UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
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 1, 2015
AV Homes, Inc.
(Exact Name of Registrant as Specified in Charter)
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Delaware | | 001-07395 | | 23-1739078 |
(State or Other Jurisdiction | | (Commission | | (IRS Employer |
of Incorporation) | | File Number) | | Identification No.) |
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8601 N. Scottsdale Rd. Suite 225 | | |
Scottsdale, Arizona | | 85253 |
(Address of Principal Executive Offices) | | (Zip Code) |
(480) 214-7400
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:
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| | |
o | | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
EXPLANATORY NOTE
On July 1, 2015, AV Homes, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) reporting that, on July 1, 2015, the Company closed its acquisition of substantially all of the assets and certain liabilities of Bonterra Builders, LLC (“Bonterra”). This Form 8-K/A amends the Original Form 8-K to include the historical audited and unaudited financial statements of Bonterra and the pro forma condensed consolidated financial information required by Items 9.01(a) and 9.01(b) of Form 8-K that were excluded from the Original Form 8-K in reliance on the instructions to such items.
Item 9.01. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired. The audited financial statements of Bonterra for the years ended December 31, 2014, 2013 and 2012, are filed herewith as Exhibit 99.1. The unaudited financial statements of Bonterra for the six months ended June 30, 2015, are filed herewith as Exhibit 99.2. The consent of Derek K. Atwell, CPA, LLC, Bonterra’s independent auditor, is attached as Exhibit 23.1 to this Form 8-K/A.
(b) Pro forma financial information. The unaudited pro forma condensed consolidated financial information of the Company and Bonterra for the year ended December 31, 2014 and as of and for the six months ended June 30, 2015 are filed herewith as Exhibit 99.3.
(c) Exhibits
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| | |
Exhibit No. | | Description |
23.1 | | Consent of Derek K. Atwell, CPA, LLC, Independent Auditor of Bonterra |
99.1 | | Audited financial statements of Bonterra for the years ended December 31, 2014, 2013 and 2012 |
99.2 | | Unaudited financial statements of Bonterra for the six months ended June 30, 2015 |
99.3 | | Unaudited pro forma condensed consolidated financial information of the Company and Bonterra for the year ended December 31, 2014 and as of and for the six months ended June 30, 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.
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| | AV HOMES, INC. |
Date: | September 10, 2015 | By: | /s/ Roger A. Cregg |
| | | Name: Roger A. Cregg |
| | | Title: President and Chief Executive Officer |
| | | (Principal Executive Officer) |
EXHIBIT INDEX
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| | |
Exhibit No. | | Description |
23.1 | | Consent of Derek K. Atwell, CPA, LLC, Independent Auditor of Bonterra |
99.1 | | Audited financial statements of Bonterra for the years ended December 31, 2014, 2013 and 2012 |
99.2 | | Unaudited financial statements of Bonterra for the six months ended June 30, 2015 |
99.3 | | Unaudited pro forma condensed consolidated financial information of the Company and Bonterra for the year ended December 31, 2014 and as of and for the six months ended June 30, 2015 |
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration Statements:
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| |
(1) | Registration Statements (Form S-8 No. 333-63278, Form S-8 No. 333-125555, Form S-8 No. 333-147263, and Form S-8 No. 333-175066) pertaining to the Amended and Restated 1997 Incentive and Capital Accumulation Plan of Avatar Holdings Inc.; |
(2) | Registration Statement (Form S-8 No. 333-206011) pertaining to the AV Homes, Inc. 2015 Incentive Compensation Plan; and |
(3) | Registration Statement (Form S-3 No. 333-187763) of AV Homes, Inc. and related Prospectus for the registration of $200,000,000 in common stock, preferred stock, and debt securities; |
of our reports dated April 28, 2014 and March 27, 2015, with respect to the financial statements of Bonterra Builders, LLC, included in the accompanying Current Report (Form 8-K/A) of AV Homes, Inc. dated September 10, 2015.
/s/ Derek K. Atwell, CPA, LLC
Monroe, North Carolina
September 10, 2015
Exhibit 99.1
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FINANCIAL STATEMENTS |
with Supplemental Data |
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BONTERRA BUILDERS, LLC |
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DECEMBER 31, 2013 |
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BONTERRA BUILDERS, LLC |
| | | | |
TABLE OF CONTENTS |
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| | | | PAGE |
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INDEPENDENT AUDITOR'S REPORT | | | 1 |
| | | | |
FINANCIAL STATEMENTS | | | | |
| | | | |
BALANCE SHEETS | | | | 2 |
| | | | |
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY | 3 |
| | | | |
STATEMENTS OF CASH FLOWS | | | 4 |
| | | | |
NOTES TO FINANCIAL STATEMENTS | | | 5 |
Derek K Atwell, CPA, PLLC
Independent Auditor’s Report
To the Members
Bonterra Builders, LLC
Matthews, North Carolina
I have audited the accompanying balance sheets of Bonterra Builders, LLC as of December 31, 2013 and 2012, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that I 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of Bonterra Builders, LLC as of December 31, 2013 and 2012, 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.
Derek K Atwell, CPA, PLLC
Monroe, North Carolina
April 28, 2014
PO Box 3335 Monroe, North Carolina 28111
Phone: 980-322-6864 Fax: 704-288-4058
Derek@datwellcpa.com
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BONTERRA BUILDERS, LLC |
BALANCE SHEETS |
December 31, |
| | | | | |
| | | 2013 | | 2012 |
| | | | | |
ASSETS |
| | | | | |
CURRENT ASSETS | | | | | |
Cash and cash equivalents | | | $ 1,981,501 | | $ 924,162 |
Accounts receivable - trade | | | 1,091,775 | | 487,792 |
Accounts receivable - employees | | | 32,149 | | 16,250 |
Lot inventories | | | 43,402,531 | | 22,952,071 |
| | | | | |
Total current assets | | | 46,507,956 | | 24,380,275 |
| | | | | |
PROPERTY AND EQUIPMENT | | | 1,459,896 | | 1,146,800 |
Less accumulated depreciation | | | (584,724) | | (503,519) |
Total net property and equipment | | | 875,172 | | 643,281 |
| | | | | |
OTHER ASSETS | | | | | |
Affiliate receivables | | | 2,494,844 | | 2,208,000 |
Deposits | | | 1,192,500 | | 519,000 |
Total other assets | | | 3,687,344 | | 2,727,000 |
| | | | | |
Total Assets | | | $ 51,070,472 | | $27,750,556 |
| | | | | |
LIABILITIES AND MEMBERS' EQUITY |
| | | | | |
CURRENT LIABILITIES | | | | | |
Construction loans | | | $ 26,761,344 | | $15,833,739 |
Accounts payable | | | 7,646,374 | | 3,237,617 |
Accrued expenses | | | 279,103 | | 144,051 |
Accrued payroll and payroll taxes | | | 0 | | 6,026 |
Deposits | | | 1,247,156 | | 534,684 |
| | | | | |
Total current liabilities | | | 35,933,977 | | 19,756,117 |
| | | | | |
AFFILATE PAYABLES | | | 347,099 | | 535,834 |
| | | | | |
NOTES PAYABLE - AUTO | | | 119,799 | | 81,536 |
| | | | | |
MEMBERS' EQUITY | | | 14,669,597 | | 7,377,069 |
| | | 14,669,597 | | 7,377,069 |
| | | | | |
Total Liabilities and Members' Equity | | | $ 51,070,472 | | $27,750,556 |
See independent auditor's report.
