UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
July 31, 2001
Date of Report (Date of earliest event reported)
KFx INC.
(Exact name of Registrant as specified in its charter)
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Delaware 0-23634 84-1079971
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(State or other jurisdiction of Commission File Number IRS Employer
incorporation or organization) Identification Number
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3300 East 1/st/ Avenue, Suite 290
Denver, Colorado, USA 80206
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(Address of principal executive offices) (Zip Code)
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(303) 293-2992
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(Registrant's telephone number,
including area code)
EXPLANATORY NOTE
This Form 8-K/A amends Item 7 of the current report on Form 8-K filed by KFx
Inc. on August 15, 2001 to include financial statements that were not available
at the time of the filing of the initial report.
Item 7. FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
PAGE NO.
a) Financial Statements of the Business Acquired
Report of Independent Accountants F-1
Balance Sheets F-2
Statement of Operations F-3
Statement of Cash Flows F-4
Notes to Financial Statements F-5
b) Unaudited Pro Forma Combined Financial Statements F-13
Unaudited Pro Forma Combined Balance Sheet F-15
Unaudited Pro Forma Combined Statement of Operations F-16
Notes to Unaudited Pro Forma Combined Financial Statements F-17
c) Exhibits
2
Item 7(a). Financial Statements of the Business Acquired - Financial statements
of the Power Optimization Division of Pavilion Technologies, Inc. as of and for
the years ended March 31, 2001 and 2000 and the three months ended June 30, 2001
and 2000.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Pavilion Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, and cash flows present fairly, in all material respects, the
financial position of the Power Optimization Division of Pavilion Technologies,
Inc. as of March 31, 2001 and 2000, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Pavilion Technologies, Inc. management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Power
Optimization Division will continue as a going concern. As discussed in Note 1
to the financial statements, the Power Optimization Division has suffered
recurring losses and negative cash flows from operations and has an accumulated
deficit of $732,000 at March 31, 2001. These factors, among others, raise
substantial doubt about the Power Optimization Division's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 1, the assets of the Power Optimization Division were
acquired by KFx Inc. on July 31, 2001.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Denver, Colorado
October 12, 2001
F-1
Power Optimization Division
(a division of Pavilion Technologies, Inc.)
BALANCE SHEETS
(In thousands)
March 31, June 30,
------------------ ----------------
2001 2000 2001 2000
ASSETS (unaudited)
Current assets:
Accounts receivable $ 183 $ 430 $ 43 $ 176
Prepaid expenses -- 12 -- --
Unbilled revenue 8 5 50 14
------- ------- ------- -------
Total current assets 191 447 93 190
Property and equipment, net 27 34 21 32
------- ------- ------- -------
Total assets $ 218 $ 481 $ 114 $ 222
======= ======= ======= =======
LIABILITIES AND PARENT COMPANY DEFICIT
Current liabilities
Accounts payable $ 495 $ 13 $ 279 $ --
Accrued liabilities 81 23 317 35
Deferred revenue 374 623 223 584
------- ------- ------- -------
Total current liabilities 950 659 819 619
Deferred revenue, net of current portion -- 105 -- 105
Commitment and contingencies (see Note 7)
Parent Company deficit:
Parent Company deficit (732) (283) (705) (502)
------- ------- ------- -------
Total Parent Company deficit (732) (283) (705) (502)
------- ------- ------- -------
Total liabilities and Parent Company
deficit $ 218 $ 481 $ 114 $ 222
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-2
Power Optimization Division
(a division of Pavilion Technologies, Inc.)
STATEMENT OF OPERATIONS
(In thousands)
Year Ended March 31, Three Months Ended June 30,
------------------------------ ---------------------------------
2001 2000 2001 2000
(unaudited)
OPERATING REVENUES
Software licenses and services $ 1,775 $ 2,015 $ 227 $ 476
OPERATING COSTS AND EXPENSES
Cost of software licenses and services 1,692 1,008 221 410
Research and development 222 457 67 45
Sales and marketing 1,016 436 231 215
General and administrative 1,170 483 273 102
--------------- --------------- --------------- ------------------
Loss from operations (2,325) (369) (565) (296)
Interest income 25 11 14 5
Interest expense (329) (201) (15) (76)
--------------- --------------- --------------- ------------------
Net loss $ (2,629) $ (559) $ (566) $ (367)
=============== =============== =============== ==================
The accompanying notes are an integral part of these financial statements.
F-3
Power Optimization Division
(a division of Pavilion Technologies, Inc.)
