MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS OF ENERGY SERVICES
You
should read the following discussion of the financial condition and results of
operations of Energy Services in conjunction with Energy Services historical
consolidated financial statements and related notes contained elsewhere herein.
Among other things, those historical consolidated financial statements include
more detailed information regarding the basis of presentation for the following
information.
Overview
Energy
Services was formed on March 31, 2006, to serve as a vehicle to effect a
merger, capital stock exchange, asset acquisition or other similar business
combination with an operating business. Energy Services intend to utilize cash
derived from the proceeds of its public offering, Energy Services capital
stock, debt or a combination of cash, capital stock and debt, in effecting a
business combination.
Comparison of Financial Condition at December 31,
2007 and September
30, 2007
From
September 30, 2007 to December 31, 2007, the assets of Energy Services grew
from $51,526,659 to $51,850,606. This growth was driven primarily by the
increase in cash and cash equivalents held in trust, which increased from
$49,711,430 at September 30, 2007 to $50,326,033 at December 31, 2007, due to
income earned on the funds held in trust. Liabilities decreased slightly from
$1,349,564 at September 30, 2007 to $1,318,725, due to a pay down of accrued
liabilities. The value of the Energy Services common stock subject to possible
redemption increased from $10,143,000 at September 30, 2007 to $10,263,000 at
December 31, 2007. This increase was due to the increase in the value per share
of the funds held in trust. Equity increased from $40,034,095 at September 30,
2007 to $40,268,881 at December 31, 2007.
Comparison of Financial Condition at September 30,
2006 and September
30, 2007
Total
assets increased by $1.3 million from $50,258,554 at September 30, 2006 to
$51,526,659. This increase came primarily in cash, which increased by $679,401
to $756,782 from the September 30, 2006 balance of $77,381 as well as the cash
and cash equivalents held in trust which increased by $562,257 to $49,711,430,
compared to $49,149,173 at September 30, 2006. Liabilities decreased by $97,976
to $1,349,564 at September 30, 2007, compared to $1,447,540 at September 30,
2006. Total stockholders equity increased primarily due to the earnings for
2007 to a balance of $40,034,095 at September 30, 2007, compared to a balance
at September 30, 2006 of $38,822,814.
Comparison of Operating Results for the three
months ended December 31,
2007 and 2006
Net
income for the year to date and quarter ended December 31, 2007 was $354,786,
which consisted of interest from the trust fund totalling $619,160, offset by
$58,374 of expenses, $44,790 of which related to formation and operating cost,
$2,379 of which related to due diligence expenses relating to potential
acquisitions, $11,205 relating to Delaware franchise tax and income taxes of $206,000.
This income compares to an income of $348,312 for the same period the prior
year, which consisted of interest from the trust fund totalling $654,819,
offset by $63,507 of expenses, $30,170 of which related to formation and
operating cost, $18,400 of which related to due diligence expenses relating to
potential acquisitions, $14,937 relating to Delaware franchise tax and income
taxes of $243,000.
Net
income from inception (March 31, 2006) to December 31,2007 was $1,823,268,
which consisted of interest income from the trust fund and other interest
totalling $3,409,168, which was offset
102
by $492,900 of
expenses. $307,567 of the expenses related to formation and operating costs,
$95,576 related to due diligence expenses relating to potential acquisitions,
$89,757 related to Delaware franchise tax and income taxes of $1,093,000.
Comparison of the Operating Results for the years
ended September 30,
2006 and September 30, 2007
For
the year ended September 30, 2007, Energy Services had a net income of
$1,381,062 attributable to interest and dividend income less formation and
operating expenses and federal and state income and capital taxes. Net income
for the year ended September 30, 2006 was $87,420. Net income for 2006 was lower
due to the fact that the public offering was completed on September 6, 2006 and
therefore only a partial months interest and expenses were incurred. Our
interest and dividend income for the period ended September 30, 2007 was
$2,612,835, compared to $177,174 for the period ended September 30, 2006. In
both periods, interest and dividend income was primarily derived from money
market funds and Treasury Bills. For the year ended September 30, 2007,
expenses consisted primarily of formation, operating and due diligence expenses
of $385,773 and federal and state income taxes of $846,000. Similar expenses
for the year ended September 30, 2006 were $48,754 for formation and operating
expenses and $41,000 for Federal and state income taxes.
Operating Results for the Period from March 31,
2006 (Date of
Inception) to September 30, 2007
For
the period from March 31, 2006 (inception) through September 30, 2007, we had
net income of $1,468,482, attributable to interest and dividend income less formation
and operating expenses and federal and state income and capital taxes. Energy
Services interest and dividend income of $2,790,009 for the period ended
September 30, 2007 were principally derived from money market funds and
Treasury Bills. For the period ended September 30, 2007, Energy Services
expenses consisted of formation and operating costs of $434,527 and federal and
state income taxes of $887,000.
Liquidity and Capital Resources
Energy
Services consummated its initial public offering on September 6, 2006. Gross
proceeds from the initial public offering were $51,600,000. Energy Services
paid a total of $4,128,000 in underwriting discounts and commissions, and
approximately $774,000 was paid for costs and expenses related to the offering.
After deducting the underwriting discounts and commissions and the offering
expenses, the total net proceeds to us from the offering that were deposited
into a trust fund were $48,972,000, (or approximately $5.69 per unit sold in
the offering). An additional $1,032,000, representing the underwriters
non-accountable expense allowance, and $2.0 million from the proceeds of the
private placement warrants were also placed in the trust account. As of
December 31, 2007, approximately $51,358,033 (or approximately $5.97 per share
sold in the offering) is being held in the trust account. To the extent that
Energy Services capital stock is used in whole or in part as consideration to
effect a business combination, the proceeds held in the trust fund as well as
any other net proceeds not expended will be used to finance the operations of
the target business. Energy Services working capital will be generated solely
from interest earned on the amount held in trust. Energy Services is limited to
$1,200,000 of such interest (net of taxes) to fund working capital. Energy
Services believes the interest earned on the amount held in trust will be
sufficient to fund our operations. From September 6, 2006 through September 6,
2008, Energy Services anticipates approximately $350,000 of expenses for legal,
accounting and other expenses attendant to the due diligence investigations,
structuring and negotiating of a business combination, $240,000 for expenses
for the due diligence and investigation of a target business, $120,000 in
reimbursement expenses to Chapman Printing Co. ($5,000 per month for two
years), $110,000 of expenses in legal and accounting fees relating to our SEC
reporting obligations and $305,000 for general working capital that will be
used for tax payments, miscellaneous expenses and reserves, including
approximately $100,000 (through January 1, 2008) for director and officer
liability
103
insurance
premiums. Energy Services does not believe it will need to raise additional
funds in order to meet the expenditures required for operating its business.
In
connection with Energy Services initial public offering, Energy Services
issued to the underwriters, for $100, an option to purchase up to a total of
450,000 units at $7.50 per unit. The units issuable upon exercise of this
purchase option are identical to the units Energy Services sold in its initial
public offering except that the warrants included in the option have an
exercise price of $6.25. Energy Services estimated that the fair value of this
option was approximately $1,642,500 ($3.65 per unit underlying such option)
using a Black-Scholes option-pricing model. The fair value of the option
granted to the underwriter was estimated as of the date of grant, using the
following assumptions: (1) expected volatility of 75.7%, (2) risk-free interest
rate of 5.1% and (3) expected life of five years.
Off-Balance Sheet Arrangements
Energy
Services has never entered into any off-balance sheet financing arrangements
and has never established any special purpose entities. Energy Services has not
guaranteed any debt or commitments of other entities or entered into any
options on non-financial assets.
Contractual Obligations
Energy
Services has no long-term debt, capital lease obligations, operating lease
obligations, purchase obligations or other long-term liabilities.
Quantitative and Qualitative Disclosures About
Market Risk
Market
risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices, and other market-driven rates or
prices. Energy Services is not presently engaged in and, if a suitable business
target is not identified by Energy Services prior to the prescribed liquidation
date of the trust fund, Energy Services may not engage in any substantive
commercial business. Accordingly, Energy Services is not and, until such time
as Energy Services consummates a business combination, will not be exposed to
risks associated with foreign exchange rates, commodity prices, equity prices
or other market-driven rates or prices. The net proceeds of the initial public
offering held in the trust fund have been invested only in money market funds
meeting certain conditions under Rule 2a-7 promulgated under the Investment
Company Act of 1940.
New Accounting Pronouncements
During
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141 (R) is effective for fiscal years beginning after December 15, 2008.
Earlier application is prohibited. Assets and liabilities that arose from
business combinations which occurred prior to the adoption of FASB No. 141(R)
should not be adjusted upon the adoption of SFAS No. 141(R). SFAS No. 141(R)
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the business combination;
establishes the acquisition date as the measurement date to determine the fair
value of all assets acquired and liabilities assumed; and requires the acquirer
to disclose to investors and other users all of the information they need to
evaluate and understand the nature and financial effect of the business
combination. As it relates to recognizing all (and only) the assets acquired
and liabilities assumed in a business combination, costs an acquirer expects
but is not obligated to incur in the future to exit an activity of an acquiree
or to terminate or relocate an acquirees employees are not liabilities at the
acquisition date but must be expensed in accordance with other applicable
generally accepted accounting principles. Additionally, during the measurement
period, which should not exceed one year from the acquisition date, any
adjustments that are needed to assets
104
acquired and liabilities
assumed to reflect new information obtained about facts and circumstances that
existed as of that date will be adjusted retrospectively. The acquirer will be
required to expense all acquisition-related costs in the periods such costs are
incurred other than costs to issue debt or equity securities. SFAS No. 141(R)
will have no impact on our consolidated financial position, results of
operations or cash flows at the date of adoption, but it could have a material
impact on our consolidated financial position, results of operations or cash
flows in the future when it is applied to acquisitions which occur in the
fiscal year beginning September 20, 2009.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements SFAS
No. 157 defines fair value, establishes methods used to measure fair value and
expands disclosure requirements about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal periods, as it
relates to financial assets and liabilities that are carried at fair value.