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BONTERRA BUILDERS, LLC |
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY |
For the Years Ended December 31, |
| | | | | |
| | | 2013 | | 2012 |
| | | | | |
SALES | | | $ 98,676,605 |
| | $ 43,610,490 |
COST OF HOMES SOLD | | | 79,504,596 |
| | 35,554,401 |
| | | | | |
GROSS PROFIT | | | 19,172,009 |
| | 8,056,089 |
| | | | | |
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES | | | 9,146,550 |
| | 4,523,167 |
| | | | | |
NET OPERATING INCOME | | | 10,025,459 |
| | 3,532,922 |
| | | | | |
OTHER INCOME AND (EXPENSE) | | | | | |
Rebate income | | | 290,763 |
| | 143,242 |
Rental income | | | 32,957 |
| | 39,887 |
Other income | | | 103,034 |
| | 65,687 |
Interest expense | | | (1,939,685) |
| | (533,155) |
| | | (1,512,931) |
| | (284,339) |
| | | | | |
NET INCOME BEFORE EXTRAORDINARY ITEMS | | | 8,512,528 |
| | 3,248,583 |
| | | | | |
EXTRAORDINARY ITEMS (SEE NOTE G) | | | — |
| | (571,454) |
| | | | | |
NET INCOME | | | 8,512,528 |
| | 2,677,129 |
| | | | | |
BEGINNING MEMBERS' EQUITY | | | 7,377,069 |
| | 5,179,940 |
Distributions | | | (1,220,000) |
| | (480,000) |
| | | | | |
ENDING MEMBERS' EQUITY | | | $ 14,669,597 |
| | $ 7,377,069 |
See independent auditor's report.
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BONTERRA BUILDERS, LLC |
STATEMENTS OF CASH FLOWS |
For the Years Ended December 31, |
| | | | | |
| | | 2013 | | 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income | | | $ 8,512,528 | | $ 2,677,129 |
Adjustments to reconcile net income to net cash | | | | | |
provided by (used in ) operating activities: | | | | | |
Depreciation | | | 77,278 | | 73,915 |
(Increase) decrease in: | | | | | |
Accounts receivable - trade | | | (603,983) | | (281,466) |
Accounts receivable - affiliates | | | (286,844) | | 0 |
Accounts receivable - employees | | | (15,899) | | (16,250) |
Inventories | | | (20,450,460) | | (10,097,549) |
Lot deposits | | | (673,500) | | 224,424 |
Increase (decrease) in: | | | | | |
Accounts payable | | | 4,408,757 | | 1,449,106 |
Accounts payable - affiliates | | | (188,735) | | (358,793) |
Accrued expenses | | | 129,026 | | 110,792 |
Builder deposits | | | 712,472 | | 407,209 |
| | | | | |
Net cash provided by (used in) operating expenses | | | (8,379,360) | | (5,811,483) |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Purchases of property and equipment | | | (309,169) | | (254,514) |
| | | | | |
Net cash provided by (used in) investing activities | | | (309,169) | | (254,514) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Net borrowings (payments) on construction loans | | | 10,927,605 | | 6,777,979 |
Net borrowings on auto loans | | | 38,263 | | 81,536 |
Dividends paid | | | (1,220,000) | | (480,000) |
| | | | | |
Net cash provided by (used in) financing activities | | | 9,745,868 | | 6,379,515 |
| | | | | |
NET INCREASE (DECREASE) IN CASH | | | 1,057,339 | | 313,518 |
| | | | | |
CASH AT BEGINNING OF YEAR | | | 924,162 | | 610,644 |
| | | | | |
CASH AT END OF YEAR | | | $ 1,981,501 | | $ 924,162 |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid for interest | | | $ 1,974,188 | | $ 597,075 |
See independent auditor's report.
BONTERRA BUILDERS, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Bonterra Builders, LLC (“The Company”), a North Carolina limited liability company, was formed on October 19, 2001. The company builds townhomes and single family residential homes in the greater Charlotte area of North and South Carolina.
Method of Accounting
For financial reporting purposes, assets and liabilities are recorded and income and expenses are recognized on the accrual basis of accounting.
Revenue Recognition
The Company recognizes revenue from all homebuilding activities at the closing of the sale using the deposit method. During construction, all direct material and labor costs and those indirect costs related to acquisition and construction are capitalized, and all customer deposits are treated as liabilities. Capitalized costs are charged to earnings upon closing. Costs incurred in connection with completed homes and selling, general, and administrative costs are charged to expense as incurred.
Accounts Receivable
Accounts receivable are presented at face value. Management considers receivables to be fully collectible; accordingly, no allowance for doubtful accounts has been provided. Bad debts on accounts receivable are expensed in the period in which management determines the amount to be uncollectible.
Inventory
Housing assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the assets are considered to be impaired, they are then written down to the fair value less estimated selling costs. The ultimate fair value for the Company’s inventory is dependent upon future market and economic conditions. $0 and $571,454, respectively for 2013 and 2012 of costs were written off to expense through this analysis.
Capitalized Costs
Capitalized costs include the costs of acquiring land, construction costs, interest, property taxes, and overhead related to the construction of the units. Direct costs are capitalized to individual homes and other costs are allocated to each lot based on lot size.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Property and Equipment
Cost of property and equipment as of December 31, 2013 and 2012, is as follows:
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| | | |
| 2013 | | 2012 |
| | | |
Buildings, land and leasehold improvements | $ 404,929 | | $ 404,929 |
Office furniture and fixtures | 66,496 | | 66,496 |
Autos and trucks | 387,567 | | 327,455 |
Construction equipment | 276,146 | | 23,162 |
Model furniture and fixtures | 324,758 | | 324,758 |
| | | |
| $ 1,459,896 | | $ 1,146,800 |
Depreciation
Depreciation is computed principally using straight-line methods at rates intended to distribute the cost of properties over their estimated service lives varying from five (5) to forty (40) years.
Income Taxes
Upon inception of the LLC, the Company’s members made an election to be taxed as a Corporation. Subsequently, the Company, with the consent of the owners, elected “S” status under Section 1361 of the Internal Revenue Code and North Carolina state tax code on October 19, 2001, which provides that, in lieu of corporation income taxes, the shareholder is taxed on his proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal or state income tax is included in these financial statements.
Compensated Absences
Compensated absences have not been accrued because the amount cannot be reasonably estimated and is considered immaterial to the overall statement presentation.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash, receivables, trade payables, and accrued expenses are carried at cost, which approximates fair value due to the short-time maturity of these instruments.
NOTE B - WORK IN PROCESS INVENTORY
The Company classifies any homes under construction as inventory on the balance sheet. At present, the Company has the following projects under construction and the following amounts listed in work in process inventory as of December 31:
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| | | | | |
| 2013 | | 2012 |
Bonterra Village | 2,155,882 |
| | 1,852,385 |
|
Bonterra L/W units | 936,855 |
| | 929,113 |
|
Barber Rock single family | 6,227,907 |
| | 4,810,401 |
|
Millbridge | 4,107,572 |
| | 1,457,654 |
|
Quintessa | 3,144,143 |
| | 2,360,009 |
|
Skybrook | 2,700,084 |
| | 2,699,565 |
|
St James Place | 321,976 |
| | 276,844 |
|
Willow Farms | 785,223 |
| | 761,999 |
|
Steel Gardens | 1,771,876 |
| | 494,375 |
|
Longbrook | 57,072 |
| | — |
|
Telfair | 4,094,699 |
| | 780,964 |
|
Verdict Ridge | 1,668,350 |
| | — |
|
Whitby Pond | 588,020 |
| | 242,528 |
|
Woodlands Creek | 394,576 |
| | 87,004 |
|
Oxforshire single family | 767,696 |
| | 321,771 |
|
Potters Creek single family | 401,504 |
| | 483,788 |
|
Gardens on Providence | 459,869 |
| | 185,449 |
|
Crismark single family | 6,866,849 |
| | 2,465,005 |
|
Farrington single family | 1,624,155 |
| | 576,619 |
|
Fairway Row townhomes | 168,103 |
| | 164,498 |
|
Deerstyne single family | 1,635,350 |
| | 966,378 |
|
Cureton | 74,860 |
| | 74,860 |
|
Cedarvale Farm | 1,287,972 |
| | 959,548 |
|
McAdenville | 540,683 |
| | — |
|
Mia Manor | 621,255 |
| | 1,314 |
|
| | | |
| 43,402,531 |
| | 22,952,071 |
|
The estimated costs and revenues of homes under construction at each development as of December 31, 2013, are as follows:
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| | | | | |
| Estimated Costs | | Estimated Revenues |
Bonterra Village | 4,435,000 |
| | 4,948,000 |
|
Barber Rock single family | 7,500,000 |
| | 8,625,000 |
|
Verdict Ridge | 2,575,000 |
| | 2,896,875 |
|
McAdenville | 1,225,000 |
| | 1,396,500 |
|
St James Place | 965,000 |
| | 1,100,100 |
|
Willow Farms | 1,355,000 |
| | 1,547,410 |
|
Millbridge | 5,500,000 |
| | 6,600,000 |
|
Quintessa | 4,350,000 |
| | 4,785,000 |
|
Skybrook | 4,250,000 |
| | 4,802,500 |
|
Steel Gardens | 3,250,000 |
| | 4,000,000 |
|
Woodlands Creek | 755,000 |
| | 853,150 |
|
Potters Creek | 855,000 |
| | 970,425 |
|
Oxfordshire | 1,075,000 |
| | 1,225,500 |
|
Fairway Row townhomes | 550,000 |
| | 624,250 |
|
Gardens on Providence | 925,000 |
| | 1,036,000 |
|
Farrington | 2,225,000 |
| | 2,547,625 |
|
Deerstyne | 2,425,000 |
| | 2,825,125 |
|
Whitby Pond | 945,000 |
| | 1,067,850 |
|
Crismark | 9,038,500 |
| | 10,665,430 |
|
Telfair | 6,088,000 |
| | 6,849,000 |
|
Cureton | 300,000 |
| | 330,000 |
|
Cedarvale Farm | 1,500,000 |
| | 1,650,000 |
|
| | | |
| 62,086,500 |
| | 71,345,740 |
|
NOTE C - OTHER ASSETS
The Company has paid deposits on lots in the following subdivisions: Barber Rock, Bonterra, Farrington, Millbridge, Oakstone townhomes, Skybrook, Steel Gardens, and Walnut Creek, which are classified as assets on the balance sheet. These deposits were required to ensure the company has purchase rights on each lot as they become ready for construction. The balance of the deposits held for purchase rights on December 31, 2013 and 2012 are $1,192,500 and $519,000, respectively.