STATEMENT OF CASH FLOWS
(In thousands)
Year Ended March 31, Three Months Ended June 30,
------------------------------ ---------------------------------
2001 2000 2001 2000
Cash flows from operating activities: (unaudited)
Net loss $ (2,629) $ (559) $ (566) $ (367)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 21 18 6 6
Change in current assets and current
liabilities:
Accounts receivable 247 (222) 140 254
Prepaid expenses 12 (3) -- 12
Unbilled revenue (3) 11 (42) (9)
Accounts payable 482 2 (216) (13)
Accrued liabilities 58 (33) 236 12
Deferred revenue (354) 11 (151) (39)
-------------- ------------- -------------- ---------------
Net cash used in operating activities (2,166) (775) (593) (144)
-------------- ------------- -------------- ---------------
Cash flows from investing activities:
Acquisitions of capital assets (14) -- -- (4)
-------------- ------------- -------------- ---------------
Net cash used in investing activities (14) -- -- (4)
-------------- ------------- -------------- ---------------
Cash flows from financing activities:
Net cash transfers from Parent 2,180 775 593 148
-------------- ------------- -------------- ---------------
Net cash provided by financing activities 2,180 775 593 148
-------------- ------------- -------------- ---------------
Net change in cash and cash equivalents -- -- -- --
Cash and cash equivalents at beginning of period -- -- -- --
-------------- ------------- -------------- ---------------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ --
============== ============= ============== ===============
The accompanying notes are an integral part of these financial statements.
F-4
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Power Optimization Division of Pavilion Technologies (the "Power
Optimization Division") is a division of Pavilion Technologies, Inc.
("Pavilion" or "Parent Company") that has been designated as a division
solely for the purpose of presenting these financial statements. The Power
Optimization Division is not a separate legal entity, but rather a carve-
out of a division of the Parent Company. The Power Optimization Division
develops, markets and licenses modeling and optimization software for use
in the control of complex enterprise processes to customers in the power
generation industry.
Pursuant to an Asset Purchase and License Agreement (the "Purchase
Agreement") between Pavilion, Pegasus Technologies, Inc. ("Pegasus"), a
subsidiary of KFx Inc. ("KFx"), and KFx, dated July 31, 2001, certain
assets and liabilities relating to the Power Optimization Division were
acquired by Pegasus. These purchased assets and acquired liabilities were
primarily accounts receivable, unbilled revenue, deposits, customer list,
exclusive rights to license Pavilion's software, other intangibles and
deferred revenue. Pavilion has retained certain liabilities of the Power
Optimization Division, including but not limited to Pavilion indemnifying
Pegasus regarding the intellectual property of Pavilion's software being
licensed. The Purchase Agreement provided for a base price of $9,500,000 in
cash, payable to Pavilion in installments through July 31, 2003, which is
adjusted for the net of assets and liabilities assumed. Additionally,
Pegasus shall pay Pavilion royalties of up to $5,500,000 between August 1,
2001 and October 31, 2005, based on Pavilion and Pegasus software licenses
sold by Pegasus. KFx guarantees the duties and obligations of Pegasus under
the Purchase Agreement.
BASIS OF PRESENTATION
The accompanying financial statements reflect the carve-out historical
results of operations and financial position of the Power Optimization
Division as if the Power Optimization Division had been operating as a
separate business and have been prepared using Pavilion's historical basis
in the assets and liabilities and historical results of operations of the
Power Optimization Division.
The Power Optimization Division was fully integrated within Pavilion and
these financial statements reflect the application of estimates and
allocations described herein. Pavilion has provided all of the necessary
funding for the operations of the Power Optimization Division, including
paying all vendors and employees since the Power Optimization Division's
inception. Any cash flows generated by the Power Optimization Division
revert back to Pavilion. Changes in Parent Company deficit represent
increases or decreases in Pavilion's net investment in the Power
Optimization Division, after giving effect to the net losses of the Power
Optimization Division.
The Power Optimization Division's statement of operations includes all
costs that could be directly attributable to the Power Optimization
Division, primarily employee compensation. In addition, certain other
expenses, primarily research and development, sales and marketing, and
general and administrative costs of Pavilion have
F-5
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
been allocated to the Power Optimization Division (see Note 2) on various
bases that, in the opinion of management, are reasonable.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. If operated on a stand alone
basis, the Power Optimization Division would have incurred losses of
approximately $2,629,000 and $559,000 and negative cash flow from operations
of $2,166,000 and $775,000 in fiscal 2001 and 2000, respectively. These
factors coupled with the need for additional financing to fund planned
growth in the business raise substantial doubt about whether the Power
Optimization Division can continue as a going concern. Accordingly, the plan
of Pavilion management was to sell the Power Optimization Division. The
Power Optimization Division was sold to Pegasus on July 31, 2001, as noted
above. The financial statements do not include any adjustments that might
result from this uncertainty.