SFAS No. 157 also requires certain tabular disclosures related to results of
applying SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets and SFAS No. 142, Goodwill and Other Intangible Assets. On November
14, 2007, the FASB provided a one year deferral for the implementation of SFAS
No. 157 for non-financial assets and liabilities. SFAS No. 157 excludes from its
scope SFAS No. 123 (R), Share-Based Payment and its related interpretive
accounting pronouncements that address share-based payment transactions. Based
on the assets and liabilities on our balance sheet as of December 31, 2007, we
do not expect the adoption of SFAS No. 157 to have a material impact on our
consolidated financial position, results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115. SFAS No. 159 permits entities to choose to measure at fair
value many financial instruments and certain other items at fair value that are
not currently required to be measured. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No.
159 does not affect any existing accounting literature that requires certain
assets and liabilities to be carried at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. Based on the assets and
liabilities on our balance sheet as of December 31, 2007, we do not expect the
adoption of SFAS No. 159 to have any impact on our consolidated financial
position, results of operations or cash flows.
I
NFORMATION ABOUT ST
PIPELINE
Business Overview
ST
Pipeline, Inc. was organized in 1990 as a corporation under the laws of the
State of West Virginia and is engaged in the construction, replacement and
repair of natural gas pipelines for utility companies and private natural gas
companies. The majority of ST Pipelines customers are located in West Virginia
and the surrounding Mid-Atlantic states. ST Pipeline builds, but does not own
natural gas pipelines for its customers that are part of both interstate and
intrastate pipeline systems that move natural gas from producing regions to
consumption regions. ST Pipeline is involved in the construction of both
interstate and intrastate pipelines, with an emphasis on the latter. ST Pipeline
also constructs storage facilities for its natural gas customers. ST Pipelines
other services include liquid pipeline construction, pump station construction,
production facility construction and other services related to pipeline
construction. Since 2002, ST Pipeline has completed over 225 miles of pipeline,
with its longest project consisting of 69 miles of pipeline. ST Pipeline is not
directly involved in the exploration, transportation or refinement of natural
gas.
105
Set
forth below is information regarding the sales, assets and operating income of
ST Pipelines business.
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Year Ended December 31,
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2007
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2006
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2005
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Sales
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$
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100,385,098
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$
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49,771,580
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$
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22,936,383
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Assets
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33,413,342
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11,137,798
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10,137,954
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Operating Income
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27,889,843
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3,353,235
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1,418,221
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At
December 31, 2007, ST Pipelines largest current project consists of a 69 mile
pipeline construction and installation project for Equitrans in Kentucky.
Our
services include the removal of and/or repair of existing pipelines,
installation of new pipelines, construction of pump stations, site work for
pipelines and various other services relating to pipelines.
ST
Pipeline is subject to extensive state and federal regulation, particularly in
the areas of the siting and construction of new pipelines. The work performed
by ST Pipeline on many projects relates to lines that are regulated by the US
Department of Transportation and therefore the work must be performed within
the rules and guidelines of the US Department of Transportation. In addition,
work at the various sites must comply with all environmental laws, whether it
be federal, state or local.
Customers and Marketing
ST
Pipeline customers include Equitable Resources and various of its subsidiaries,
Nisource/Columbia Gas Transmission, Nisource/Columbia Gas of Ohio and Dominion
Resources. During the year ended December 31, 2007, Equitable Resources/
Equitrans was ST Pipelines largest customer, accounting for approximately 92%
of total revenues. There can be no assurance that Equitable Resources/
Equitrans or any of ST Pipelines other principal customers will continue to
employ ST Pipelines services or that the loss of any of such customers or adverse
developments affecting any of such customers would not have a material adverse
effect on ST Pipelines financial condition and results of operations. However,
due to the nature of ST Pipelines operations, the major customers and sources
of revenues may change from year to year.
ST
Pipelines sales force consists of industry professionals with significant
relevant sales experience who utilize industry contracts and available public
data to determine how to most appropriately market ST Pipelines line of
products. We rely on direct contact between our sales force and our customers
engineering and contracting departments in order to obtain new business. Due to
the occurrence of inclement weather during the winter months, the business of
ST Pipeline, i.e., the construction of pipelines, is somewhat seasonal in that
most of the work is performed during the non-winter months.
Backlog/New Business
A
companys backlog represents orders which have not yet been processed. At
December 31, 2007, ST Pipeline had a backlog of work to be completed on
contracts of $5.4 million. At December 31, 2006, ST Pipeline had a backlog of
work on contracts of $57.3 million. Due to the timing of ST Pipelines
construction contracts and the long-term nature of some of our projects,
portions of our backlog may not be completed in the current fiscal year.
Between January 1, 2008 and February 21, 2008, ST Pipeline entered into
additional contracts with estimate revenues of approximately $16 million.
106
Types of Contracts
Our
contracts are usually awarded on a competitive and negotiated basis. While
contracts may be of a lump sum for a project or one that is based upon time and
materials, most of the work is bid based upon unit prices for various portions
of the work. The actual revenues produced from the project will be dependent
upon how accurate the customer estimates are as to the units of the various
items.
Raw Materials and Suppliers
The
principal raw materials that we use are metal plate, structural steel, pipe,
fittings and selected engineering equipment such as pumps, valves and
compressors. For the most part, the largest portion of these materials are
supplied by the customer. The materials that ST Pipeline purchases would
predominately be those of a consumable nature on the job, such as small tools
and environmental supplies. We anticipate being able to obtain these materials
for the foreseeable future.
Industry Factors
ST
Pipelines revenues, cash flows and earnings are substantially dependent upon,
and affected by, the level of natural gas exploration development activity and
the levels of integrity work on existing pipelines. Such activity and the
resulting level of demand for pipeline construction and related services are
directly influenced by many factors over which ST Pipeline has no control. Such
factors include, among others, the market prices of natural gas, market
expectations about future prices, the volatility of such prices, the cost of
producing and delivering natural gas, government regulations and trade
restrictions, local and international political and economic conditions, the
development of alternate energy sources and the long-term effects of worldwide
energy conservation measures. Substantial uncertainty exists as to the future
level of natural gas exploration and development activity.
ST
Pipeline cannot predict the future level of demand for its pipeline
construction services, future conditions in the pipeline construction industry
or future pipeline construction rates.
ST
Pipeline maintains banking relationships with three financial institutions and
has lines of credit borrowing facilities with these institutions. These lines
of credit facilities are due to expire in June and July of 2008. ST Pipeline
expects to renew these facilities and has no reason to believe that they will
not be renewed. ST Pipelines facilities have been sufficient to provide ST
Pipeline with the working capital necessary to complete their ongoing projects.
ST Pipeline also has an irrevocable standby letter of credit in the amount of
$950,542.
Competition
The
pipeline construction industry is a highly competitive business characterized
by high capital and maintenance costs. Pipeline contracts are usually awarded
through a competitive bid process and, while ST Pipeline believes that
operators consider factors such as quality of service, type and location of
equipment, or the ability to provide ancillary services, price and the ability
to complete the project in a timely manner are the primary factors in
determining which contractor is awarded a job. There are a number of regional
and national competitors that offer services similar to ours. Certain of ST
Pipelines competitors have greater financial and human resources than ST
Pipeline, which may enable them to compete more efficiently on the basis of
price and technology. Our largest competitors are Otis Eastern, LA Pipeline and
Apex Pipeline.
107
Operating Hazards and Insurance
ST
Pipelines operations are subject to many hazards inherent in the pipeline
construction business, including, for example, operating equipment in
mountainous terrain, people working in deep trenches and people working in
close proximity to large equipment. These hazards could cause personal injury
or death, serious damage to or destruction of property and equipment,
suspension of drilling operations, or substantial damage to the environment,
including damage to producing formations and surrounding areas. ST Pipeline seeks
protection against certain of these risks through insurance, including property
casualty insurance on its equipment, commercial general liability and
commercial contract indemnity, commercial umbrella and workers compensation
insurance.
ST
Pipelines insurance coverage for property damage to its equipment is based on
ST Pipelines estimate of the cost of comparable used equipment to replace the
insured property. There is a deductible per occurrence on rigs and equipment of
$10,000, except for underground occurrence which is $25,000 per occurrence and
$2,500 for miscellaneous tools. ST Pipelines third party liability insurance
coverage under the general policy is $1.0 million per occurrence, $2.0 million
in the aggregate with a self insured retention of $500,000 per occurrence. ST
Pipelines commercial umbrella policy coverage consists of $5.0 million primary
umbrella insurance and $5.0 million second layer umbrella per occurrence. ST
Pipeline believes that it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect ST Pipeline against liability for
all consequences of well disasters, extensive fire damage or damage to the
environment.
Government Regulation and Environmental
Matters
General.
ST Pipelines operations are
affected from time
to time in varying degrees by political developments and federal, state and
local laws and regulations. In particular, natural gas production, operations
and economics are or have been affected by price controls, taxes and other laws
relating to the natural gas industry, by changes in such laws and by changes in
administrative regulations. Although significant capital expenditures may be
required to comply with such laws and regulations, to date, such compliance
costs have not had a material adverse effect on the earnings or competitive
position of ST Pipeline. In addition, ST Pipelines operations are vulnerable
to risks arising from the numerous laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection.
Environmental Regulation.