NOTE D - RELATED PARTY TRANSACTIONS
Affiliate Receivables/Payables
The Company loaned a total of $2,494,844 and $2,208,000 during 2013 and 2012, respectively, to companies with common ownership. There is no stated interest rate on the receivables and no scheduled repayment terms. The receivables are due upon demand. The Company borrowed a total of $347,099 and $535,834 during 2013 and 2012, respectively, from companies with common ownership. There is no stated interest rate on the payables and no scheduled repayment terms.
Inventory
The Company buys lots and builds homes in developments that are partially owned by one of its members. According to management, the lots are purchased at comparable prices, as compared to the prices that other local and national builders pay for lots in these developments.
NOTE E - CONSTRUCTION LOANS
Construction loans consist of the following at December 31:
|
| | | | | | | |
| 2013 | | 2012 |
Construction loans collateralized by inventories and | | | |
payable as the projects are sold, bearing interest | | | |
at rates of Prime plus one half percent per annum | $ | 17,016,067 |
| | $ | 10,913,762 |
|
| | | |
Construction loans collateralized by inventories and | | | |
payable as the projects are sold, bearing interest | | | |
at the bank's prime rate | 9,745,277 |
| | 4,919,977 |
|
| | | |
| $ | 26,761,344 |
| | $ | 15,833,739 |
|
All construction loans are classified as current liabilities on December 31, 2013. Interest expense of $236,068 and $133,646 was capitalized as an additional cost of inventories during 2013 and 2012, respectively.
The Company’s main construction loan has additional related borrowers included. The development companies included that are related by common ownership (Bonterra Village, Poplin Development Group) are listed as borrowers on the line and any assets of these companies have been cross-collateralized with the loan. The amount borrowed on this construction line as of December 31, 2013 is $13,286,839.
NOTE F - CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances at one bank. Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. Balances at this institution often exceed the insured limits. At December 31, 2013, the balances in the bank exceeded FDIC limits by approximately $1,625,000.
The construction industry is highly competitive and lacks firms with dominant market power. The volume and profitability of the company’s construction work depends to a significant extent upon the general state of the economies and the volume of work available to contractors. The adverse conditions currently in the housing market along with the inherit risk of construction projects are of major concern across the industry along with inherent financing risks. The Company’s construction operation could be adversely affected by labor stoppages or shortages, adverse weather conditions, or shortages of supplies.
NOTE G - EXTRAORDINARY ITEMS
After a thorough review of all lots, homes under constructions, and finished homes inventory, Bonterra Builders, LLC has taken a one-time write down of its properties to fair market value of $571,454 during 2012. The management of Bonterra Builders, LLC considers appraisal value to be the best approximation of fair market value and has written any pertinent properties down to the lower of cost or market amount where necessary. The management of Bonterra Builders, LLC believes this to be a one-time write down and does not anticipate any future write downs of costs to value on these properties based on the current market conditions.
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|
FINANCIAL STATEMENTS |
with Supplemental Data |
|
BONTERRA BUILDERS, LLC |
|
DECEMBER 31, 2014 |
|
| | | | |
BONTERRA BUILDERS, LLC |
| | | | |
TABLE OF CONTENTS |
| | | | |
| | | | PAGE |
| | | | |
INDEPENDENT AUDITOR'S REPORT | | | 1 |
| | | | |
FINANCIAL STATEMENTS | | | | |
| | | | |
BALANCE SHEETS | | | | 2 |
| | | | |
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY | 3 |
| | | | |
STATEMENTS OF CASH FLOWS | | | 4 |
| | | | |
NOTES TO FINANCIAL STATEMENTS | | | 5 |
| | | | |
Derek K Atwell, CPA, PLLC
Independent Auditor’s Report
To the Members
Bonterra Builders, LLC
Matthews, North Carolina
I have audited the accompanying balance sheets of Bonterra Builders, LLC as of December 31, 2014 and 2013, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that I 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of Bonterra Builders, LLC as of December 31, 2014 and 2013, 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.
Derek K Atwell, CPA, PLLC
Monroe, North Carolina
March 27, 2015
PO Box 3335 Monroe, North Carolina 28111
Phone: 980-322-6864 Fax: 704-288-4058
Derek@datwellcpa.com
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| | | | | | | | | |
BONTERRA BUILDERS, LLC |
BALANCE SHEETS |
December 31, |
| | | | | |
| | | 2014 | | 2013 |
| | | | | |
ASSETS |
| | | | | |
CURRENT ASSETS | | | | | |
Cash and cash equivalents | | | 5,421,480 |
| | 1,981,501 |
|
Accounts receivable - trade | | | 1,162,444 |
| | 1,091,775 |
|
Accounts receivable - employees | | | 48,789 |
| | 32,149 |
|
Lot inventories | | | 67,164,491 |
| | 43,402,531 |
|
| | | | | |
Total current assets | | | 73,797,204 |
| | 46,507,956 |
|
| | | | | |
PROPERTY AND EQUIPMENT | | | 2,410,233 |
| | 1,459,896 |
|
Less accumulated depreciation | | | (743,148 | ) | | (584,724 | ) |
Total net property and equipment | | | 1,667,085 |
| | 875,172 |
|
| | | | | |
OTHER ASSETS | | | | | |
Affiliate receivables | | | 102,720 |
| | 2,494,844 |
|
Investments in partnerships (lot development) | | | 301,900 |
| | — |
|
Deposits | | | 2,098,054 |
| | 1,192,500 |
|
Total other assets | | | 2,502,674 |
| | 3,687,344 |
|
| | | | | |
Total Assets | | | $ | 77,966,963 |
| | $ | 51,070,472 |
|
| | | | | |
LIABILITIES AND MEMBERS' EQUITY |
| | | | | |
CURRENT LIABILITIES | | | | | |
Construction loans | | | 48,105,060 |
| | 26,761,344 |
|
Accounts payable | | | 7,982,542 |
| | 7,646,374 |
|
Accrued expenses | | | 549,531 |
| | 279,103 |
|
Accrued payroll and payroll taxes | | | — |
| | — |
|
Deposits | | | 1,150,926 |
| | 1,247,156 |
|
| | | | | |
Total current liabilities | | | 57,788,059 |
| | 35,933,977 |
|
| | | | | |
AFFILATE PAYABLES | | | — |
| | 347,099 |
|
| | | | | |
NOTES PAYABLE - AUTO | | | 91,231 |
| | 119,799 |
|
| | | | | |
MEMBERS' EQUITY | | | 20,087,673 |
| | 14,669,597 |
|
| | | 20,087,673 |
| | 14,669,597 |
|
| | | | | |
Total Liabilities and Members' Equity | | | 77,966,963 |
| | 51,070,472 |
|
See independent auditor's report.