The accompanying interim financial statements of the Power Optimization
Division have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and
regulations. However, Pavilion believes that the disclosures are adequate to
make the information presented not misleading.
The unaudited financial statements included herein have been prepared on the
same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments necessary for a fair
presentation in accordance with accounting principles generally accepted in
the United States of America. The results for the three-month period ended
June 30, 2001 are not necessarily indicative of the results expected for the
full fiscal year.
The following summarizes the changes to Parent Company Deficit as if the
Power Optimization Division was on a stand alone basis:
Total Parent
Company
Deficit
Balance at April 1, 1999 $ (499)
Net advances to Power Optimization Division by Parent Company 775
Net loss (559)
------------------
Balance at March 31, 2000 (283)
Net advances to Power Optimization Division by Parent Company 2,180
Net loss (2,629)
------------------
Balance at March 31, 2001 $ (732)
==================
FOREIGN CURRENCY TRANSLATION
The Belgian subsidiary of Pavilion is the only Foreign subsidiary where
there is activity related to the Power Optimization Division. The functional
currency of the Belgium subsidiary is the local currency. The translation of
asset and liability balances to U.S. dollars is based on exchange rates as
of each balance sheet date. The statements of operations and cash flows
amounts are translated at the average exchange rates for the period.
Transaction gains and losses and unrealized gains and losses on short-term
intercompany receivables and payables are included in income or loss as
incurred. Net foreign exchange transaction losses are included in general
and administrative expenses and totaled $28,190 and $0 in fiscal 2001 and
2000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America require
management to make estimates and assumptions that affect 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Power Optimization Division's financial
instruments, which include accounts payable and accrued expenses,
approximate fair value due to their short maturities.
CONCENTRATION OF CREDIT RISK
Accounts receivable is comprised of amounts due from customers of the Power
Optimization Division. During the years ended March 31, 2001 and 2000, three
and four customers accounted for approximately 49% and 80% of the Power
Optimization Division's total revenue, respectively, and three customers
accounted for 85% and 89% of total accounts receivable as of March 31, 2001
and 2000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on the
straight-line method over the respective estimated useful lives of six years
for furniture, fixtures, and office equipment and three to five years for
computer equipment. Expenditures for maintenance and repairs are charged to
operations as incurred.
F-6
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
REVENUE RECOGNITION
The Power Optimization Division recognizes revenue in accordance with the
provisions of Statement of Position 97-2, "Software Revenue Recognition."
The Power Optimization Division derives revenues from license fees, for the
Power Optimization Division's software, and services, including
installation, implementation, maintenance and training, under the terms of
both fixed-price and time-and-materials contracts. Revenues are not
recognized until persuasive evidence of an arrangement exists, either by way
of a signed contract or signed purchase order.
Where services are essential to the functionality of the delivered software,
the license fee and services revenue are generally recognized using the
percentage-of-completion method of accounting, as prescribed by SOP 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts". The percentage of completion for each contract is determined
based on the ratio of direct labor hours incurred to total estimated direct
labor hours required to complete the contract. The Power Optimization
Division may periodically encounter changes in costs, estimated costs and
other factors that may lead to a change in the original estimated
profitability of a fixed-price contract. In such circumstances, adjustments
to cost and profitability estimates are made in the periods in which the
underlying factors requiring such revisions become known. If such revisions
indicate a loss on a contract, the entire loss is recorded at such time.
Amounts billed in advance of services being performed are recorded as
deferred revenue. Unbilled work-in-progress represents revenue earned but
not yet billable under the terms of fixed price contracts and all such
amounts are expected to be billed in accordance with performance milestones
specified in the contract with the client and collected within twelve
months.
Services revenue provided under fixed-price contracts is generally
recognized using the percentage completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed. Annual maintenance
revenue is recorded as deferred revenue and recognized ratably over the
service period, which is generally twelve months.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed", requires the capitalization of certain software
development costs once technological feasibility is established.
Capitalization ceases when such software is ready for general availability.
To date, the period between achieving technological feasibility and general
availability has been relatively short. Consequently, software development
costs qualifying for capitalization have been insignificant and therefore,
such costs have been expensed.
INCOME TAXES
Pavilion accounts for income taxes under the liability method. The Power
Optimization Division is not a separate legal or taxable entity,
accordingly, operating results historically have been included in Pavilion's
U.S. and state income tax returns. The provision for income taxes in the
Power Optimization Division's financial statements has been determined on a
separate-return basis. Deferred tax assets and liabilities are recorded for
the estimated future tax effects of temporary differences between the tax
bases of assets and liabilities and amounts reported in the accompanying
balance sheet, as well as operating loss carryforwards. Deferred tax assets
are reduced by a valuation allowance if current evidence indicates that it
is considered more likely than not that these benefits will not be realized.