ST
Pipelines activities are
subject to existing federal, state and local laws and regulations governing
environmental quality, pollution control and the preservation of natural
resources. Such laws and regulations concern, among other things, the
containment, disposal and recycling of waste materials, and reporting of the
storage, use or release of certain chemicals or hazardous substances. Numerous
federal and state environmental laws regulate drilling activities and impose
liability for discharges of waste or spills, including those in coastal areas.
ST Pipeline has conducted pipeline construction in or near ecologically
sensitive areas, such as wetlands and coastal environments, which are subject
to additional regulatory requirements. State and federal legislation also
provide special protections to animal and marine life that could be affected by
ST Pipelines activities. In general, under various applicable environmental
programs, ST Pipeline may potentially be subject to regulatory enforcement
action in the form of injunctions, cease and desist orders and administrative,
civil and criminal penalties for violations of environmental laws. ST Pipeline
may also be subject to liability for natural resource damages and other civil
claims arising out of a pollution event. ST Pipeline would be responsible for
any pollution event that was caused by its actions. It has insurance that it
believes is adequate to cover any such occurrences.
108
Environmental
regulations that affect ST Pipelines customers also have an indirect impact on
ST Pipeline. Increasingly stringent environmental regulation of the natural gas
industry has led to higher drilling costs and a more difficult and lengthy well
permitting process.
The
primary environmental statutory and regulatory programs that affect ST
Pipelines operations include the following: Department of Transportation
regulations, regulations set forth by agencies such as Federal Energy
Regulatory Commission and various environmental agencies including state,
federal and local government.
Health And Safety Matters.
ST
Pipelines facilities and
operations are also governed by various other laws and regulations, including
the federal Occupational Safety and Health Act, relating to worker health and
workplace safety. As an example, the Occupational Safety and Health
Administration has issued the Hazard Communication Standard. This standard
applies to all private-sector employers, including the natural gas exploration
and producing industry. The Hazard Communication Standard requires that
employers assess their chemical hazards, obtain and maintain certain written
descriptions of these hazards, develop a hazard communication program and train
employees to work safely with the chemicals on site. Failure to comply with the
requirements of the standard may result in administrative, civil and criminal
penalties. ST Pipeline believes that appropriate precautions are taken to
protect employees and others from harmful exposure to materials handled and
managed at its facilities and that it operates in substantial compliance with
all Occupational Safety and Health Act regulations. While it is not anticipated
that ST Pipeline will be required in the near future to make material
expenditures by reason of such health and safety laws and regulations, ST
Pipeline is unable to predict the ultimate cost of compliance with these
changing regulations.
Research and Development/Intellectual
Property
ST
Pipeline has not made any material expenditures for research and development.
ST Pipeline does not own any patents, trademarks or licenses.
Legal Proceedings
ST
Pipeline is not a party to any legal proceedings, other than in the ordinary
course of business, that if decided in a manner adverse to ST Pipeline would be
materially adverse to ST Pipelines financial condition or results of
operations.
Facilities and Other Property
ST
Pipeline operates from its main office at 5 Youngstown Drive, Clendenin, West
Virginia. This property is leased at a cost of $3,750 per month. In addition,
ST Pipeline is currently leasing a warehouse lot in Prestonsburg, Kentucky. The
lease payment on the lot is $300 per month. ST Pipeline believes that its
properties are adequate to support its operations.
Employees
As
of December 31, 2007, ST Pipeline had approximately 226 employees, of which
approximately 27 were salaried and approximately 199 were employed on an hourly
basis. A number of ST Pipelines employees are represented by trade unions
represented by any collective bargaining unit. ST Pipelines management
believes that ST Pipelines relationship with its employees is good.
109
ST
Pipeline may from time to time be involved in litigation arising in the
ordinary course of business. At December 31, 2007, ST Pipeline was not involved
in any material legal proceedings, the outcome of which would have a material
adverse effect on its financial condition or results of operations.
M
ANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF ST PIPELINE
You should read the following discussion of the
financial condition and results of operations of ST Pipeline in conjunction
with ST Pipelines historical combined financial statements and related notes
contained elsewhere herein. Among other things, those historical combined
financial statements include more detailed information regarding the basis of
presentation for the following information.
F
orward-Looking
Statements
Within
ST Pipelines financial statements and this discussion and analysis of the
financial condition and results of operations, there are included statements
reflecting assumptions, expectations, projections, intentions or beliefs about
future events that are intended as forward-looking statements under the
Private Securities Litigation Reform Act of 1995. You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
They use words such as anticipate, estimate, project, forecast, may,
will, should, could, expect, believe, intend and other words
of
similar meaning.
These
forward-looking statements are not guarantees of future performance and involve
or rely on a number of risks, uncertainties, and assumptions that are difficult
to predict or beyond our control. ST Pipeline has based it s forward-looking statements
on managements beliefs and assumptions based on information available to the
management at the time the statements are made. Actual outcomes and results may
differ materially from what is expressed, implied and forecasted by the
forward-looking statements and that any or all of the forward-looking
statements may turn out to be wrong. They can be affected by inaccurate
assumptions and by known or unknown risks and uncertainties.
ST
Pipelines forward-looking statements, whether written or oral, are expressly
qualified by these cautionary statements and any other cautionary statements
that may accompany such forward-looking statements or that are otherwise
included in this report. In addition, ST Pipeline does undertake and expressly
disclaims any obligation to update or revise any forward-looking statements to
reflect events or circumstances after the date of this report or otherwise.
I
ntroduction
ST
Pipeline is a regional provider of contracting services to the natural gas
industry and the oil industry. ST Pipeline derives its revenues from one
reportable segment. ST Pipeline customers are primarily natural gas and oil
companies. ST Pipeline had total revenues of $100.4 million for the year ended
December 31, 2007, which primarily came from the natural gas industry.
ST
Pipelines customers include many of the leading companies in the natural gas
and oil industries. ST Pipeline strives to make and keep strong relationships
with all its customers and where possible to maintain and keep a status as a
preferred vendor. ST Pipeline enters into various types of contracts, including
competitive unit price, cost-plus (or time and materials basis) and fixed price
(lump sum) contracts. The terms of the contracts will vary greatly from job to
job and customer to customer though most contracts are on the basis of either
the unit pricing in which we agree to do the work for a price per unit of work
performed or for a fixed amount for the entire project. Most of ST Pipelines
projects are completed within one year from the start of the work. Some of ST
Pipelines customers
110
require ST
Pipeline to post performance and/or payment bonds upon execution of the
contract, depending upon the nature of the work performed.
ST
Pipeline generally recognizes revenue on its unit price and cost-plus contracts
when units are completed or services are performed. For fixed price contracts,
ST Pipeline usually records revenues as work on the contract progresses on a
percentage of completion basis. Under this valuation method, revenue is
recognized based on the percentage of total costs incurred to date in
proportion to total estimated costs to complete the contract. Many contracts
also include retainage provisions under which a percentage of the contract
price is withheld until the project is complete and has been accepted by our customer.
ST
Pipeline is taxed as an S-Corporation. Accordingly, the financial statements do
not contain any provision for income taxes.
Seasonality and cyclical nature: Fluctuation
of Results
ST
Pipelines revenues and results of operations can and usually are subject to
seasonal variations. These variations are the result of weather, customer
spending patterns, bidding seasons and holidays. The first quarter of the year
typically produces the lowest revenues because inclement weather conditions
cause delays in production and customers usually do not plan large projects
during that time. The second quarter often has some inclement weather which can
cause delays in production. The third quarter usually is least impacted by
weather and usually has the largest number of projects underway. The fourth
quarter is usually lower than the third due to the various holidays. Many
projects are completed in the fourth quarter and revenues are often impacted by
customers seeking to either spend their capital budget for the year or scale
back projects due to capital budget overruns. However, in rare circumstances in
which the weather is less inclement in the first and second quarters, those
quarters could perform better than normal while if there would occur more
inclement weather in the third or fourth quarter or customers cut back on their
spending, the performances in those quarters could be less.
In
addition to the fluctuations discussed above, our industry can be highly
cyclical. As a result, ST Pipelines volume of business may be adversely
affected by where customers are in the cycle and thereby their financial
condition as to their capital needs and access to capital to finance those
needs. For example ST Pipeline would normally be bidding on and receiving
contracts in the first quarter of the year. However, entering 2007, ST
Pipeline had the contract for the large project in place as well as a backlog
of $57.3 million. For 2008, ST Pipeline is in a more normal position
with a backlog of $5.4 million and will be bidding for many contracts
during the first quarter.
Accordingly,
ST Pipelines operating results in any particular quarter or year may not be
indicative of the results that can be expected for any other quarter or any
other year. Please see
Understanding Gross Margins
and
Outlook
below for
discussions of trends and challenges that may affect ST Pipelines financial
condition and results of operations.
Understanding Gross Margins
ST
Pipelines gross margin is gross profit expressed as a percentage of revenues.
Cost of revenues consists primarily of salaries, wages and some benefits to
employees, depreciation, fuel and other equipment, equipment rentals,
subcontracted services, portions of insurance, facilities expense, materials
and parts and supplies. Various factors, some of which are controllable (e.g.,
our fixed costs) and some of which are not (e.g., weather-related delays)
impact ST Pipelines gross margin on a quarterly or annual basis.
111
Seasonal.
As discussed above,
seasonal
patterns can have a significant impact on gross margins. Usually, business is
slower in the winter months versus the warmer months. Competition for projects
may be greater during the winter months when most contractors are experiencing
slower amounts of business.
Weather.
Adverse or favorable
weather
conditions can impact gross margin in a given period. Periods of wet weather,
snow or rainfall, as well severe temperature extremes can severely impact
production and therefore negatively impact revenues and margins. Conversely,
periods of dry weather with moderate temperatures can positively impact
revenues and margins due to the opportunity for increased production and
efficiencies.
Revenue Mix.