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BONTERRA BUILDERS, LLC |
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY |
For the Years Ended December 31, |
| | | | | |
| | | 2014 | | 2013 |
| | | | | |
SALES | | | $ 111,781,538 | | $ 98,676,605 |
COST OF HOMES SOLD | | | 90,819,122 | | 79,504,596 |
| | | | | |
GROSS PROFIT | | | 20,962,416 | | 19,172,009 |
| | | | | |
SELLING, GENERAL, AND ADMINISTRATIVE | | | | | |
EXPENSES | | | 11,220,698 | | 9,146,550 |
| | | | | |
NET OPERATING INCOME | | | 9,741,718 | | 10,025,459 |
| | | | | |
OTHER INCOME AND (EXPENSE) | | | | | |
Rebate income | | | 784,132 | | 290,763 |
Rental income | | | 39,195 | | 32,957 |
Other income | | | 101,904 | | 103,034 |
Interest expense | | | (2,589,983) | | (1,939,685) |
| | | (1,664,752) | | (1,512,931) |
| | | | | |
| | | | | |
NET INCOME | | | 8,076,966 | | 8,512,528 |
| | | | | |
BEGINNING MEMBERS' EQUITY | | | 14,669,597 | | 7,377,069 |
Distributions | | | (2,658,890) | | (1,220,000) |
| | | | | |
ENDING MEMBERS' EQUITY | | | $ 20,087,673 | | $ 14,669,597 |
See independent auditor's report.
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| | | | | | | | | |
BONTERRA BUILDERS, LLC |
STATEMENTS OF CASH FLOWS |
For the Years Ended December 31, |
| | | | | |
| | | 2014 | | 2013 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income | | | $ | 8,076,966 |
| | $ | 8,512,528 |
|
Adjustments to reconcile net income to net cash | | | | | |
provided by (used in ) operating activities: | | | | | |
Depreciation | | | 159,566 |
| | 77,278 |
|
(Increase) decrease in: | | | | | |
Accounts receivable - trade | | | (70,669 | ) | | (603,983 | ) |
Accounts receivable - affiliates | | | 2,392,124 |
| | (286,844 | ) |
Accounts receivable - employees | | | (16,640 | ) | | (15,899 | ) |
Inventories | | | (23,761,960 | ) | | (20,450,460 | ) |
Lot deposits | | | (905,554 | ) | | (673,500 | ) |
Increase (decrease) in: | | | | | |
Accounts payable | | | 336,168 |
| | 4,408,757 |
|
Accounts payable - affiliates | | | (347,099 | ) | | (188,735 | ) |
Accrued expenses | | | 270,428 |
| | 129,026 |
|
Builder deposits | | | (96,230 | ) | | 712,472 |
|
| | | | | |
Net cash provided by (used in) operating expenses | | | (13,962,900 | ) | | (8,379,360 | ) |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Investments in partnerships | | | (301,900 | ) | | — |
|
Purchases of property and equipment | | | (951,479 | ) | | (309,169 | ) |
| | | | | |
Net cash provided by (used in) investing activities | | | (1,253,379 | ) | | (309,169 | ) |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Net borrowings (payments) on construction loans | | | 21,343,716 |
| | 10,927,605 |
|
Net borrowings (payments) on auto loans | | | (28,568 | ) | | 38,263 |
|
Dividends paid | | | (2,658,890 | ) | | (1,220,000 | ) |
| | | | | |
Net cash provided by (used in) financing activities | | | 18,656,258 |
| | 9,745,868 |
|
| | | | | |
NET INCREASE (DECREASE) IN CASH | | | 3,439,979 |
| | 1,057,339 |
|
| | | | | |
CASH AT BEGINNING OF YEAR | | | 1,981,501 |
| | 924,162 |
|
| | | | | |
CASH AT END OF YEAR | | | $ | 5,421,480 |
| | $ | 1,981,501 |
|
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid for interest | | | $ | 2,558,738 |
| | $ | 1,974,188 |
|
See independent auditor's report.
BONTERRA BUILDERS, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2014 and 2013
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Bonterra Builders, LLC (“The Company”), a North Carolina limited liability company, was formed on October 19, 2001. The company builds townhomes and single family residential homes in the greater Charlotte area of North and South Carolina.
Method of Accounting
For financial reporting purposes, assets and liabilities are recorded and income and expenses are recognized on the accrual basis of accounting.
Revenue Recognition
The Company recognizes revenue from all homebuilding activities at the closing of the sale using the deposit method. During construction, all direct material and labor costs and those indirect costs related to acquisition and construction are capitalized, and all customer deposits are treated as liabilities. Capitalized costs are charged to earnings upon closing. Costs incurred in connection with completed homes and selling, general, and administrative costs are charged to expense as incurred.
Accounts Receivable
Accounts receivable are presented at face value. Management considers receivables to be fully collectible; accordingly, no allowance for doubtful accounts has been provided. Bad debts on accounts receivable are expensed in the period in which management determines the amount to be uncollectible.
Inventory
Housing assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the assets are considered to be impaired, they are then written down to the fair value less estimated selling costs. The ultimate fair value for the Company’s inventory is dependent upon future market and economic conditions.
Capitalized Costs
Capitalized costs include the costs of acquiring land, construction costs, interest, property taxes, and overhead related to the construction of the units. Direct costs are capitalized to individual homes and other costs are allocated to each lot based on lot size.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Property and Equipment
Cost of property and equipment as of December 31, 2014 and 2013, is as follows:
|
| | | |
| 2014 | | 2013 |
| | | |
Buildings, land and leasehold improvements | $ 1,238,046 | | $ 404,929 |
Office furniture and fixtures | 70,023 | | 66,496 |
Autos and trucks | 387,567 | | 387,567 |
Construction equipment | 36,146 | | 276,146 |
Model furniture and fixtures | 678,451 | | 324,758 |
| | | |
| $ 2,410,233 | | $ 1,459,896 |
Depreciation
Depreciation is computed principally using straight-line methods at rates intended to distribute the cost of properties over their estimated service lives varying from five (5) to forty (40) years.
Income Taxes
Upon inception of the LLC, the Company’s members made an election to be taxed as a Corporation. Subsequently, the Company, with the consent of the owners, elected “S” status under Section 1361 of the Internal Revenue Code and North Carolina state tax code on October 19, 2001, which provides that, in lieu of corporation income taxes, the shareholder is taxed on his proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal or state income tax is included in these financial statements.
Compensated Absences
Compensated absences have not been accrued because the amount cannot be reasonably estimated and is considered immaterial to the overall statement presentation.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash, receivables, trade payables, and accrued expenses are carried at cost, which approximates fair value due to the short-time maturity of these instruments.