ACCOUNTING FOR STOCK BASED COMPENSATION
Pavilion applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost for options granted to employees whose exercise price is
equal to or exceeds the fair value of Pavilion's common stock ("Common
Stock") as of the grant date. Pavilion provides disclosures required by SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock-based
awards to nonemployees are accounted for under the provisions of SFAS 123.
The Power Optimization Division did not have any equity issuances.
F-7
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
LONG LIVED ASSETS
The Power Optimization Division evaluates long-lived assets, based on fair
values or an undiscounted cash flow basis, whichever is more readily
determinable, whenever circumstances occur which indicate the carrying
amount may not be recoverable. If that analysis indicates that an impairment
has occurred, any loss is measured based on a comparison of discounted cash
flows or fair values, whichever is more determinable, to the carrying value
of the related asset.
COMPREHENSIVE LOSS
The Power Optimization Division has no components of other comprehensive
loss and, accordingly, the comprehensive loss is the same as net loss for
the periods presented.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense, which is
included in sales and marketing in the statement of operations, totaled
$6,813 and $35,560 for the years ended March 31, 2001 and 2000,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("FAS 141") and Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142").
FAS 141 requires that all purchase business combinations must be accounted
for using the purchase method. Under this method, the purchase price of an
acquired business is allocated to the individual tangible and intangible
assets acquired and liabilities assumed based on the estimated fair values
at the date of acquisition. If the purchase price exceeds the amounts
assigned to assets acquired and liabilities assumed, the excess is
recognized as goodwill. Acquired intangible assets that do not meet certain
criteria for recognition apart from goodwill are included in the amount
initially recognized as goodwill. FAS 141 is effective for all business
combinations initiated after June 30, 2001.
FAS 142 requires that after a company allocates the purchase price in
accordance with FAS 141, the assets acquired, liabilities assumed, and
goodwill must be assigned to one or more reporting units based upon certain
criteria outlined in FAS 142. In addition, goodwill will no longer be
amortized. Instead, companies are required to test goodwill for impairment
at the reporting unit level. If the carrying amount of reporting unit
goodwill exceeds its implied fair value, that excess should be recognized as
an impairment loss. FAS 142 is effective for the Power Optimization Division
for any goodwill acquired in a business combinations entered into after June
30, 2001. The remaining provisions of the Statement are effective for the
fiscal year ending March 31, 2003.
On October 3, 2001, the FASB issued Statement of Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 supercedes FAS 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS 144 applies
to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30 (APB 30),
Reporting Results of Operations -Reporting the Effects of Disposal of a
Division of a Business. FAS 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. FAS 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book
value or fair value less cost to sell. Additionally, FAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. FAS 144 is effective for Pavilion's financial statements issued
in fiscal 2003.
F-8
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
2. ALLOCATIONS
Certain expenses of Pavilion have been allocated to Power Optimization
Division on various bases that, in the opinion of management, are
reasonable. The accompanying statement of operations contains certain
allocations that were based on personnel assigned to the Power Optimization
Division because it was an inherent part of Pavilion's main operations.
Certain direct expenses related to the Power Optimization Division of
$1,664,000 and $927,000 in costs of software licenses and services, $815,000
and $263,000 in sales and marketing costs, and $702,000 and $0 in general
and administrative costs for fiscal 2001 and 2000, respectively, are
included in the statement of operations as directly attributable costs. The
directly attributable costs are comprised primarily of compensation expenses
for those individuals that work directly for the Power Optimization Division
and legal costs. In addition, the statement of operations includes
allocations of shared costs (primarily marketing, development, facility and
administrative costs, interest expense and interest income), which were
allocated based upon the Power Optimization Division's portion of revenues
in relation to the Parent Company's total revenues. There were also various
shared costs (primarily marketing, facility administrative costs) of
Pavilion's Belgium operations that were allocated to the Power Optimization
Division based upon the employee headcount of the Power Optimization
Division at the Belgium facility in relation to total Belgium employee
headcount.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
------------------------------
(in thousands) 2001 2000
Furniture, fixtures and office equipment $ 17 $ 13
Computer equipment 59 49
--------------- ---------------
76 62
Less accumulated deprecation (49) (28)
--------------- ---------------
$ 27 $ 34
=============== ===============
4. INCOME TAXES
The accompanying footnote has been prepared as if the Power Optimization
Division filed a tax return on a separate basis even though the Power
Optimization Division was part of an entity (Pavilion) that filed a
consolidated return.