The mix of
revenues between
customer types and types of work for various customers will impact gross
margins. Some projects will have more margins while others that are extremely
competitive in bidding may have narrower margins.
Service and Maintenance Compared
to Installation.
In
general, installation work has a higher gross margin than maintenance work.
This is due to the fact that installation work usually is more of a fixed price
nature and therefore has higher risks involved. Accordingly, a higher portion
of the revenue mix from installation work typically will result in higher
margins.
Subcontract work
. Work that is
subcontracted to other service providers generally has lower gross margins.
Increases in subcontract work as a percentage of total revenues in a given
period may contribute to a decrease in gross margin.
Materials and Labor
.
Typically materials
supplied on projects have smaller margins than labor. Accordingly, projects
with a higher material cost in relation to the entire job will have a lower
overall margin.
Depreciation.
Depreciation is
included in
our cost of revenue. This is a common practice in ST Pipelines industry, but
can make comparability to other companies difficult.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of compensation and
related benefits to management, administrative salaries and benefits, marketing,
communications, office and utility costs, professional fees, bad debt expense,
letter of credit fees, general liability insurance and miscellaneous other
expenses.
112
Results of Operations
The
following table sets forth the statements of operations data and such data as a
percentage of revenues for the years indicated (dollars in thousands):
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2007
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2006
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2005
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|
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|
|
|
|
|
|
|
|
Amount
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|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
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|
|
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|
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|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
Revenues
|
|
|
$
|
100,385
|
|
|
|
|
100.0
|
%
|
|
|
$
|
49,772
|
|
|
|
|
100.0
|
%
|
|
|
$
|
22,936
|
|
|
|
|
100.0
|
%
|
|
Cost of Revenue
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|
|
|
70,948
|
|
|
|
|
70.7
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%
|
|
|
|
45,123
|
)
|
|
|
|
90.7
|
%
|
|
|
|
20,538
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|
|
|
|
89.4
|
%
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Gross Profit
|
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|
29,437
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|
|
|
|
29.3
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%
|
|
|
|
4,649
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|
|
|
|
9.3
|
%
|
|
|
|
2,398
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|
|
|
|
10.5
|
%
|
|
Selling, general and
administrative expenses
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|
|
$
|
1,547
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|
|
|
|
1.5
|
%
|
|
|
$
|
1,296
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|
|
|
|
2.6
|
%
|
|
|
$
|
980
|
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
27,890
|
|
|
|
|
27.8
|
%
|
|
|
|
3,353
|
|
|
|
|
6.7
|
%
|
|
|
|
1,418
|
|
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest expense
|
|
|
|
(299
|
)
|
|
|
|
0.3
|
%
|
|
|
|
(289
|
)
|
|
|
|
0.6
|
%
|
|
|
|
(72
|
)
|
|
|
|
0.3
|
%
|
|
Interest income
|
|
|
|
45
|
|
|
|
|
0.0
|
%
|
|
|
|
60
|
)
|
|
|
|
(0.1
|
)%
|
|
|
|
17
|
|
|
|
|
(0.1
|
)%
|
|
Net other
|
|
|
|
308
|
|
|
|
|
(0.3
|
)%
|
|
|
|
212
|
|
|
|
|
(1.4
|
)%
|
|
|
|
287
|
|
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax
|
|
|
|
27,944
|
|
|
|
|
27.8
|
%
|
|
|
|
3,336
|
|
|
|
|
6.7
|
%
|
|
|
|
1,650
|
|
|
|
|
7.2
|
%
|
|
Provision for income taxes
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|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
Net income
|
|
|
$
|
27,944
|
|
|
|
|
27.8
|
%
|
|
|
$
|
3,336
|
|
|
|
|
6.7
|
%
|
|
|
$
|
1,650
|
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
|
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|
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|
|
|
|
|
|
|
Comparison of
Operating Results of the years ended December 31, 2007 and 2006
Revenues.
Revenues increased
by $50.6
million or 101.6% to $100.4 million for the year ended December 31, 2007. This
increase was primarily due to the fact that ST Pipeline was the successful
bidder on a $92 million contract for 69 miles of 20 inch pipe and substantially
completed that project during 2007.
Cost
of Revenues
. Cost of revenues increased for 2007 by
$25.8 million or 57.2% to $70.9 million for the year ended December 31, 2007
from $45.1 million for the year ended December 31, 2006. This increase was
directly attributable to the large project referenced above.
Gross Profit.
Gross profit
increased $24.8
million, or 538% to $29.4 million for the year ended December 31, 2007. As a
percentage of revenue, gross profit increased from 9.3% to 29.3%. The primary
driver of this increase was the increased revenues that occurred because of
the large job and the fact that the Companys fixed costs did not increase
proportionately. Also, due to the added risk in the larger job, it had much
higher margins built into it.
Selling, General and
Administrative Expenses.
Selling,
general and administrative expenses increased by $251,000, or 19.4% to $1.5
million for the year ended December 31, 2007. This increase was primarily due
to legal and professional fees
associated with our initial audit and other accounting and legal matters.
Income
from Operations.
Income from operations increased
$24.5 million or 731.7% to $27.9 million for the year ended December 31, 2007
from $3.3 million for the year ended December 31, 2006. As with the gross
profit, the increased revenues were associated with the large project
referenced above as well as ST Pipelines fixed costs not increasing
proportionately.
Interest
Expense.
Interest expense increased $10,000 to
$300,000 for the year ended December 31, 2007. This increase was driven
primarily by the periodic borrowings from an existing line of credit to finance
the initial costs of new projects added revenue volumes.
113
Income
taxes
. Income taxes have not been provided because ST
Pipeline by consent of its shareholders has elected to be taxed as an
S-Corporation. Accordingly, income or loss is passed through to its
shareholders, who are taxed at their individual rates.
Net
Income.
Net income increased by $24.6 million or
737.6% to $27.9 million for the year ended December 31, 2007, from net income
of $3.3 million for the year ended December 31, 2006. The increased revenue
volume and margin of profitability as discussed in the gross margin section was
the primary reasons for this increased net income.
Comparison of
Operating Results of the Years ended December 31, 2006 and 2005
Revenues.
Revenues increased
by $26.8
million, or 117.0%, to $49.8 million for the year ended December 31, 2006. The
increase was due to an increase in the number of larger projects awarded to ST
Pipeline and an increase in the overall number of projects initiated for
customers.
Cost of Revenues
. Cost of
revenues
increased by $24.5 million, or 120.0%, to $45.1 million for the year ended
December 31, 2007, from $ 20.5 million for the year ended December 31, 2006.
The increase was primarily due to the increase in contracts discussed above,
with the cost of revenue percentage remaining relatively unchanged from the
prior year.
Gross Profit.
Gross profit
increased $2.2
million, or 93.9%, to $4.6 million for the year ended December 31, 2006. As a
percentage of revenue, gross profit decreased from 10.5% to 9.3%. The primary
reason for this decrease was the mix of jobs that ST Pipeline performed during
the year, including some projects with lower margins due to unanticipated
higher costs of completion.
Selling, General and
Administrative Expenses.
Selling,
general and administrative expenses increased by $315,000, or 32.2%, to $1.3
million for the year ended December 31, 2006. This increase was primarily due
to increased General Liability insurance as the number and size of the projects
ST Pipeline worked on increased.
Income
from Operations.
Income from operations increased by
$1.9 million, or 136.7%, to $3.4 million for the year ended December 31, 2006,
from $1.4 million for the year ended December 31, 2005. This increase was due
to larger, new projects and an increase in the projects awarded to ST Pipeline.
Interest
Expense.
Interest Expense increased $217,000 to
$289,000 at December 31, 2006. This increase was a result of the increased use
of the lines of credit to maintain new projects as the number and size of our
projects increased.
Income
Taxes
. Income taxes have not been provided because ST
Pipeline by consent of its shareholders has elected to be taxed as an
S-Corporation. Accordingly, income or loss is passed through to its shareholders
and taxed at their individual rates.
Net
Income
. Net income increased by $1.7 million to $3.3
million for the year ended December 31, 2006, from $1.7 million for the year
ended December 31, 2005. This increase was the result of additional revenues
from the increase in the number and size of the projects ST Pipeline worked on.
Comparison of
Financial Condition at December 31, 2007 and 2006
Assets.
Assets increased by $22.3 million to $33.4 million at December 31, 2007, from
$11.1 million at December 31, 2006. The increase was due in large part to
accounts receivable, which increased by $19.7 million to $26.4 million at
December 31, 2007 due to the increased revenues in 2007. As of
114
April 21, 2008, $17.5 million of the outstanding $26.4 million in
accounts receivable and retainage receivables had been collected. It is
anticipated that the remaining accounts receivable and/or retainage receivables
for these accounts will be collected within the next two quarters since there are
no remaining contingencies on these contracts, although there can be no
assurance of this occurring. Retainage is typically held by the customer for
several months after a contract is completed to ensure compliance with such
contract.
Liabilities.
Liabilities increased from $6.3 million at December
31, 2006 to $9.7 million at December 31, 2007. This increase was due primarily
to the increased utilization of existing lines of credit and accounts payable
related to the increase in ST Pipelines revenues.
Stockholders
Equity.
Stockholders equity increased from $4.9
million at December 31, 2006 to $23.7 million at December 31, 2006 due to the
increased net income for 2007 of $27.9 million, partially offset by $9.1
million of distributions to stockholders. It is the intention of ST Pipeline to
distribute all of its 2007 net income, excluding $4.2 million, to shareholders
prior to the closing of the acquisition of ST Pipeline by Energy Services
Acquisition Corp. in accordance with the Agreement and Plan of Merger.
