal and state income taxes in which the Company operates. Tax years subject to examination by federal and state jurisdictions include 2007 and after.
Foreign Operations
SECL, a United Kingdom Corporation, which is wholly owned by the Company had total assets of $128,353 and $214,136, and total liabilities of $11,720 and $752,711 as of June 26, 2011 and June 27, 2010, respectively. SECL incurred a net loss of $112,630 in 2011 and $442,788 in 2010. The results of SECL are included in the accompanying consolidated financial statements. The financial statements of SECL are translated using exchange rates in effect at year-end for assets and liabilities and average exchange rates during the year for results of operations. The related translation adjustments are reported as a separate component of shareholder's equity.
Stock Based Compensation
Share based payment awards that result in a cost are measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest and are reflected as compensation cost in the financial statements.
Reclassifications
Certain balances in the prior year have been reclassified to conform with 2011 classifications.
11
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
2. Intangible Assets
Intangible assets consist of the following as of June 26, 2011:
| Amount | Amortization Period | ||||
| Depreciable intangibles: | |||||
| Non-compete agreements | $ | 92,665 | 1 Year | ||
| Contracts | 445,823 | 10 Years | |||
| 538,488 | |||||
| Less accumulated amortization | (241,232 | ) | |||
| 297,256 | |||||
| Non-depreciable intangibles: | |||||
| Trademarks | 5,000 | ||||
| Intangible assets, net | $ | 302,256 | |||
Amortization expense for intangibles was approximately $45,000 during 2011 and 2010. Amortization costs for the next five years are expected to be approximately $45,000 per year.
3. Note Payable and Long-Term Debt Long-term debt consists of the following:
| 2011 | 2010 | |||||||
| Note payable due in monthly installments of $36,296 including interest at 5.22%, collateralized by equipment with original cost of $1,993,212. Repaid in 2011. | $ | - | $ | 1,058,860 | ||||
| Less current portion | - | 449,612 | ||||||
| Long-term portion | $ | - | $ | 609,248 | ||||
As of June 26, 2011, the company does not have any future maturities of long-term debt.
12
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
3. Note Payable and Long-Term Debt (continued)
The Company has a bank line of credit (the "Line of Credit"), however no amount was outstanding at June 26, 2011. The Line of Credit is secured by substantially all of the Company's assets and provides the Company an $8,000,000 revolving line of credit available for working capital needs of the Company and its current and future subsidiaries, including an inter-company facility for credit to foreign operations. Borrowings under the Line of Credit are limited by collateral formulas, based principally upon the Company's domestic accounts receivable ($8,000,000 available at June 26, 2011). The agreement requires the Company to maintain a minimum working capital (as defined) and restricts payments of dividends or distributions to shareholders and affiliates. The interest rate is determined at LIBOR plus a margin determined on a quarterly basis based on certain funded debt to EBITDA ratios and was 3.00% as of June 26, 2011. The Line of Credit also provides for the issuance of up to $4,000,000 in letters of credit subject to certain provisions. The Company had no letters of credit outstanding as of June 26, 2011.
4. Employee Benefit Plans
The Company has a 401(k) profit sharing plan covering substantially all its employees. Employees are allowed to make before-tax contributions to the plan, through salary reduction, up to the legal limits as described under the Internal Revenue Code. The Company's contributions to the plan totaled $432,532 in 2011 and $332,481 in 2010.
SECL has a group stakeholder pension scheme for the benefit of its employees. The plan covers substantially all SECL employees and provides for SECL to contribute at least three percent of the eligible employee's compensation to the plan. SECL did not make any contributions in 2011 and contributed $610 in 2010.
5. Equity Incentive Plan
The Company has a 2008 Equity Incentive Plan (the "2008 Plan") which provides for up to 964,669 options to be granted to executive and non-executive employees to purchase shares of Common Stock of the Company.
A total of 964,669 options were available under this plan with a weighted average fair market value of $1.24 per share as determined by the Company, based on a pricing model approved by the Company. During the year, all options outstanding and exercisable were purchased by the company for $850,000. Compensation expense totaled $658,249 in 2011 and $72,551 in 2010 related to the 2008 Plan.
13
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
6. Leases
The Company has a lease agreement for office space with an entity owned by the Company's CEO. The Company recognized rent expense under this agreement of $344,028 in 2011 and 2010.