As of March 31, 2001, the Power Optimization Division has net operating loss
carryforwards of approximately $3,314,000 and research and development
credit carryforwards of approximately $46,000, both of which begin to expire
in 2009. The Internal Revenue Code places certain limitations on the annual
amount of net operating loss carryforwards which can be utilized if certain
changes in the Pavilion's ownership occur. Changes in Pavilion's ownership
may limit the use of such carryforward benefits. Events which may cause
changes in Pavilion's net operating loss and credit carryforwards include,
but are not limited to, significant changes in ownership under Internal
Revenue Code 382.
F-9
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
Deferred tax assets (liabilities) are comprised of the following:
(in thousands) March 31,
-------------------------------
2001 2000
Gross deferred tax assets:
Deferred revenue $ 138 $ 269
Net operating loss carryforwards 1,226 123
Research credit carryforwards 46 31
------------- -------------
1,410 423
Valuation allowance (1,410) (423)
------------- -------------
Net deferred tax assets $ -- $ --
============= =============
A valuation allowance has been provided for the Power Optimization
Division's net deferred tax assets due to the fact that it is more likely
than not that such benefits will not be realized.
The income tax benefit differs from the amount computed by applying the U.S.
federal income tax rate of 34% to loss before income taxes. The amounts are
reconciled as follows:
March 31,
-------------------------------
2001 2000
U.S. federal income tax benefit at statutory rate $ 893 $ 190
State income tax benefit, net of federal expense 79 17
Research credits 15 31
Change in valuation allowance (987) (238)
------------- -------------
Income tax benefit $ -- $ --
============= =============
5. STOCK COMPENSATION
Pavilion has three stock option plans, a 2000 Long-Term Incentive Plan, a
1996 Incentive Plan, and a 1992 Stock Option Plan (collectively the
"Plans"). Pursuant to the Plans, Pavilion may grant awards which include
incentive and non-qualified stock options, restricted stock, performance
shares, stock appreciation rights, cash awards and phantom stock, to
employees, consultants, independent contractors and directors. Incentive
stock options are granted at an exercise price of not less than the fair
value of the stock on the date of grant, as determined by the Pavilion's
Board of Directors. Options granted under the Plans generally vest over four
to six years and all awards expire no more than ten years from the date of
grant. All information presented below concerning options is allocated on
the basis of actual employees of Pavilion in the Power Optimization
Division.
F-10
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
As of April 1, 1999 there were 39,850 options outstanding with a weighted-
average exercise price of $2.01 per share. During fiscal 2000, there were
19,036 options granted with a weighted-average exercise price of $1.70 per
share, which resulting in 58,886 options outstanding as of March 31, 2000,
with a weighted-average exercise price of $1.91 per share. During fiscal
2000, there were 485,000 options granted with a weighted-average exercise
price of $.28 per share, and 22,836 options cancelled with a weighted-
average exercise price of $1.83 per share, which resulted in 521,050 options
outstanding at March 31, 2001, with a weighted-average exercise price of
$.39 per share.
As of March 31, 2001, there were 385,999 options outstanding with an
exercise price of $.09 per share with a weighted-average remaining
contractual life of 9.87 years and there were no options exercisable at $.09
per share; there were 100,000 options outstanding with an exercise price of
$1.00 per share with a weighted-average remaining contractual life of 9.42
years and there were no options exercisable at $1.00 per share; there were
20,550 options outstanding with an exercise price of $1.33 per share with a
weighted-average remaining contractual life of 4.64 years and there were
8,361 options exercisable at $1.33 per share; there were 2,500 options
outstanding with an exercise price of $1.70 per share with a weighted-
average remaining contractual life of 8.45 years and there were 1,093
options exercisable at $1.70 per share; there were 13,000 options
outstanding with an exercise price of $3.00 per share with a weighted-
average remaining contractual life of 6.82 years and there were 5,257
options exercisable at $3.00 per share.
As of March 31, 2001 and 2000, there were 14,711 and 14,803 options
exercisable with weighted-average exercise price of options exercisable of
$1.95 and $1.98, respectively.
Pavilion applies APB Opinion 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for
options granted at fair market value under the Plans. Had compensation costs
for Pavilion's stock-based compensation Plans been determined on the fair
value at the grant dates for awards under those Plans consistent with the
method of FASB Statement 123, the Power Optimization Division's pro forma
results of operations would have been as follows for stock options granted
to employees of the Power Optimization Division:
(In thousands) 2001 2000
Net loss:
As reported $(2,629) $(559)
Pro forma $(2,637) $(566)
6. DEFINED CONTRIBUTION PLAN
In 1996, Pavilion adopted a 401(k) retirement plan, which is available to
all domestic, full-time employees meeting certain minimum eligibility
requirements. For the years ended March 31, 2001 and 2000, Pavilion did not
make any employer contributions to the plan for Power Optimization Division
employees.