NOTE B - WORK IN PROCESS INVENTORY
The Company classifies any homes under construction as inventory on the balance sheet. At present, the Company has the following projects under construction and the following amounts listed in work in process inventory as of December 31:
|
| | | | | |
| 2014 | | 2013 |
Bonterra Village | $ 4,573,484 | | $ | 3,092,737 |
|
Barber Rock | 4,540,489 | | 6,227,907 |
|
Beulah Church Rd | 1,264,253 | | — |
|
Channing Hall | 1,694,135 | | — |
|
Millbridge | 5,443,626 | | 4,107,572 |
|
Quintessa | 2,997,638 | | 3,144,143 |
|
Skybrook | 1,442,321 | | 2,700,084 |
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Willow Farms | 887,367 | | 785,223 |
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Steel Gardens | 2,819,208 | | 1,771,876 |
|
Telfair | 5,396,902 | | 4,094,699 |
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Verdict Ridge | 3,877,515 | | 1,668,350 |
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Woodlands Creek | 851,028 | | 394,576 |
|
Potter Road Vickery | 2,027,387 | | — |
|
Potters Road South | 2,526,100 | | 401,504 |
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The Haven | 1,228,762 | | — |
|
Heron Cove | 1,885,572 | | — |
|
Harper's Pointe | 1,187,287 | | — |
|
Walnut Creek | 3,449,439 | | — |
|
Crismark single family | 7,218,399 | | 6,866,849 |
|
Farrington single family | 735,821 | | 1,624,155 |
|
Fairway Row townhomes | 1,105,904 | | 168,103 |
|
Deerstyne single family | 975,048 | | 1,635,350 |
|
Cedarvale Farm | 2,623,207 | | 1,287,972 |
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Mia Manor | 1,825,815 | | 621,255 |
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McAdenville | 1,585,784 | | 540,683 |
|
Other | 3,002,000 | | 2,269,493 |
|
| | | |
| $ 67,164,491 | | 43,402,531 |
|
The estimated costs and revenues of homes under construction at each development as of December 31, 2014, are as follows:
|
| | | | | |
| Estimated | | Estimated |
| Costs | | Revenues |
Bonterra Village | 6,100,000 |
| | 7,015,000 |
|
Barber Rock single family | 7,500,000 |
| | 8,625,000 |
|
Verdict Ridge | 5,250,000 |
| | 6,037,500 |
|
McAdenville | 2,500,000 |
| | 2,875,000 |
|
Willow Farms | 1,800,000 |
| | 2,070,000 |
|
Millbridge | 6,750,000 |
| | 7,762,500 |
|
Quintessa | 4,650,000 |
| | 5,347,500 |
|
Skybrook | 2,700,000 |
| | 3,105,000 |
|
Mia Manor | 3,425,000 |
| | 4,041,500 |
|
Steel Gardens | 3,500,000 |
| | 4,000,000 |
|
Woodlands Creek | 1,500,000 |
| | 1,695,000 |
|
Potters Road | 7,000,000 |
| | 8,120,000 |
|
Oxfordshire | 1,050,000 |
| | 1,225,500 |
|
Fairway Row townhomes | 2,080,000 |
| | 2,350,400 |
|
Channing Hall | 3,500,000 |
| | 3,937,500 |
|
Farrington | 1,050,000 |
| | 1,202,250 |
|
Deerstyne | 1,845,000 |
| | 2,116,215 |
|
Walnut Creek | 5,200,000 |
| | 5,865,600 |
|
Crismark | 10,450,000 |
| | 12,749,000 |
|
Telfair | 6,850,000 |
| | 7,795,300 |
|
Cureton | 1,825,000 |
| | 2,044,000 |
|
Cedarvale Farm | 4,725,000 |
| | 5,594,400 |
|
| | | |
| 91,250,000 |
| | 105,574,165 |
|
NOTE C - OTHER ASSETS
The Company has paid deposits on lots in the following subdivisions: Barber Rock, Bonterra, Farrington, Millbridge, Oakstone townhomes, Skybrook, Steel Gardens, Heron Cove, Blanchard Farms, and Walnut Creek, which are classified as assets on the balance sheet. These deposits were required to ensure the company has purchase rights on each lot as they become ready for construction. The balance of the deposits held for purchase rights on December 31, 2014 and 2013 are $2,098,054 and $1,192,500, respectively.
NOTE D - RELATED PARTY TRANSACTIONS
Affiliate Receivables/Payables
The Company loaned a total of $102,720 and $2,494,844 during 2014 and 2013, respectively, to companies with common ownership. There is no stated interest rate on the receivables and no scheduled repayment terms. The receivables are due upon demand. The Company borrowed a total of $0 and $347,099 during 2014 and 2013, respectively, from companies with common ownership. There is no stated interest rate on the payables and no scheduled repayment terms.
Inventory
The Company buys lots and builds homes in developments that are partially owned by one of its members. According to management, the lots are purchased at comparable prices, as compared to the prices that other local and national builders pay for lots in these developments.
NOTE E - CONSTRUCTION LOANS
Construction loans consist of the following at December 31:
|
| | | |
| 2014 | | 2013 |
Construction loans collateralized by inventories and | | | |
payable as the projects are sold, bearing interest | | | |
at rates of Prime plus one half percent per annum | $ 34,754,186 | | $ 17,016,067 |
| | | |
Construction loans collateralized by inventories and | | | |
payable as the projects are sold, bearing interest | | | |
at the bank's prime rate | 13,350,874 | | 9,745,277 |
| | | |
| $ 48,105,060 | | $ 26,761,344 |
All construction loans are classified as current liabilities on December 31, 2014. Interest expense of $424,108 and $236,068 was capitalized as an additional cost of inventories during 2014 and 2013, respectively.
The Company’s main construction loan has additional related borrowers included. The development companies included that are related by common ownership (Bonterra Village, Poplin Development Group) are listed as borrowers on the line and any assets of these companies have been cross-collateralized with the loan. The amount borrowed on this construction line as of December 31, 2014 is $21,094,268.
NOTE F - CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances at one bank. Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. Balances at this institution often exceed the insured limits. At December 31, 2014, the balances in the bank exceeded FDIC limits by approximately $4,500,000.
The construction industry is highly competitive and lacks firms with dominant market power. The volume and profitability of the company’s construction work depends to a significant extent upon the general state of the economies and the volume of work available to contractors. The adverse conditions currently in the housing market along with the inherit risk of construction projects are of major concern across the industry along with inherent financing risks. The Company’s construction operation could be adversely affected by labor stoppages or shortages, adverse weather conditions, or shortages of supplies.
Exhibit 99.2
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FINANCIAL STATEMENTS |
(unaudited) |
|
BONTERRA BUILDERS, LLC |
|
JUNE 30, 2015 |
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BONTERRA BUILDERS, LLC |
| | | | |
TABLE OF CONTENTS |
| | | | |
| | | | PAGE |
| | | | |
INDEPENDENT ACCOUNTANT'S REPORT | | | 1 |
| | | | |
FINANCIAL STATEMENTS | | | | |
| | | | |
BALANCE SHEET | | | | 2 |
| | | | |
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY | 3 |
| | | | |
STATEMENT OF CASH FLOWS | | | 4 |
| | | | |
NOTES TO FINANCIAL STATEMENTS | | | 5 |
|
| | | | | |
BONTERRA BUILDERS, LLC |
BALANCE SHEET |
June 30, 2015 |
| | | |
ASSETS |
| | | |
CURRENT ASSETS | | | |
Cash and cash equivalents | | | $ | 211,050 |
|
Accounts receivable - trade | | | 2,065,774 |
|
Lot inventories | | | 74,762,022 |
|
| | | |
Total current assets | | | 77,038,846 |
|
| | | |
PROPERTY AND EQUIPMENT | | | 894,619 |
|
Less accumulated depreciation | | | (459,212 | ) |
Total net property and equipment | | | 435,407 |
|
| | | |
OTHER ASSETS | | | |
Deposits | | | 1,998,254 |
|
Total other assets | | | 1,998,254 |
|
| | | |
Total Assets | | | $ | 79,472,507 |
|
| | | |
| | | |
LIABILITIES AND MEMBERS' EQUITY |
| | | |
CURRENT LIABILITIES | | | |
Construction loans | | | $ | 52,940,863 |
|
Accounts payable | | | 5,372,555 |
|
Accrued expenses | | | 219,210 |
|
Deposits | | | 1,849,926 |
|
| | | |
Total current liabilities | | | 60,382,554 |
|
| | | |
| | | |
MEMBERS' EQUITY | | | 19,089,953 |
|
| | | 19,089,953 |
|
| | | |
Total Liabilities and Members' Equity | | | $ | 79,472,507 |
|
See independent accountant's report.
|
| | | | | |
BONTERRA BUILDERS, LLC |
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY |
For the Six Months Ended June 30, 2015 |
| | | |
SALES | | | $ | 70,766,661 |
|
COST OF HOMES SOLD | | | 57,149,297 |
|
| | | |
GROSS PROFIT | | | 13,617,364 |
|
| | | |
SELLING, GENERAL, AND ADMINISTRATIVE | | | |
EXPENSES | | | 6,205,429 |
|
| | | |
NET OPERATING INCOME | | | 7,411,935 |
|
| | | |
OTHER INCOME AND (EXPENSE) | | | |
Rebate income | | | 293,185 |
|
Rental income | | | 24,530 |
|
Other income | | | 419,334 |
|
Interest expense | | | (1,074,270 | ) |
| | | (337,221 | ) |
| | | |
| | | |
NET INCOME | | | 7,074,714 |
|
| | | |
BEGINNING MEMBERS' EQUITY | | | 20,087,673 |
|
Distributions | | | (8,072,434 | ) |
| | | |
ENDING MEMBERS' EQUITY | | | $ | 19,089,953 |
|
See independent accountant's report.