Liquidity and Capital Resources
Cash Requirements
Our
cash and cash equivalents at December 31, 2007 was $3.9 million. The cash and
cash equivalents, along with our available credit facilities and our anticipated
future cash flows from operations, should provide sufficient cash to meet our
operating needs. However, with the current high energy demand and the resulting
increased demand for our services, we could need significant additional working
capital.
ST Pipeline
had significant receivables at December 31, 2007 as a result of the $10.3
million in retainage receivables related to our large contract with Equitable
Resources/Equitrans. These are portions of the billings on contracts that are
held back by the customer to ensure that the contract is completed to
the correct specifications. All or a portion of these amounts are not collected
until after the contract
is
completed. Accordingly, keeping these amounts
outstanding for longer periods requires the company to have added cash needs.
After completion of the contract and collection of the retainage receivable,
total accounts receivable are expected to decline.
Sources and Uses of Cash
As of
December 31, 2007, we had $3.9 million in cash, working capital of $21.1
million and long term debt net of current maturities of $176,000. The long term
debt consists primarily of term debt for equipment purchases. The maturities of
the total long term debt is as follows:
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
$
|
262,247
|
|
|
|
$
|
122,704
|
|
|
|
$
|
53,292
|
|
|
Off-Balance Sheet transactions
Due to
the nature of our industry, we often enter into certain off-balance sheet
arrangements in the ordinary course of business that result in risks not directly
reflected in our balance sheets. Though most of the following off-balance sheet
arrangements are not material in nature, they include:
115
Leases.
Our work often requires us to lease various
facilities, equipment and vehicles. These leases are usually short term in
nature (one year or less) though we occasionally may enter into longer term
leases when warranted. By leasing equipment, vehicles and facilities, we are
able to reduce are capital outlay requirements for equipment vehicles and
facilities that we may only need for short periods of time. ST Pipeline rents
real estate from its stockholders-officers under long-term lease agreements.
The lease agreement requires monthly rental payments of $3,750 and extends
through January 1, 2012. ST Pipeline believes these rental payments are at
market rates.
Letters
of Credit.
Certain of ST Pipelines customers and
vendors may require letters of credit to secure payments that the vendors are
making on its behalf or to secure payments to subcontractors, vendors, etc. on
various customer projects. At December 31, 2007, ST Pipeline was contingently
liable on an irrevocable letter of credit for $825,280 to guarantee payments of
insurance premiums to the group captive insurance company through which ST
Pipeline obtains its general liability insurance.
Performance
Bonds
. Some customers, particularly new ones or
governmental agencies require ST Pipeline to post bid bonds, performance bonds
and payment bonds. These bonds are obtained through insurance carriers and
guarantee to the customer that ST Pipeline will perform under the terms of a
contract and that ST Pipeline will pay subcontractors and vendors. If ST
Pipeline fails to perform under a contract or to pay subcontractors and vendors,
the customer may demand that the insurer make payments or provide services
under the bond. ST Pipeline must reimburse the insurer for any expenses or
outlays it is required to make. Depending upon the size and conditions of a
particular contract, ST Pipeline may be required to post letters of credit or
other collateral in favor of the insurer. Posting of these letters or other
collateral will reduce ST Pipelines borrowing capabilities. Historically, ST
Pipeline has never had a payment made by an insurer under these circumstances
and does anticipate any claims in the foreseeable future. At December 31, 2007,
ST Pipeline had no bonds issued by the insurer outstanding.
Contractual
Obligations
. At December 31, 2007, ST Pipeline had
future contractual obligations as follows:
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|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Debt
|
|
$
|
262,247
|
|
$
|
122,704
|
|
$
|
53,292
|
|
$
|
|
|
Lease Payments
|
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
307,247
|
|
$
|
167,704
|
|
$
|
98,292
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration of Credit
Risk
.
In the ordinary course of business ST
Pipeline grants credit under normal payment terms, generally without
collateral, to our customers, which include natural gas and oil companies,
general contractors, and various commercial and industrial customers located
within the United States. Consequently, ST Pipeline is subject to potential
credit risk related to business and economic factors that would affect these
companies. However, ST Pipeline generally has certain statutory lien rights
with respect to services provided. Under certain circumstances such as
foreclosure, ST Pipeline may take title to the underlying assets in lieu of
cash in settlement of receivables. ST Pipeline had only one customer that
exceeded ten percent of revenues for the year ended December 31, 2007. This was
Equitrans LP which accounted for 92% of revenues for the year ended December
31, 2007.
Litigation.
ST Pipeline
is a
party from time to time to various lawsuits, claims and other legal proceedings
that arise in the ordinary course of business. These actions typically seek,
among other things, compensation for alleged personally injury, breach of
contract and/or property damages, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all such lawsuits,
claims, and proceedings, ST Pipeline records reserves when it is probable that
a liability has
116
been incurred
and the amount of loss can be reasonably estimated. ST Pipeline does not
believe that any of these proceedings, separately or in aggregate, would be
expected to have a material adverse effect on its financial position, results
of operations or cash flows.
Related
Party Transactions
. Other than the lease of certain
buildings by ST Pipeline from its principal owners, there are no related party
transactions. The annual rental payment during 2007 was $45,000, which ST
Pipeline believes is at the market rate.
Inflation
Due to
relatively low levels of inflation during the years ended December 31, 2005,
2006 and 2007, inflation did not have a significant effect on ST Pipelines
results.
New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements SFAS
No. 157 defines fair value, establishes methods used to measure fair value and
expands disclosure requirements about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal periods, as it
relates to financial assets and liabilities that are carried at fair value.
SFAS No. 157 also requires certain tabular disclosures related to results of
applying SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets and SFAS No. 142, Goodwill and Other Intangible Assets. On November
14, 2007, the FASB provided a one-year deferral for the implementation of SFAS
No. 157 for non-financial assets and liabilities. SFAS No. 157 excludes from
its scope SFAS No. 123 (R), Share-Based Payment and its related interpretive
accounting pronouncements that address share-based payment transactions. Based
on the assets and liabilities on ST Pipelines balance sheet as of December 31,
2007, ST Pipeline does not expect the adoption of SFAS No. 157 to have a
material impact on its consolidated financial position, results of operations
or cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to choose to measure at fair value many
financial instruments and certain other items at fair value that are not
currently required to be measured. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No.
159 does not affect any existing accounting literature that requires certain
assets and liabilities to be carried at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. Based on the assets and
liabilities on ST Pipelines balance sheet as of December 31, 2007, ST Pipeline
does not expect the adoption of SFAS No. 159 to have any impact on its
consolidated financial position, results of operations or cash flows.
Critical Accounting Policies
The
discussion and analysis of ST Pipelines financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles generally
accepted in the United States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets
and liabilities known to exist at the date of the consolidated financial
statements and reported amounts of revenues and expenses during the reporting
period. ST Pipeline evaluates its estimates on an ongoing basis, based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. There can be no assurance that actual
results will not differ from those estimates. ST Pipelines management
117
believes the following accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Revenue Recognition.
ST
Pipeline
recognizes revenue when services are performed except when work is being
performed under a fixed price contract. Revenue from fixed price contracts are
recognized under the percentage of completion method, measured by the
percentage of costs incurred to date to total estimated costs for each
contract. Such contracts generally provide that the customer accept completion
of progress to date and compensate us for services rendered, measured typically in terms of units installed, hours expended or some other measure of
progress. Contract costs typically include all direct material, labor and
subcontract costs and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs and depreciation. Cost
provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result
in revisions to costs and income and their effects are recognized in the period
in which the revisions are determined.
Substantially
all of the contract work in 2007 for ST Pipeline was for a fixed unit price.
The units, such as a foot of pipeline, are measured as work progresses. The
total number of units is not known until the completion of the job, but is
billed at the bid rate per unit. The percentage of completion is based on
the number of units completed and number of units in progress, and is measured
in the field and verified by a representative of the customer.
Self Insurance.
ST Pipeline
is insured for
general liability insurance through a captive insurance company. While ST
Pipeline believes that this arrangement has been very beneficial in reducing
and stabilizing insurance costs, ST Pipeline does have to maintain a letter of
credit to guarantee payments of premiums. Should the captive insurance company
experience severe losses over an extended period, it could have a detrimental
affect on ST Pipeline.
Current
and Non Current Accounts Receivable and Provision for Doubtful Accounts.
ST
Pipeline provides an allowance for doubtful accounts when collection of an
account is considered doubtful. Inherent in the assessment of the allowance for
doubtful accounts are certain judgments and estimates relating to, among
others, our customers access to capital, our customers willingness or ability
to pay, general economic conditions and the ongoing relationship with the customer. While most of ST Pipelines customers are large well capitalized
companies, should they experience material changes in their revenues and cash
flows or incur other difficulties and not be able to pay the amounts owed, this
could cause reduced cash flows and losses in excess of our current reserves. At
December 31, 2007, the management review deemed that no allowance for doubtful
accounts was necessary.
Outlook
The
following statements are based on current expectations. These statements are
forward-looking, and actual results may differ materially.
With
the current high energy demand, ST Pipelines customers are experiencing high
demand for their products. Accordingly, ST Pipeline anticipates projected
spending for its customers on their transmission and distribution systems
increasing over the next few years. Although ST Pipeline believes it may enter
into substantial new projects during 2008, the backlog at December 31, 2007 was
$5.4 million versus $57.3 million at December 31, 2006 and no assurances can be
given that ST Pipeline will be successful in those bidding processes.
Assuming
this anticipated growth occurs, we will be required to make additional capital
expenditures for equipment. Currently, it is anticipated that in 2008, ST
Pipelines capital expenditures
118
may be between $2.5 and $3.0 million.
Assuming customer demand continues to increase, this requirement could
materially change. Significantly higher capital expenditure requirements will
adversely affect ST Pipelines cash flow and require additional borrowings.