7. CONTINGENCIES AND COMMITMENTS
From time to time, Pavilion is subject to various investigations, claims and
legal proceedings covering a wide range of matters that arise in the
ordinary course of its business activities. Pavilion is not currently aware
of any legal proceedings or claims that will have, individually or in the
aggregate, a material effect on the Power Optimization Division's financial
condition, results of operations or cash flows.
On August 14, 2000, Pavilion filed a suit against Pegasus, a competitor of
Pavilion, alleging infringement of various patents owned or exclusively
licensed by Pavilion. In response to the claims brought by Pavilion, Pegasus
filed seven counterclaims against Pavilion alleging, among other things,
unfair competition, deceptive
F-11
Power Optimization Division
(a segment of Pavilion Technologies, Inc.)
Notes to Financial Statements
trade practices, attempted monopolization, tortuous interference with
business relationships, and that Pegasus is entitled to a declaratory
judgement of non-infringement as well as a request for declaratory judgment
that Pavilion is barred from any recovery. On April 13, 2001, the suit
between Pegasus and Pavilion, including both Pavilions claims and Pegasus'
counterclaims, was voluntarily dismissed without prejudice.
On August 7, 2001, Pavilion instituted a suit against Computer Associates
International ("CA"), alleging infringement of various patents owned by
Pavilion. CA has responded by filing an answer along with counter claims for
a declaratory judgement of non-infringement, as well as declaratory judgment
of invalidity. Neither side has yet specified the amount of the damages
sought. Pavilion will aggressively defend itself against these
counterclaims. As discovery, has not yet commenced, management cannot
estimate the ultimate outcome of this proceeding.
F-12
Item 7(b). Unaudited Pro Forma Combined Financial Statements of KFx Inc. and the
Power Optimization Division of Pavilion Technologies, Inc. as of December 31,
2000 and June 30, 2001.
KFX INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
On July 31, 2001, KFx Inc. ("KFx") completed the purchase of certain assets and
liabilities of the Power Optimization Division of Pavilion Technologies, Inc.
(the "Power Optimization Division") pursuant to the terms of the Purchase
Agreement dated as of July 31, 2001 (the "Purchase Agreement"), entered into by
Pavilion Inc. ("Pavilion"), Pegasus Technologies, Inc. ("Pegasus"), a subsidiary
of KFx, and KFx. These purchased assets and acquired liabilities were primarily
accounts receivable, unbilled revenue, deposits, customer list, exclusive rights
to license Pavilion's software, other intangibles and deferred revenue, which
are adjusted against the base purchase price. The Purchase Agreement provided
for a base price of $9,500,000 in cash payable to Pavilion due in installments
through July 31, 2003. The present value of these payments are $8,567,000 using
a 14% effective interest rate. Additionally, Pegasus shall pay Pavilion
royalties of up to $5,500,000 between August 1, 2001 and October 31, 2005, based
on Pavilion and Pegasus software licenses sold by Pegasus. KFx guarantees the
duties and obligations of Pegasus under the Purchase agreement. The Power
Optimization Division acquisition was consummated on July 31, 2001. The business
combination will be accounted for as a purchase.
These unaudited pro forma combined financial statements and accompanying notes
have been prepared and should be read in conjunction with the historical
financial statements and the related notes thereto of KFx Inc., the "Management
Discussion and Analysis of Financial Condition and Results of Operations"
contained in KFx's Annual Report on Form 10-K for the year ended December 31,
2000 and the Quarterly Report on Form 10-Q as of June 30, 2001 filed with the
Securities and Exchange Commission, and the carve out financial statements of
the Power Optimization Division as of March 31, 2001, which are included in this
Current Report on Form 8-K/A.
The combining companies have different year-ends for reporting purposes.
Pavilion maintains its accounting records on a fiscal basis ending on March 31
and KFx maintains its accounting records on a calendar basis ending on December
31.
The pro forma combined balance sheets as of June 30, 2001 assume that the
acquisition took place on June 30, 2001 and as such combines KFx's unaudited
June 30, 2001 balance sheet with the Power Optimization Division's unaudited
June 30, 2001 balance sheet.
The pro forma combined statement of operations assumes the acquisition took
place as of the beginning of the period presented. The pro forma combined
statement of operations for the year ended December 31, 2000 combines KFx's
audited statement of operations for the year ended December 31, 2000 and the
Power Optimization Division's statement of operations for the year ended March
31, 2001. The combined statement of operations for the six months ended June 30,
2001 combines KFx's statement of operations for the six months ended June 30,
2001 and the Power Optimization Division's statement of operations for the six
months ended June 30, 2001. The results of operations of the Power Optimization
Division for the three month period ended March 31, 2001, which included revenue
of approximately $290,000 and a net loss of approximately $697,000 has been
included in the results of operations for the six months ended June 30, 2001 as
well as the year ended March 31, 2001.