|
| | | | | | |
BONTERRA BUILDERS, LLC |
STATEMENT OF CASH FLOWS |
For the Six Months Ended, June 30, 2015 |
| | | | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Net income | | | $ | 7,074,714 |
| |
Adjustments to reconcile net income to net cash | | | | |
provided by (used in ) operating activities: | | | | |
Depreciation | | | 90,012 |
| |
(Increase) decrease in: | | | | |
Accounts receivable - trade | | | (751,821) |
| |
Inventories | | | (7,597,531) |
| |
Lot deposits | | | 99,800 |
| |
Increase (decrease) in: | | | | |
Accounts payable | | | (2,609,987) |
| |
Accrued expenses | | | (330,321) |
| |
Builder deposits | | | 699,000 |
| |
| | | | |
Net cash provided by (used in) operating expenses | | | (3,326,134) |
| |
| | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Investments in partnerships | | | 301,900 |
| |
Purchases of property and equipment | | | (366,678) |
| |
| | | | |
Net cash provided by (used in) investing activities | | | (64,778) |
| |
| | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Net borrowings (payments) on construction loans | | | 4,835,803 |
| |
Net borrowings (payments) on auto loans | | | (91,231) |
| |
Sale of property and equipment | | | 1,508,344 |
| |
Dividends paid | | | (8,072,434) |
| |
| | | | |
Net cash provided by (used in) financing activities | | | (1,819,518) |
| |
| | | | |
NET INCREASE (DECREASE) IN CASH | | | (5,210,430) |
| |
| | | | |
CASH AT BEGINNING OF YEAR | | | 5,421,480 |
| |
| | | | |
CASH AT END OF YEAR | | | $ | 211,050 |
| |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid for interest | | | $ | 1,075,344 |
| |
See independent accountant's report.
BONTERRA BUILDERS, LLC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
June 30, 2015
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Bonterra Builders, LLC (“The Company”), a North Carolina limited liability company, was formed on October 19, 2001. The company builds townhomes and single family residential homes in the greater Charlotte area of North and South Carolina. Bonterra Builders, LLC sold its assets and operations to AV Homes, Inc. as of July 1, 2015.
Method of Accounting
For financial reporting purposes, assets and liabilities are recorded and income and expenses are recognized on the accrual basis of accounting.
Revenue Recognition
The Company recognizes revenue from all homebuilding activities at the closing of the sale using the deposit method. During construction, all direct material and labor costs and those indirect costs related to acquisition and construction are capitalized, and all customer deposits are treated as liabilities. Capitalized costs are charged to earnings upon closing. Costs incurred in connection with completed homes and selling, general, and administrative costs are charged to expense as incurred.
Accounts Receivable
Accounts receivable are presented at face value. Management considers receivables to be fully collectible; accordingly, no allowance for doubtful accounts has been provided. Bad debts on accounts receivable are expensed in the period in which management determines the amount to be uncollectible.
Inventory
Housing assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the assets are considered to be impaired, they are then written down to the fair value less estimated selling costs. The ultimate fair value for the Company’s inventory is dependent upon future market and economic conditions.
Capitalized Costs
Capitalized costs include the costs of acquiring land, construction costs, interest, property taxes, and overhead related to the construction of the units. Direct costs are capitalized to individual homes and other costs are allocated to each lot based on lot size.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Property and Equipment
Cost of property and equipment as of June 30, 2015, is as follows:
|
| |
| 2015 |
| |
Office furniture and fixtures | $ 27,722 |
Computer equipment | 42,301 |
Construction equipment | 36,146 |
Model furniture and fixtures | 788,450 |
| |
| $ 894,619 |
Depreciation
Depreciation is computed principally using straight-line methods at rates intended to distribute the cost of properties over their estimated service lives varying from five (5) to forty (40) years.
Income Taxes
Upon inception of the LLC, the Company’s members made an election to be taxed as a Corporation. Subsequently, the Company, with the consent of the owners, elected “S” status under Section 1361 of the Internal Revenue Code and North Carolina state tax code on October 19, 2001, which provides that, in lieu of corporation income taxes, the shareholder is taxed on his proportionate share of the Company’s taxable income. Therefore, no provision or liability for federal or state income tax is included in these financial statements.
Compensated Absences
Compensated absences have not been accrued because the amount cannot be reasonably estimated and is considered immaterial to the overall statement presentation.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Cash, receivables, trade payables, and accrued expenses are carried at cost, which approximates fair value due to the short-time maturity of these instruments.
NOTE B - WORK IN PROCESS INVENTORY
The Company classifies any homes under construction as inventory on the balance sheet. Work in process as of June 30, 2015 consists of the following:
|
| |
| 2015 |
Land held for development | $ 7,798,008 |
Land under development | 10,414,562 |
Work in process invesntory | 56,549,452 |
| |
| $ 74,762,022 |
NOTE C - OTHER ASSETS
The Company has paid deposits on lots in the following subdivisions: Bonterra, Millbridge, Cedarvale Farm, Steel Gardens, Heron Cove, Blanchard Farms, and Walnut Creek, which are classified as assets on the balance sheet. These deposits were required to ensure the company has purchase rights on each lot as they become ready for construction. The balance of the deposits held for purchase rights on June 30, 2015 are $1,998,254.
NOTE D - RELATED PARTY TRANSACTIONS
Inventory
The Company buys lots and builds homes in developments that are partially owned by one of its members. According to management, the lots are purchased at comparable prices, as compared to the prices that other local and national builders pay for lots in these developments.
NOTE E - CONSTRUCTION LOANS
Construction loans consist of the following at June 30:
|
| | | |
| 2015 |
Construction loans collateralized by inventories and | |
payable as the projects are sold, bearing interest | |
at rates of Prime plus one half percent per annum | $ | 37,922,593 |
|
| |
Construction loans collateralized by inventories and | |
payable as the projects are sold, bearing interest | |
at the bank's prime rate | 15,018,270 |
|
| |
| $ | 52,940,863 |
|
All construction loans are classified as current liabilities on June 30, 2015. Interest expense of $251,549 was capitalized as an additional cost of inventories during the period ended June 30, 2015.
The Company’s main construction loan has additional related borrowers included. The development companies included that are related by common ownership (Bonterra Village, Poplin Development Group) are listed as borrowers on the line and any assets of these companies have been cross-collateralized with the loan. The amount borrowed on this construction line as of June 30, 2015 is $15,837,324.
NOTE F - CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances at one bank. Accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. Balances at this institution often exceed the insured limits. At June 30, 2015, the balances in the bank exceeded FDIC limits by approximately $500,000.
The construction industry is highly competitive and lacks firms with dominant market power. The volume and profitability of the company’s construction work depends to a significant extent upon the general state of the economies and the volume of work available to contractors. The adverse conditions currently in the housing market along with the inherit risk of construction projects are of major concern across the industry along with inherent financing risks. The Company’s construction operation could be adversely affected by labor stoppages or shortages, adverse weather conditions, or shortages of supplies.
Exhibit 99.3
AV Homes, Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
For the Year Ended December 31, 2014 and for the Six Months Ended June 30, 2015
On July 1, 2015, AV Homes, Inc. ("the Company" or "we") acquired substantially all of the assets and certain liabilities of Bonterra Builders, LLC (“Bonterra”) for approximately $101.5 million, including an estimated earn-out, subject to customary post-closing adjustments. The actual amount of the earn-out may be more or less than the $6.0 million target amount based on the performance of the Bonterra business through the end of 2016. A portion of the aggregate consideration equal to $0.8 million was held back by us at the closing as security for Bonterra's indemnification and other obligations under the purchase agreement. Bonterra acquires raw and developed land, develops raw land and constructs homes in the Charlotte, North Carolina area. With approximately 1,700 lots owned or controlled at the time of acquisition, the Bonterra acquisition significantly enhances our position in a key growth market.