Recent Developments
On
January 22, 2008, ST Pipeline entered into an agreement to be acquired by
Energy Services Acquisition Corp. Management believes that becoming affiliated
with the larger, well capitalized company will enable ST Pipeline to have more
flexibility in meeting the needs of its customers and in financing the
continued anticipated growth. The transaction is conditioned on the approval of
the Energy Services shareholders and less than 20 percent of those
shareholders exercising their right of redemption.
INFORMATION
ABOUT C.J. HUGHES
Business Overview
C.J.
Hughes Construction, Inc. was organized in 1946 as a corporation under the laws
of West Virginia and is primarily engaged in the construction, replacement and
repair of natural gas pipelines for utility companies and private natural gas
companies. In addition, C.J. Hughes also engages in the installation of water
and sewer lines and provides various maintenance and repair services for
customers. The majority of C.J. Hughes customers are located in West Virginia,
Virginia, Ohio, Kentucky and North Carolina. C.J. Hughes builds, but does not
own, natural gas pipelines for its customers that are part of both interstate
and intrastate pipeline systems that move natural gas from producing regions to
consumption regions as well as building and replacing gas line services to
individual customers of the various utility companies. C.J. Hughes is involved
in the construction of both interstate and intrastate pipelines, with an
emphasis on the latter. C.J. Hughes also constructs storage facilities for its
natural gas customers. C.J. Hughes other services include liquid pipeline
construction, pump station construction, production facility construction,
water and sewer pipeline installations, and other services related to pipeline
construction. At December 31, 2007, C.J. Hughes had 362 employees. Since
2002, C.J. Hughes has completed over 350 miles of pipeline, with its
longest project consisting of 10 miles of 20-inch pipe. C.J. Hughes is not
directly involved in the exploration, transportation or refinement of natural
gas.
Acquisition
of Nitro Electric
In
May of 2007, C.J. Hughes acquired Nitro Electric Company LLC. Nitro Electric
has been in business since 1960. Nitro Electric provides a full range of
electrical contracting services to various industries. These services include
substation and switchyard services, including site preparation, packaged
buildings, dry and oil-filled transformer installations and other ancillary
work with regards thereto. Nitro Electric also provides general electrical
services such as underground, conduit/raceway, testing, cable installation,
switchgear lineups as well as a full range of data and communication
installation services such as fiber optics, attenuation and OTDR testing,
cell/hub systems and various other electrical services to the industrial sector.
Though Nitro Electric has numerous customers, its primary focus since becoming
part of C.J. Hughes has been the completion of a large project for Hitachi
America. That project in Council Bluffs, Iowa, was the largest project for
Nitro Electric for 2007. For the year ended December 31, 2007, Nitro Electrics
operations contributed $36.1 million of revenue to C.J. Hughes total revenues.
Unless otherwise stated, references to C.J. Hughes include Nitro Electric.
119
Set
forth below is information regarding the sales, assets and operating income of
C.J. Hughes business.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
75,305,234
|
|
$
|
31,604,911
|
|
$
|
29,368,850
|
|
Total assets
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|
|
27,248,499
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|
|
14,413,914
|
|
|
12,811,708
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|
Operating Income
|
|
|
3,990,841
|
|
|
451,955
|
|
|
2,174,147
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|
Sales by
product line
|
|
|
|
|
|
|
|
|
|
|
Pipeline
|
|
$
|
39,431,085
|
|
$
|
31,604,911
|
|
$
|
29,368,850
|
|
Electrical
|
|
|
36,098,589
|
|
|
|
|
|
|
|
At
December 31, 2007, C.J. Hughes largest current project consists of a project
for Spectra Energy to start in early 2008 to install 11 miles of 30-inch pipe.
C.J.
Hughes is subject to extensive state and federal regulation, particularly in
the areas of the siting and construction of new pipelines. The work performed
by C.J. Hughes on many projects relates to lines that are regulated by the U.S.
Department of Transportation and therefore the work must be performed within
the rules and guidelines of the U.S. Department of Transportation. In addition,
work at the various sites must comply with all Federal, state or local
environmental laws.
C.J.
Hughes has a related company for accounting purposes that is called Contractors
Rental Corporation. A condition of the transaction with Energy Services is that
C.J. Hughes acquires Contractors Rental prior to closing. The primary business
of Contractors Rental is that it acts as a subsidiary to C.J. Hughes and
provides labor and some equipment to complete contracts that C.J. Hughes has
been awarded. Contractors Rentals contributions to C.J. Hughes results of
operations and financial condition are not material. All of Contractors
Rentals revenue is derived from C.J. Hughes. Contractors Rental is considered
a variable interest entity under FASB Interpretation 46R,
Consolidation of Variable Interest Entities
,
and as such the consolidated financial statements of C.J. Hughes include the
accounts of Contractors Rental.
Customers and Marketing
C.J.
Hughes customers include Equitable Resources and various of its subsidiaries,
Nisource/Columbia Gas Transmission, Nisource/Columbia Gas of Ohio and
Pennsylvania, Kentucky American Water, Marathon Ashland Petroleum LLC and
various state, county and municipal public service districts. During the year
ended December 31, 2007, Columbia Gas of Ohio was C.J. Hughes largest
customer, accounting for approximately 20% of total revenues. Other customers
who represented over 10% of revenues in 2007 included Marathon Ashland Petroleum
LLC at 18% and Columbia Gas of Pennsylvania at 12%. C.J. Hughes is not
dependent upon any single customer and C.J. Hughes does not believe that the
loss of any single customer would have a material adverse effect on its
business. There can be no assurance that Columbia Gas of Ohio or any of C.J.
Hughes other principal customers will continue to employ C.J. Hughes services
or that the loss of any of such customers or adverse developments affecting any
of such customers would not have a material adverse effect on C.J. Hughes
financial condition and results of operations.
C.J.
Hughes sales force consists of industry professionals with significant
relevant sales and work experience who utilize industry contacts and available
public data to determine how to most appropriately market C.J. Hughes
services. We rely on direct contact between our sales force and our customers
engineering and contracting departments in order to obtain new business. Due to
the occurrence of inclement weather during the winter months, the business of
C.J. Hughes (i.e., the
120
construction
of pipelines) is somewhat seasonal in that most of the work is performed during
the non-winter months.
Nitro
Electrics customers include Hitachi of America, American Electric Power,
Toyota and numerous other local companies. Due to the large job that was
underway in 2007, Hitachi of America was the largest customer of Nitro
Electric, accounting for approximately 63% of total revenues for the period
that Nitro Electric was owned by C.J. Hughes (May through December). Other
customers who represented over 10% of revenues of Nitro Electric included
Toyota (18%) and American Electric Power (11%). While Nitro Electric had a
large portion of its resources devoted to the Hitachi of America project in
2007, it is believed that in 2008 and beyond, there are many opportunities to
widen the customer base. However, there can be no assurance that Hitachi of
Americas business will continue and in fact the above described project should
be completed in early 2008. Further, while it appears likely that most of Nitro
Electrics other customers will continue to do business with Nitro Electric, no
assurances can be given to that occurring.
As
with C.J. Hughes, the sales force for Nitro Electric consists of industry
professionals with significant sales and work experience who utilize industry
contacts and available public data to determine how to most appropriately
market Nitro Electrics services. They rely on direct contact between their
sales force and the customers engineering and contracting departments in order
to obtain new business. While inclement weather can have some effect on Nitro
Electrics business, that effect is much less than the effect of inclement
weather on C.J. Hughes.
Backlog/New Business
A
companys backlog represents orders or contracts which have not yet been
completed. At December 31, 2007, C.J. Hughes had a backlog of work to be
completed on contracts of $54.2 million. At December 31, 2007, Nitro Electric
had a backlog of approximately $16.4 million. At December 31, 2006, C.J. Hughes
had a backlog of work on contracts of $18.6 million. Due to the timing of C.J.
Hughes and Nitro Electric construction contracts and the long-term nature of
some of our projects, portions of our backlog may not be completed in the
current fiscal year.
Types of Contracts
The
contracts for C.J. Hughes are usually awarded on a competitive and negotiated
basis. While contracts may be a
lump sum for a project or one that is based upon time and materials, most of
the work is bid based upon unit prices for various portions of the work. The
actual revenues produced from the project will be dependent upon how accurate
the customer estimates are as to the units of the various items.
Raw Materials and Suppliers
The
principal raw materials that we use are metal plate, structural steel, pipe,
fittings and selected engineering equipment such as pumps, valves and
compressors. For the most part, the largest portion of these materials are
supplied by the customer. The materials that C.J. Hughes purchases would
predominately be those of a consumable nature on the job, such as small tools
and environmental supplies. These materials are available from a variety of suppliers.
We anticipate being able to obtain these materials for the foreseeable future.
121
Industry Factors
C.J.
Hughes revenues, cash flows and earnings are substantially dependent upon, and
affected by, the level of natural gas exploration, development activity and the
levels of integrity work on existing pipelines. Such activity and the resulting
level of demand for pipeline construction and related services are directly
influenced by many factors over which C.J. Hughes has no control. Such factors
include, among others, the market prices of natural gas, market expectations
about future prices, the volatility of such prices, the cost of producing and
delivering natural gas, government regulations and trade restrictions, local
and international political and economic conditions, the development of
alternate energy sources and the long-term effects of worldwide energy
conservation measures. Substantial uncertainty exists as to the future level of
natural gas exploration and development activity.
C.J.
Hughes cannot predict the future level of demand for its pipeline construction
services, future conditions in the pipeline construction industry or future
pipeline construction rates.
Competition
The
pipeline construction industry is a highly competitive business characterized
by high capital and maintenance costs. Pipeline contracts are usually awarded
through a competitive bid process and, while C.J. Hughes believes that
operators consider factors such as quality of service, type and location of
equipment, or the ability to provide ancillary services, price and the ability
to complete the project in a timely manner are the primary factors in
determining which contractor is awarded a job. There are a number of regional
and national competitors that offer services similar to ours. Certain of C.J.