The Company also leases office space, equipment and warehouse space under noncancelable operating leases expiring on various dates through 2011. Total rental expense for all noncancelable operating leases, excluding the office lease above, totaled $304,893 in 2011 and $278,177 in 2010.
Future minimum lease payments for all noncancellable leases, by year and in the aggregate, consist of the following as of June 26, 2011:
| Related Party | Other | Total | ||||||||||
| 2012 | $ | 344,028 | $ | 225,144 | $ | 569,172 | ||||||
| 2013 | 344,028 | 29,330 | 373,358 | |||||||||
| 2014 | 344,028 | - | 344,028 | |||||||||
| 2015 | 344,028 | - | 344,028 | |||||||||
| 2016 | 344,028 | - | 344,028 | |||||||||
| Thereafter | 659,381 | - | 659,381 | |||||||||
| $ | 2,379,521 | $ | 254,474 | $ | 2,633,995 | |||||||
7. Series A Convertible Preferred Stock
All of the issued and outstanding shares of the Company's Series A Preferred Stock is held by HSCC and is pledged as collateral on certain hScC debt. Each Preferred Share accrues dividends cumulatively at the rate of eight percent (8%) per annum. Preferred dividends are approximately $2,778,167 in arrears as of June 26, 2011. Each preferred share is convertible into one share of the Company's common stock at any time by HSCC, subject to adjustment for stock dividends, stock splits, and similar events. Each Preferred Share is entitled to one vote as if converted into Company common stock. The holders of the outstanding Preferred Shares vote as a class on certain matters and will have the right to designate a majority of the board of directors of the Company. Each Preferred Share has a liquidation preference of $1.00 per share plus any accrued and unpaid dividends.
8. Concentration of Credit Risk
During the year ended June 26, 2011, the Company had three customers which accounted for 22%, 20%, and 11%, respectively of contract revenues. As of June 26, 2011, there were two customers who accounted for 27% and 23% of customer receivables. As of June 27, 2010, there were three customers which accounted for 21%, 18%, and 15%, respectively of contract revenues and five customers who comprised 45% of customer receivables.
14
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The Company is included in the consolidated federal income tax return of HSCC. The Company has a tax sharing arrangement which requires it to make tax payments to HSCC equal to the Company's liability as if it filed a separate return. The Company paid HSCC approximately $1,300,000 in 2011 and $364,000 in 2010 related to the tax sharing arrangement.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities at June 26, 2011, are as follows:
Non-United States | United States | Total | ||||||||||
| Deferred tax assets: | ||||||||||||
| Accrued vacation | $ | - | $ | 51,476 | $ | 51,476 | ||||||
| Allowance for bad debts | - | 41,480 | 41,480 | |||||||||
| Other | - | 17,577 | 17,577 | |||||||||
| Net operating loss carryforwards | 502,846 | - | 502,846 | |||||||||
| Deferred tax asset | - | 110,533 | 613,379 | |||||||||
| Valuation allowance for deferred tax assets | (502,846 | ) | - | (502,846 | ) | |||||||
| Net deferred tax asset | - | 110,533 | 110,533 | |||||||||
| Deferred tax liabilities: | ||||||||||||
| Prepaid expenses | - | (40,567 | ) | (40,567 | ) | |||||||
| Tax over book depreciation | - | (251,290 | ) | (251,290 | ) | |||||||
| Amortization of intangibles | - | (113,804 | ) | (113,804 | ) | |||||||
| Other | - | (86,082 | ) | (86,082 | ) | |||||||
| Total deferred tax liabilities | - | (491,743 | ) | (491,743 | ) | |||||||
| Net deferred tax liabilities | - | (381,210 | ) | (381,210 | ) | |||||||
| Less portion classified as current liability | - | (16,116 | ) | (16,116 | ) | |||||||
| Portion classified as long-term liability | $ | - | $ | (365,094 | ) | $ | (365,094 | ) | ||||
15
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
For financial statement purposes, a valuation allowance has been established to offset the benefit of non-United States net operating loss carryforwards due to uncertainties surrounding their ultimate realization. This valuation allowance increased by $22,526 in 2011 and $78,884 in 2010.