The transaction was accounted for as a business combination in accordance with the Company’s accounting policies with the acquired assets and assumed liabilities recorded at their estimated fair values as of July 1, 2015. The following unaudited pro forma condensed financial information and explanatory notes, presents the pro forma impact of the Bonterra acquisition on the Company’s results of operations for the year ended December 31, 2014 and the six months ended June 30, 2015 as if it had been completed on January 1, 2014. The unaudited pro forma balance sheet as of June 30, 2015 presented herein also includes the effects of the Bonterra acquisition as if it had been completed on June 30, 2015.
We derived the unaudited pro forma condensed consolidated financial information set forth below by the application of pro forma adjustments to the audited and unaudited consolidated financial statements for the Company and Bonterra. The Company’s and Bonterra's historical consolidated financial information has been adjusted in the unaudited pro forma condensed consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) with respect to the pro forma statement of operations, expected to have a continuing impact on the combined results.
The unaudited pro forma condensed financial information reflects pro forma adjustments that are described in the accompanying explanatory notes and are based on available information, and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the unaudited pro forma condensed consolidated financial information.
The unaudited pro forma condensed financial information is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the acquisition of Bonterra been consummated on the dates indicated, and does not purport to be indicative of the financial condition or results of operations as of any future date or for any future period. You should read our unaudited pro forma condensed consolidated financial information and the accompanying explanatory notes in conjunction with the consolidated historical financial statements and related notes included elsewhere in this Form 8-K/A. Certain amounts in the historical consolidated financial statements of Bonterra have been reclassified to conform to the Company’s presentation.
|
| | | | | | | | | | | | | | | |
|
AV Homes, Inc. |
Unaudited Pro Forma Consolidated Statement of Operations |
For the Year Ended December 31, 2014 |
(in thousands, except share and per share amounts) |
| | | | | | | |
| Historical AV Homes, Inc. (1) | | Historical Bonterra Builders, LLC (2) | | Pro Forma Adjustments (2) | | AV Homes, Inc. Pro Forma |
Revenues | | | | | | | |
Real estate revenues | | | | | | | |
Homebuilding | $ | 243,171 |
| | $ | 111,782 |
| | $ | — |
| | $ | 354,953 |
|
Amenity and other | 10,146 |
| | — |
| | — |
| | 10,146 |
|
Land sales | 32,596 |
| | — |
| | — |
| | 32,596 |
|
Total real estate revenues | 285,913 |
| | 111,782 |
| | — |
| | 397,695 |
|
| | | | | | | |
Expenses | | | | | | | |
Real estate expenses | | | | | | | |
Homebuilding | 233,250 |
| | 102,809 |
| | 5,928 |
| (3), (4) | 341,987 |
|
Amenity and other | 10,948 |
| | — |
| | — |
| | 10,948 |
|
Land sales | 22,003 |
| | — |
| | — |
| | 22,003 |
|
Total real estate expenses | 266,201 |
| | 102,809 |
| | 5,928 |
| | 374,938 |
|
| | | | | | | |
General and administrative expenses | 15,941 |
| | — |
| | 466 |
| | 16,407 |
|
Interest income and other | (447 | ) | | — |
| | — |
| | (447 | ) |
Interest expense | 5,805 |
| | 896 |
| | (1,923 | ) | (4) | 4,778 |
|
Total expenses | 287,500 |
| | 103,705 |
| | 4,471 |
| | 395,676 |
|
Equity in earnings (loss) from unconsolidated entities | (16 | ) | | — |
| | — |
| | (16 | ) |
Income (Loss) before income taxes | (1,603 | ) | | 8,077 |
| | (4,471 | ) | | 2,003 |
|
Income tax (expense) | — |
| | — |
| | — |
| (5) | — |
|
Net income (loss) and comprehensive income (loss) | (1,603 | ) | | 8,077 |
| | (4,471 | ) | | 2,003 |
|
Net income attributable to non-controlling interests in consolidated entities | 329 |
| | — |
| | — |
| | 329 |
|
Net income (loss) and comprehensive income (loss) attributable to stockholders | $ | (1,932 | ) | | $ | 8,077 |
| | $ | (4,471 | ) | | $ | 1,674 |
|
| | | | | | | |
Basic and Diluted Earnings (Loss) Per Share | $ | (0.09 | ) | | | | | (6) | $ | 0.08 |
|
Basic Weighted Average Common Shares | 21,945,491 |
| | | | | | 21,945,491 |
|
Diluted Weighted Average Common Shares | 21,945,491 |
| | | | | | 22,007,007 |
|
|
| | | | | | | | | | | | | | | |
AV Homes, Inc. |
Unaudited Pro Forma Consolidated Statement of Operations |
For the Six Months Ended June 30, 2015 |
(in thousands, except share and per share amounts) |
| | | | | | | |
| Historical AV Homes, Inc. | | Historical Bonterra Builders, LLC (2) | | Pro Forma Adjustments (2) | | AV Homes, Inc. Pro Forma |
Revenues | | | | | | | |
Real estate revenues | | | | | | | |
Homebuilding | $ | 129,251 |
| | $ | 70,767 |
| | $ | — |
| | $ | 200,018 |
|
Amenity and other | 5,504 |
| | — |
| | — |
| | 5,504 |
|
Land sales | 3,464 |
| | — |
| | — |
| | 3,464 |
|
Total real estate revenues | 138,219 |
| | 70,767 |
| | — |
| | 208,986 |
|
| | | | | | | |
Expenses | | | | | | | |
Real estate expenses | | | | | | | |
Homebuilding | 129,187 |
| | 62,992 |
| | 4,100 |
| (3), (4) | 196,279 |
|
Amenity and other | 4,813 |
| | — |
| | — |
| | 4,813 |
|
Land sales | 383 |
| | — |
| | — |
| | 383 |
|
Total real estate expenses | 134,383 |
| | 62,992 |
| | 4,100 |
| | 201,475 |
|
| | | | | | | |
General and administrative expenses | 7,936 |
| | — |
| | — |
| | 7,936 |
|
Interest income and other | (124 | ) | | — |
| | — |
| | (124 | ) |
Interest expense | 5,663 |
| | 700 |
| | (2,371 | ) | (4) | 3,992 |
|
Total expenses | 147,858 |
| | 63,692 |
| | 1,729 |
| | 213,279 |
|
Equity in earnings (loss) from unconsolidated entities | 165 |
| | — |
| | — |
| | 165 |
|
Income (Loss) before income taxes | (9,474 | ) | | 7,075 |
| | (1,729 | ) | | (4,128 | ) |
Income tax (expense) | — |
| | — |
| | — |
| | — |
|
Net income (loss) and comprehensive income (loss) | $ | (9,474 | ) | | $ | 7,075 |
| | $ | (1,729 | ) | | $ | (4,128 | ) |
| | | | | | | |
Basic and Diluted Earnings (Loss) Per Share | $ | (0.43 | ) | | | | | (6) | $ | (0.19 | ) |
Basic and Diluted Weighted Average Common Shares | 22,000,367 |
| | | | | | 22,000,367 |
|
|
| | | | | | | | | | | | | | | | |
AV Homes, Inc. |
Unaudited Pro Forma Condensed Consolidated Balance Sheet |
As of June 30, 2015 |
(in thousands) |
| | | | | | | | |
| Historical AV Homes, Inc. | | Historical Bonterra Builders, LLC | | Pro Forma Adjustments | | | AV Homes, Inc. Pro Forma |
Assets | | | | | | | | |
Cash and cash equivalents | $ | 113,274 |
| | $ | 211 |
| | $ | (95,859 | ) | (7) | | $ | 17,626 |
|
Restricted cash | 25,175 |
| | — |
| | — |
| | | 25,175 |
|
Land and other inventories | 496,910 |
| | 76,760 |
| | 11,470 |
| (8) | | 585,140 |
|
Receivables | 3,256 |
| | 2,066 |
| | — |
| | | 5,322 |
|
Property and equipment, net | 36,140 |
| | 436 |
| | — |
| | | 36,576 |
|
Investments in unconsolidated entities | 1,179 |
| | — |
| | — |
| | | 1,179 |
|
Prepaid expenses and other assets | 22,547 |
| | — |
| | 1,800 |
| (9) | | 24,347 |
|
Goodwill | 6,071 |
| | — |
| | 17,122 |
| (10) | | 23,193 |
|
Total Assets | $ | 704,552 |
| | $ | 79,473 |
| | $ | (65,467 | ) | | | $ | 718,558 |
|
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
| | | | | | | | |
Liabilities | | | | | | | | |
Accounts payable | $ | 29,370 |
| | $ | 5,373 |
| | $ | — |
| | | $ | 34,743 |
|
Accrued and other liabilities | 17,257 |
| | 219 |
| | 7,030 |
| (11) | | 24,506 |
|
Customer deposits | 10,882 |
| | 1,850 |
| | — |
| | | 12,732 |
|
Estimated development liability | 32,908 |
| | — |
| | — |
| | | 32,908 |
|
Notes payable | 335,211 |
| | 52,941 |
| | (52,941 | ) | (12) | | 335,211 |
|
Total Liabilities | 425,628 |
| | 60,383 |
| | (45,911 | ) | | | 440,100 |
|
| | | | | | | | |
Stockholders' Equity | 278,924 |
| | 19,090 |
| | (19,556 | ) | (13) | | 278,458 |
|
Total Liabilities and Stockholders' Equity | $ | 704,552 |
| | $ | 79,473 |
| | $ | (65,467 | ) | | | $ | 718,558 |
|
AV Homes, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(a) Description of Transaction
On July 1, 2015, we acquired substantially all of the assets and certain liabilities of Bonterra Builders, LLC (“Bonterra”) for approximately $101.5 million, including an estimated earn-out, subject to customary post-closing
adjustments. The actual amount of the earn-out may be more or less than the $6.0 million target amount based on the
performance of the Bonterra business through the end of 2016. A portion of the aggregate consideration equal to $0.8 million
was held back by us at the closing as security for Bonterra's indemnification and other obligations under the purchase agreement. Bonterra acquires raw and developed land, develops raw land and constructs single-family homes in the Charlotte,
North Carolina area. With approximately 1,700 lots owned or controlled at the time of the transaction, the Bonterra acquisition significantly enhances our position in a key growth market.