Hughes competitors have greater financial and human resources than C.J.
Hughes, which may enable them to compete more effectively on the basis of price
and technology. Our largest competitors are Otis Eastern, LA Pipeline and Apex
Pipeline.
The
electrical contracting industry is also a highly competitive business, though
the capital costs are less in that business and the primary costs are labor and
supervision. Electrical contracts are usually awarded through a competitive bid
process. While Nitro Electric believes that operators consider factors such as
quality of service, type and location of equipment, or the ability to provide
ancillary services, price and the ability to complete the project in a timely
manner are the primary factors in determining which contractor is awarded a
job. There are a number of regional and national competitors that offer
services similar to ours. Certain of Nitro Electrics competitors have greater
financial and human resources than Nitro Electric, which may enable them to
compete more effectively on the basis of price and technology. The largest
competitors for Nitro Electric are Green Electric and Summit Electric, Inc.
Operating Hazards and Insurance
C.J.
Hughes operations are subject to many hazards inherent in the pipeline
construction business, including, for example, operating equipment in
mountainous terrain, people working in deep trenches and people working in
close proximity to large equipment. These hazards could cause personal injury
or death, serious damage to or destruction of property and equipment,
suspension of drilling operations, or substantial damage to the environment,
including damage to producing formations and surrounding areas. C.J. Hughes
seeks protection against certain of these risks through insurance, including
property casualty insurance on its equipment, commercial general liability and
commercial contract indemnity, commercial umbrella and workers compensation
insurance.
C.J.
Hughes and Nitro Electrics insurance coverage for property damage to its
equipment is based on both companies estimates of the cost of comparable used
equipment to replace the insured property. There is a deductible per occurrence
on equipment of $2,500. Third-party liability insurance
122
coverage for
both C.J. Hughes and Nitro Electric under the general policy is $1,000,000 per
occurrence, with a self-insured retention of $0 per occurrence. The commercial
umbrella policy has a self -insured retention of $10,000 per occurrence, with
coverage of $10,000,000 per occurrence.
Government Regulation and Environmental
Matters
General.
C.J. Hughes
operations are affected from time to time in varying degrees by political
developments and federal, state and local laws and regulations. In particular,
natural gas production, operations and economics are or have been affected by
price controls, taxes and other laws relating to the natural gas industry, by
changes in such laws and by changes in administrative regulations. Although
significant capital expenditures may be required to comply with such laws and
regulations, to date, such compliance costs have not had a material adverse
effect on the earnings or competitive position of C.J. Hughes. In addition,
C.J. Hughes operations are vulnerable to risks arising from the numerous laws
and regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection.
Environmental Regulation.
C.J. Hughes and Nitro Electrics activities are subject to existing federal,
state and local laws and regulations governing environmental quality, pollution
control and the preservation of natural resources. Such laws and regulations
concern, among other things, the containment, disposal and recycling of waste
materials, and reporting of the storage, use or release of certain chemicals
or hazardous substances. Numerous federal and state environmental laws regulate
pipeline activities and impose liability for discharges of waste or spills,
including those in coastal areas. C.J. Hughes has conducted pipeline
construction in or near ecologically sensitive areas, such as wetlands and
coastal environments, which are subject to additional regulatory requirements.
State and Federal legislation also provide special protections to animal and
marine life that could be affected by C.J. Hughes activities. In general,
under various applicable environmental programs, C.J. Hughes may potentially be
subject to regulatory enforcement action in the form of injunctions, cease and
desist orders and administrative, civil and criminal penalties for violations
of environmental laws. C.J. Hughes may also be subject to liability for natural
resource damages and other civil claims arising out of a pollution event. C.J.
Hughes would be responsible for any pollution event that was caused by its
actions. It has insurance that it believes is adequate to cover any such
occurrences. While Nitro Electrics business is usually performed in plant
type situations, there are still risks associated with environmental issues
that may occur in those locations.
Environmental
regulations that affect C.J. Hughes and Nitro Electrics customers also have
an indirect impact on both companies. Increasingly stringent environmental
regulation of the natural gas industry and the electrical utility companies
has led to higher costs and a more lengthy permitting process.
The
primary environmental statutory and regulatory programs that affect C.J. Hughes and Nitro Electrics operations include the following: Department of
Transportation regulations, regulations set forth by agencies such and FERC and
various environmental agencies including state, Federal, and local government.
Health and Safety Matters.
C.J. Hughes and Nitro Electrics facilities and operations are also governed
by various other laws and regulations, including the federal Occupational
Safety and Health Act, relating to worker health and workplace safety. As an
example, the Occupational Safety and Health Administration has issued the
Hazard Communication Standard. This standard applies to all private-sector
employers, including the natural gas exploration and producing industry. The Hazard
Communication Standard requires that employers assess their chemical hazards,
obtain and maintain certain written descriptions of these hazards, develop a
hazard communication program and train employees to work safely with the
chemicals on site. Failure to comply with the requirements of the
123
standard may
result in administrative, civil and criminal penalties. C.J. Hughes and Nitro
Electric believe that appropriate precautions are taken to protect employees
and others from harmful exposure to materials handled and managed at its
facilities and that it operates in substantial compliance with all Occupational Safety and Health Act regulations. While it is not anticipated that
C.J. Hughes or Nitro Electric will be required in the near future to make
material expenditures by reason of such health and safety laws and regulations,
C.J. Hughes and Nitro Electric are unable to predict the ultimate cost of
compliance with these changing regulations.
Research and Development/Intellectual
Property
C.J.
Hughes has not made any material expenditures for research and development.
C.J. Hughes does not own any patents, trademarks or licenses.
Properties
C.J.
Hughes owns and operates its main office at 2450 First Avenue, Huntington, West
Virginia 25703. C.J. Hughes will lease temporary locations on an as-needed
basis to accommodate its operations based on the projects it is working on.
Legal Proceedings
C.J.
Hughes is not a party to any legal proceedings, other than in the ordinary
course of business, that if decided in a manner adverse to C.J. Hughes would be
materially adverse to C.J. Hughes financial condition or results of
operations.
124
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF C.J. HUGHES
Forward-Looking Statements
Within
C.J. Hughes financial statements and this discussion and analysis of the
financial condition and results of operations, there are included statements
reflecting assumptions, expectations, projections, intentions or beliefs about
future events that are intended as forward-looking statements under the
Private Securities Litigation Reform Act of 1995. You can identify these
statements by the fact that they do not relate strictly to historical or
current facts. They use words such as anticipate, estimate, project,
forecast, may, will, should, could, expect,
believe, intend and
other words of similar meaning.
These
forward-looking statements are not guarantees of future performance and involve
or rely on a number of risks, uncertainties, and assumptions that are difficult
to predict or beyond C.J. Hughes control. C.J. Hughes has based its
forward-looking statements on managements beliefs and assumptions, based on information
available to management at the time the statements are made. Actual outcomes
and results may differ materially from what is expressed, implied and
forecasted by forward-looking statements and any or all of C.J. Hughes
forward-looking statements may turn out to be wrong. They can be affected by
inaccurate assumptions and by known or unknown risks and uncertainties.
All
of the forward-looking statements, whether written or oral, are expressly
qualified by these cautionary statements and any other cautionary statements
that may accompany such forward -looking statements or that are otherwise
included in this report. In addition, C.J. Hughes does not undertake and
expressly disclaim any obligation to update or revise any forward-looking statements
to reflect events or circumstances after the date of this report or otherwise.
Introduction
C.J.
Hughes Construction, Inc. was organized in 1946 as a corporation under the laws
of West Virginia and is primarily engaged in the construction, replacement and
repair of natural gas pipelines for utility companies and private natural gas
companies. In addition, C.J. Hughes also engages in the installation of water
and sewer lines and provides various maintenance and repair services for customers.
The majority of C.J. Hughes customers are located in West Virginia, Virginia,
Ohio, Kentucky and North Carolina. C.J. Hughes builds, but does not own,
natural gas pipelines for its customers that are part of both interstate and
intrastate pipeline systems that move natural gas from producing regions to
consumption regions as well as building and replacing gas line services to
individual customers of the various utility companies. C.J. Hughes is involved
in the construction of both interstate and intrastate pipelines, with an
emphasis on the latter. C.J. Hughes also constructs storage facilities for its
natural gas customers. C.J. Hughes other services include liquid pipeline
construction, pump station construction, production facility construction, water
and sewer pipeline installations, and other services related to pipeline
construction. C.J. Hughes had consolidated revenues of $75.3 million for the
year ended December 31, 2007 of which 48% was attributable to electrical
customers, 30% to natural gas customers, 9% each for the oil industry and
governmental entities and 4% for all other customers.
On
April 30, 2007, C.J. Hughes acquired Nitro Electric Company LLC for $2.7
million dollars in cash. Nitro Electric provides a full range of electrical
contracting services to various industries. These services include substation
and switchyard services, including site preparation, packaged buildings, dry
and oil-filled transformer installations and other ancillary work with regards
thereto.
125
C.J.
Hughes customers include many of the leading companies in the industries it
serves, including Marathon Ashland Petroleum LLC, Spectra Energy and Nisource.
C.J. Hughes enters into various types of contracts, including competitive unit
price, cost-plus (or time and materials basis) and fixed price (lump sum)
contracts. The terms of the contracts will vary from job to job and customer to
customer, though most contracts are on the basis of either unit pricing in
which C.J. Hughes agrees to do the work for a price per unit of work performed
or for a fixed amount for the entire project. Most of C.J. Hughes projects are
completed within one year of the start of the work. On occasion, C.J. Hughes
customers will require the posting of performance and/or payment bonds upon
execution of the contract, depending upon the nature of the work performed.