The pro forma adjustments do not reflect any operating efficiency and cost
savings that may be achieved with respect to the acquisition. The pro forma
adjustments do not include any adjustments to historical sales for any future
price changes nor any adjustments to sales, marketing or any other expenses for
any future operating changes. The following pro forma information is not
necessarily indicative of the financial position or operating results that would
have occurred had the acquisition been consummated on the dates at the beginning
of the periods, for which such transactions are being given effect. The pro
forma adjustments reflecting the
F-13
KFX INC.
UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
consummation of the acquisition are based upon the assumptions set forth in the
notes hereto.
KFx currently knows of no events other than those disclosed in these pro forma
notes that would require a material change to the preliminary purchase price
allocation of the acquisition. The purchase price allocation is preliminary and
includes KFx's managements best estimates based upon the assets acquired;
however, a final determination of required purchase accounting adjustments will
be made upon the completion of a study undertaken by KFx in conjunction with
independent appraisers to determine the fair value of certain of the assets to
be acquired, including intangible assets, and liabilities. The future financial
position and results of operations will differ, perhaps significantly, from the
pro forma amounts reflected herein because of a variety of factors, including
access to additional information, changes in value not currently identified and
changes in operating results, which could result in adjustment to among other
items identifiable intangible assets and goodwill.
F-14
KFX INC.
UNAUDITED PRO FORMA BALANCE SHEET
(In thousands)
As Reported
---------------------------
Power
KFx Inc. Optimization
(June 30, Division Pro Forma
2001) (June 30, 2001) Adjustments Combined
----------- --------------- ------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 392 $ -- $ $ 392
Trade accounts receivable 686 43 (43) A 686
Unbilled revenue 95 50 (50) A 95
Other current assets 803 -- 803
------------ ------------ ------------ -------------
Total current assets 1,976 93 (93) 1,976
Property, plant and equipment, net 826 21 (21) A 826
Patents, net 1,772 -- 1,772
Intangible assets -- -- 2,160 B 2,160
Goodwill, net 1,478 -- 6,277 B 8,335
580 C
Other assets 1,655 -- 1,655
------------ ------------ ------------ -------------
TOTAL ASSETS $ 7,707 $ 114 $ 8,903 $ 16,724
============ ============ ============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 2,029 $ 279 $ (279) A $ 2,029
Accrued expenses 559 317 (317) A 1,139
580 C
Deferred revenue 1,217 223 (223) A 1,217
Short term notes payable to directors 1,050 -- 1,050
Obligations to repurchase Pegasus preferred
stock, net 1,148 -- 1,148
Current maturities of long-term debt 734 -- 4,705 D 5,439
Other current liabilities 515 -- 515
------------ ------------ ------------- -------------
Total current liabilities 7,252 819 4,466 12,537
Convertible debentures 15,163 -- 15,163
Other liabilities 882 -- 3,732 D 4,614
------------ ------------ ------------- -------------
Total liabilities 23,297 819 8,198 32,314
Minority interest 4,095 -- 4,095
Stockholders' deficit
Preferred stock, $.001 par value,
20,000,000 shares authorized; none issued -- -- --
Common stock, $.001 par value, 80,000,000
shares authorized; and 25,710,505 and 25,
196,280 shares issued and outstanding 26 26
Accumulated deficit (76,912) (705) 705 A (76,912)
Additional paid-in capital 57,201 -- 57,201
------------ ------------ ------------- -------------
Total stockholders' deficit (19,685) (705) 705 (19,685)
------------ ------------ ------------- -------------
TOTAL LIABILITIES AND PARENT COMPANY DEFICIT $ 7,707 $ 114 $ 8,903 $ 16,724
------------ ------------ ------------- -------------
The accompanying notes are an integral part of these
unaudited pro forma financial statements.