The following is a summary of the assets acquired and the liabilities assumed in the Bonterra acquisition. We have made an estimate of the fair value of the acquired assets and assumed liabilities based on information currently available to us. We also acquired certain intangible assets, including a trade name and non-compete agreements. Once we finalize our valuation analysis, assumptions utilized to estimate fair value may change, and accordingly, our estimated allocation may change.
The following table summarizes our preliminary estimates of the fair value of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
|
| | | | |
Assets acquired and liabilities assumed | | |
Assets | | |
Accounts receivable | | $ | 2,066 |
|
Land and other inventories | | 88,230 |
|
Property, plant and equipment | | 436 |
|
Trade name | | 1,400 |
|
Non-compete agreements | | 400 |
|
Goodwill | | 17,122 |
|
| | |
Total assets acquired | | 109,654 |
|
| | |
Liabilities | | |
Accounts payable | | 5,373 |
|
Accrued and other liabilities | | 949 |
|
Customer deposits | | 1,850 |
|
| | |
Total liabilities assumed | | 8,172 |
|
| | |
Total net assets acquired | | $ | 101,482 |
|
| | |
We are determining the preliminary estimate of fair value for acquired land and other inventories with the assistance of a third-party appraiser primarily using a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimate include future per lot development costs, construction and overhead costs, mix of products sold in each community as well as average sales price and absorption rates.
We are determining the preliminary estimate of fair value for amortizable intangible assets, which includes the trade name and non-compete agreements, with the assistance of a third-party valuation firm based primarily on a relief from royalty and income approach. Our preliminary estimates of the fair value of the trade name and non-compete agreements were $1.4 million and $0.4 million, respectively, which will be amortized over 5 years and 3 years, respectively.
We determined that Bonterra’s carrying costs approximated fair value for all other acquired assets and assumed liabilities. Goodwill includes the anticipated economic value of the acquired workforce.
(b) Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
(1) Presentation of Condensed Consolidated Statement of Operations for AV Homes, Inc.
Certain revenue and expense balances were reclassified from "Homebuilding and amenity," as well as "Other real estate" into the line item "Amenity and other" to enhance the visibility to our core homebuilding operations.
(2) Historical Bonterra Builders, LLC and Pro Forma Adjustments
As the acquisition of Bonterra occurred on July 1, 2015, the historical Bonterra Builders, LLC and pro forma adjustments columns of the unaudited pro forma consolidated statement of operations for the year ended December 31, 2014 and for the six months ended June 30, 2015 include the results of Bonterra’s operations and related pro forma adjustments for the period from January 1, 2014 through June 30, 2015.
(3) Homebuilding Expenses
As noted above, the land and other inventories purchased in the Bonterra acquisition were recognized at their estimated fair value as of the acquisition date. As a result, the historical homebuilding expenses for Bonterra also requires a pro forma adjustment to reflect this increase in pro forma inventory cost. The pro forma adjustment to homebuilding expenses is estimated to be additional expense of $4.0 million for the year ended December 31, 2014 and $2.6 million for the six months ended June 30, 2015.
The pro forma adjustments were determined for all the lots owned or controlled as of January 1, 2014, including the 303 and 195 lots that were delivered by Bonterra during the year ended December 31, 2014 and the six months ended June 30, 2015, respectively, in accordance with ASC 820-10-55-21(f). Accordingly, we applied pro forma adjustments to Bonterra’s historical costs based upon an average of the estimated fair value adjustment per owned lot as of January 1, 2014, such that the pro forma increase to inventory and homebuilding expenses results in an expected gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. We estimated a market participant would require a gross margin ranging from 5% to 20% based upon the stage of production of the individual lot.
As noted above, certain intangible assets were acquired in the Bonterra acquisiton and will be amortized over their respective lives. As a result, we have made a pro forma adjustment to homebuilding expenses in the pro forma statement of operations for the year ended December 31, 2014 and the six months ended June 30, 2015 totaling $0.4 million and $0.2 million, respectively, for the amortization of the intangibles.
(4) Interest expense
The inventories purchased in the Bonterra acquisition have increased the amount of the assets eligible for the capitalization of interest. Accordingly, we have recorded pro forma adjustments to decrease interest expense by $1.9 million for the year ended December 31, 2014 and by $2.4 million for the six months ended June 30, 2015. In addition, we have recorded pro forma adjustments to increase capitalized interest included in homebuilding expenses by $1.5 million for the year ended December 31, 2014 and $1.3 million for the six months ended June 30, 2015. These adjustments are based upon applying our average interest rate to an estimate of the incremental inventory balance that was eligible for interest capitalization.
(5) Income Tax Expense
We have not recorded a pro forma adjustment to increase current income tax expense for the year ended December 31, 2014 as we have a full valuation allowance against our deferred tax asset.
(6) Earnings Per Share
Pro forma basic and diluted net income per share for the six months ended June 30, 2014 and the year ended December 31, 2014 give effect to pro forma adjustments discussed above.
(7) Cash and Cash Equivalents
This pro forma adjustment reflects the cash consideration paid at the closing of the transaction, transaction costs, and the cash that the owners of Bonterra were entitled to retain.
(8) Land and other inventories
This pro forma adjustment reflects the fair value adjustment to inventory discussed in (a) above.
(9) Prepaid expenses and other assets
This pro forma adjustment reflects the addition of intangible assets obtained in the Bonterra acquisition.
(10) Goodwill
This pro forma adjustment reflects the addition of goodwill obtained in the Bonterra acquisition. The goodwill amount represents the excess of the purchase price allocated to identified assets and liabilities.
(11) Accrued and other liabilities
This pro forma adjustment reflects the fair value assigned to the contingent consideration (earn-out) that was accrued for in connection with the Bonterra acquisition, as well as an increase to accrued warranty liability to conform our warranty policy.
(12) Notes payable
As part of the consideration transferred in acquisition of Bonterra, the Company paid off all existing notes payable at the close of the transaction.
(13) Stockholders' equity
Purchase accounting requires the elimination of the acquired company's stockholders' equity. This adjustment also reflects transaction costs that were expensed at the close of the acquisition.
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