Significant components of the Company's deferred tax assets and liabilities at June 27, 2010, are as follows:
Non-United States | United States | Total | ||||||||||
| Deferred tax assets: | ||||||||||||
| Accrued vacation | $ | - | $ | 41,622 | $ | 41,622 | ||||||
| Allowance for bad debts | - | 28,973 | 28,973 | |||||||||
| Other | - | 196,185 | 196,185 | |||||||||
| Net operating loss carryforwards | 480,320 | - | 480,320 | |||||||||
| Deferred tax asset | 480,320 | 266,780 | 747,100 | |||||||||
| Valuation allowance for deferred tax assets | (480,320 | ) | - | (480,320 | ) | |||||||
| Net deferred tax asset | - | 266,780 | 266,780 | |||||||||
| Deferred tax liabilities: | ||||||||||||
| Prepaid expenses | - | (32,296 | ) | (32,296 | ) | |||||||
| Tax over book depreciation | - | (428,282 | ) | (428,282 | ) | |||||||
| Amortization of intangibles | - | (130,874 | ) | (130,874 | ) | |||||||
| Total deferred tax liabilities | - | (591,452 | ) | (591,452 | ) | |||||||
| Net deferred tax liabilities | - | (324,672 | ) | (324,672 | ) | |||||||
| Less portion classified as current asset | - | 234,484 | 234,484 | |||||||||
| Portion classified as long-term liability | $ | - | $ | 559,156 | $ | 559,156 | ||||||
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Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
Significant components of the provision for income tax (benefit) expense are as follows:
| 2011 | 2010 | |||||||
| Current United States-Federal | $ | 152,906 | $ | 2,642,928 | ||||
| Non-United States | - | - | ||||||
| Deferred: | ||||||||
| United States: | ||||||||
| Federal | 37,314 | (406,933 | ) | |||||
| State | 19,223 | (51,894 | ) | |||||
| Total deferred United States | 56,537 | (458,827 | ) | |||||
| Net provision for income tax expense | $ | 209,443 | $ | 2,184,101 | ||||
The Company's income tax provision (benefit) differs from that obtained by using the federal statutory rate of 34% as a result of the following:
| 2011 | 2010 | |||||||
| Federal income taxes at 34% | $ | 306,057 | $ | 1,661,748 | ||||
| Non-United States loss | - | 150,548 | ||||||
| Effect of permanent differences | (37,995 | ) | - | |||||
| Other | (125,144 | ) | 91,185 | |||||
| State income taxes | 66,525 | 280,620 | ||||||
| Net income tax expenses | $ | 209,443 | $ | 2,184,101 | ||||
10. Changes in Estimates
Revisions in contract profits are made in the period in which circumstances requiring the revision become known. The effect of changes in estimates of contract profits was to decrease net income by approximately $1,900,000 in 2011 from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in the proceeding period.
11. Contingencies
During the ordinary course of business, the Company is subject to various other disputes and claims pertaining to contracts, and there are uncertainties surrounding the ultimate resolution of these matters. Because of these uncertainties, it is at least reasonably possible the amounts recorded will change within the near term.
17
Safety and Ecology Holdings Corporation
Notes to Consolidated Financial Statements (continued)
12. Related Party Transactions
The Company paid HSCC management fees of $240,000 in 2011 and 2010. During 2010, the Company also paid HSCC accounting fees totaling $400,000. The Company also provided certain management and public relations support to HSCC totaling approximately $165,000 in 2011 and $223,000 in 2010.
At December 31, 2011, the Company had outstanding advances to HSCC totaling $1,288,219. As the advances are not expected to be repaid by HSCC, the advances have been classified as a reduction in shareholder's equity.
13. Subsequent Events
Subsequent to June 26, 2011, HSCC entered into an agreement to sell the Company. On October 31, 2011 all the issued and outstanding shares of the Company's stock have been sold.
14. Subsequent Contract Losses
Subsequent to September 30, 2011, management determined the Company has incurred additional estimated losses on two contracts. On one contract, certain requests for equitable adjustment (REA) totaling approximately $1,800,000 were rejected. These REA’s were included in costs and estimated earnings in excess of billings on the accompanying financial statements as of June 26, 2011. Also, the Company anticipates additional losses on another contract in progress as of June 26, 2011; however, the amount of loss has not been determined.
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