F-15
KFX, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(In thousands, except per share data)
As Reported
------------------------------
Power
Optimization
KFx Inc. Division
Twelve Twelve
months ended months ended
December 31, March 31, Pro Forma
2000 2001 Adjustments Combined
OPERATING REVENUES
Software licenses and services $ 1,895 $ 1,775 $ $ 3,670
K-Fuel demonstration plant and laboratory contract
revenue 230 230
------------- -------------- ------------ ----------
Total operating revenues 2,125 1,775 3,900
OPERATING COST & EXPENSES
Cost of Pegasus software licenses and services 1,776 1,692 644 E 4,112
K-Fuel demonstration plant and laboratory 782 -- 782
Marketing, sales, general and administrative 5,123 2,186 39 E 7,348
Pegasus research and development 614 222 836
Depreciation and amortization 2,828 -- 2,828
------------- -------------- ------------ ----------
Total operating costs and expenses 11,123 4,100 683 15,906
OPERATING LOSS (8,998) (2,325) (683) (12,006)
Interest expense (including accretion of debenture
premium) (2,656) (329) (974) F (3,959)
Other (636) 25 (611)
------------- -------------- ------------ ----------
NET LOSS $ (12,290) $ (2,629) $ (1,657) $ (16,576)
============= ============== ============ ==========
Basic and diluted net loss per share $ (.49) $ (.67)
============= ==========
Weighted-average common shares outstanding 24,908 24,908
============= ==========
As Reported
------------------------------
Power
Optimization
KFx Inc. Six Division Six
Months ended Months ended Pro Forma
June 30, 2001 June 30, 2001 Adjustments Combined
OPERATING REVENUES
Software licenses and services $ 777 $ 517 $ $ 1,294
K-Fuel demonstration plant and laboratory contract
revenue -- -- --
------------- -------------- ------------ ----------
Total operating revenues 777 517 1,294
OPERATING COST & EXPENSES
Cost of Pegasus software licenses and services 609 676 322 E 1,607
K-Fuel demonstration plant and laboratory 90 -- 90
Marketing, sales, general and administrative 2,239 1,204 20 E 3,463
Pegasus research and development 353 138 491
Depreciation and amortization 1,377 -- 1,377
------------- -------------- ------------ ----------
Total operating costs and expenses 4,668 2,018 342 7,028
OPERATING LOSS (3,891) (1,501) (342) (5,734)
Interest expense (including accretion of debenture
premium) (1,894) (16) (536)F (2,446)
Other (35) 31 (4)
------------- -------------- ------------ ----------
NET LOSS $ (5,820) $ (1,486) $ (878) $ (8,184)
============= ============== ============ ==========
Basic and diluted net loss per share $ (.23) $ (.32)
============= ==========
Weighted-average common shares outstanding 25,336 25,336
============= ==========
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-16
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following adjustments give pro forma effect to the transaction:
(A) Adjustment to reflect the Power Optimization Division assets that were
not acquired and the liabilities that were not assumed by KFx as part of the
acquisition. KFx purchased net tangible assets and acquired liabilities
consisting of accounts receivable, unbilled revenue, deposits, and deferred
revenue, the net of which adjusts the base purchase price.
(B) To reflect the allocation of the purchase price adjustment based on the
preliminary allocation of the excess of consideration over the net assets of
the Power Optimization Division. In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No.142 -
Accounting for Goodwill and Other Intangible Assets. Under this Statement,
goodwill arising from transactions occurring subsequent to June 30, 2001 is
no longer amortized but instead reviewed annually for impairment. As such,
amortization of goodwill has not been considered.
The preliminary allocation of purchase price to tangible and intangible
assets acquired and liabilities assumed is as follows:
(dollars in thousands):
Purchase price $ 8,567
Fair value of identifiable intangible assets acquired
(See Note E) 2,160
Net assets and liabilities assumed (130)
----------
Excess cost over net assets acquired 6,277
Acquisition costs 580
----------
Goodwill $ 6,857
==========
(C) To reflect the $580,000 in direct acquisition expenses.
(D) To reflect the present value of $8,567,000 of debt incurred to finance
the acquisition, which was calculated using an effective interest rate of
14% net of $130,000 adjustment for net liabilities assumed.
(E) Adjustment to record amortization of the identified intangibles from the
purchase price allocation. Based upon KFx's preliminary valuation obtained
from independent appraisers, there was $2,160,000 of identifiable
intangibles identified and which was comprised of $734,000 for a license
agreement, $319,000 for order backlog, $990,000 for maintenance contracts
and $117,000 for customer lists. Intangible amortization was calculated
based upon estimated useful lives of 18 to 48 months.
(F) On a pro forma basis, interest expense was incurred as a result of the
debt incurred to finance the acquisition. Interest expense was based upon
the present value of the installments of the debt at the beginning of the
period and was calculated using an effective interest rate of 14%.
F-17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 15, 2001 KFX INC.
By: /s/ Patrick S. Flaherty
---------------------------
Name: Patrick S. Flaherty
Title: Vice President-Finance & Chief Financial
Officer
Item 7(c). Exhibits
INDEX TO EXHIBITS
Exhibit
Consent of Independent Accountants 23.2