C.J.
Hughes generally recognizes revenue on unit price and cost-plus contracts when
units are completed or services are performed. Fixed price contracts usually
results in recording revenues as work on the contract progresses on a
percentage of completion basis. Under this accounting method, revenue is
recognized based on the percentage of total costs incurred to date in
proportion to total estimated costs to complete the contract. Many contacts
also include retainage provisions under which a percentage of the contract
price is withheld until the project is complete and has been accepted by C.J.
Hughes customer.
C.J.
Hughes is taxed as an S-Corporation. Accordingly, the financial statements do
not contain any provision for income taxes.
O
utlook
The
following statements are based on current expectations. These statements are
forward looking, and actual results may differ materially.
With
the increased demand for energy, C.J. Hughes customers are experiencing high
demand for their products. C.J. Hughes management believes that projected
spending by its customers on their transmission and distribution systems will increase
over the next few years, although there is no assurance that this will occur.
In
order to be able to take advantage of the growth opportunities that may arise,
C.J. Hughes will be required to make additional capital expenditures. It is
anticipated that in 2008, C.J. Hughes will make capital expenditures of between
$2.5 million and $3.0 million. Significantly higher capital expenditure
requirements will adversely affect C.J. Hughes cash flows and require
additional borrowings.
R
ecent Developments
On
February 21, 2008, C.J. Hughes entered into an agreement to be acquired by
Energy Services Acquisition Corp. Management believes that becoming affiliated
with the larger, well capitalized company will enable C.J. Hughes to have more
flexibility in meeting the needs of its customers and in financing the
continued anticipated growth in the business. The transaction with Energy
Services Acquisition Corp. is contingent, upon among other things, the approval
of the Energy Services shareholders and less than 20% of those shareholders
exercising their rights of redemption. As described elsewhere, C.J. Hughes and
Energy Services Acquisition Corp. are affiliated companies.
As
of April 21, 2008, $7.8 million of the $9.2 million in accounts receivable and
retainage receivables outstanding at December 31, 2007 had been collected. It
is anticipated that the remaining accounts receivable and/or retainage
receivables for these accounts will be collected within the next two quarters
since there are no remaining contingencies on these contracts, although there
can be no assurance of this occurring.
126
S
easonality:
Fluctuation of Results
C.J.
Hughes revenues and results of operations usually are subject to seasonal
variations. These variations are the result of weather, customer spending
patterns, bidding seasons and holidays. The first quarter of the calendar year
typically produces the lowest revenues because inclement weather conditions
frequently cause delays in production and customers tend to not commence large
projects during that time. While usually better than the first quarter, the
second quarter often has some inclement weather which can cause delays in
production. The third quarter traditionally has the largest number of ongoing
projects because it is the quarter least impacted by weather. Many projects are
completed in the fourth quarter and revenues are often impacted by customers
seeking to either spend their capital budget for the year or scale back
projects due to capital budget overruns.
In
addition to the fluctuations discussed above, C.J. Hughes industry can be
highly cyclical. As a result, C.J. Hughes volume of business may be adversely
affected by instances where its customers are adversely affected by lower
energy prices and consequently they reduce their capital projects.
Accordingly,
C.J. Hughes operating results in any particular quarter or year may not be
indicative of the results that can be expected for any other quarter or any
other year. Please see
Understanding Gross
Margins
and
Outlook
for discussions of trends and challenges that may affect C.J. Hughes financial
condition and results of operations.
U
nderstanding Gross
Margins
C.J.
Hughes gross margin is gross profit expressed as a percentage of revenues.
Cost of revenues consists primarily of salaries, wages, benefits to employees,
depreciation, fuel and other equipment expenses, equipment rentals,
subcontracted services, portions of insurance, facilities expense, materials,
parts and supplies. Various factors, some of which are controllable (e.g., our
fixed costs), some of which are not (e.g., weather-related delays), impact C.J.
Hughes gross margin on a quarterly or annual basis.
Seasonal.
As discussed above, seasonal
patterns can have a significant impact on gross margins. Usually, C.J. Hughes
business is slower in the winter months as compared with the warmer months.
Weather.
Adverse or favorable weather
conditions can impact gross margin in a given period. Periods of wet weather,
snow or rainfall, as well as severe temperature extremes can severely impact
production and therefore negatively impact revenues and margins. Conversely,
periods of dry weather with moderate temperatures can positively impact
revenues and margins due to the opportunity for increased production and
efficiencies.
Revenue
Mix.
The mix of revenues between customer types and
types of work for various customers will impact gross margins. Some projects
will have greater margins while others that are extremely competitive in
bidding may have narrower margins.
Service and Maintenance Compared to Installation.
In
general, installation work has a higher gross margin than maintenance work.
This is due to the fact that installation work usually is more of a fixed price
nature and has higher risk and therefore is bid with higher markups to
compensate for that risk. Accordingly, a higher portion of the revenue mix from
installation work typically will result in higher gross margins.
127
Subcontract
Work
. Work that is subcontracted to other service
providers generally has lower gross margins. Increases in subcontract work as a
percentage of total revenues in a given period may contribute to a decrease in
gross margin.
Materials
and Labor
. Typically, materials supplied on projects
have lower margins than labor. Accordingly, projects with a higher material
cost in relation to the entire job will have a lower gross margin.
Depreciation.
Depreciation is included in the cost of revenue. This
is a common practice in C.J. Hughes industry, but can make comparisons to
other companies difficult.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of compensation and
related benefits to management, administrative salaries and benefits,
marketing, communications, office and utility costs, professional fees, bad
debt expense, letter of credit fees, general liability insurance and
miscellaneous other expenses.
Results of Operations
The
following table sets forth the statements of operations data and such data as a
percentage of revenues for the years indicated (dollars in thousands):
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2007
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2006
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2005
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|
|
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|
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Amount
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|
Percent
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|
Amount
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|
Percent
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|
Amount
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|
Percent
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|
|
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|
Revenues
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|
$
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75,305
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|
|
100.0
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%
|
$
|
31,605
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|
|
100.0
|
%
|
$
|
29,369
|
|
|
100.0
|
%
|
Cost of Revenues
|
|
|
68,096
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|
|
90.4
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%
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|
29,292
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|
|
90.3
|
%
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|
25,172
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|
|
83.4
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%
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|
Gross Profit
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|
7,209
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|
|
9.6
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%
|
|
2,313
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|
|
9.7
|
%
|
|
4,197
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|
|
16.6
|
%
|
Selling, general and administrative expense
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|
3,218
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|
|
4.3
|
%
|
|
1,861
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|
|
8.2
|
%
|
|
2,023
|
|
|
9.2
|
%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Income from Operations
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|
3,991
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|
5.3
|
%
|
|
452
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|
|
1.4
|
%
|
|
2,174
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|
|
7.4
|
%
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|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
|
Interest Expense
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|
|
(1,063
|
)
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|
1.4
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%
|
|
(520
|
)
|
|
1.6
|
%
|
|
(238
|
)
|
|
0.9
|
%
|
Interest Income
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|
|
51
|
|
|
(0.1
|
%)
|
|
30
|
|
|
(0.1
|
%)
|
|
|
|
|
0.0
|
%
|
Net Other
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|
|
(2
|
)
|
|
0.0
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%
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|
|
|
|
0.1
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%
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|
(30
|
)
|
|
0.1
|
%
|
|
|
|
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|
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|
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|
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|
|
|
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|
Income (loss) Before Taxes
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|
2,977
|
|
|
4.0
|
%
|
|
(38
|
)
|
|
(0.2
|
%)
|
|
1,906
|
|
|
6. 5
|
%
|
Provision (benefit) for income taxes
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|
|
275
|
|
|
0.0
|
%
|
|
|
|
|
0.0
|
%
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before variable interest entity
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|
|
2,702
|
|
|
3.6
|
%
|
|
(38
|
)
|
|
(0.1
|
)%
|
|
1,906
|
|
|
6.5
|
%
|
Income (loss) attributable to variable interest entity
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|
|
69
|
|
|
(0. 0
|
)%
|
|
(20
|
)
|
|
(0.1
|
%)
|
|
(42
|
)
|
|
(0.1
|
)%
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Net Income (loss)
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|
2,771
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|
|
3.7
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%
|
|
(58
|
)
|
|
(0.2
|
%)
|
|
1,864
|
|
|
6. 4
|
%
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
128
Comparison
of Operating Results of the
Y
ears
ended December 31, 2007 and 2006
Revenues.
Revenues increased by $43.7 million, or 138.2%, to
$75.3 million for the year ended December 31, 2007, from $31.6 million for the
year ended December 31, 2006. This increase was made up of two components. First,
C.J. Hughes acquired Nitro Electric and its results are included from the date
of acquisition. From May to December of 2007, Nitro Electric had revenues of
$36.1 million. The remainder of the 2007 increase was $6.7 million (25%) due to
revenues from volume increases. The volume increase was spread across C.J.
Hughes customer base.
Cost
of Revenues
. Cost of Revenues increased by $38.8
million, or 132.5%, to $68.1 million for the year ended December 31, 2007, from
$29.3 million for the year ended December 31, 2006. As with the revenue
increases, there were two components. First, the revenues from the acquisition
of Nitro Electric brought added cost of revenues of $33.1 million. The
remaining increase of $5.7 million was due to the revenue volume increases.
Gross
Profit.
Gross profit increased $4.9 million, or
211.7%, to $7.2 million for the year ended December 31, 2007, from $2.3 million
for the year ended December 31, 2006. The primary reasons for this increase
were an increase in the number of larger projects and an increase in the
projects initiated for existing customers. The margins for both years were
comparable, due primarily to two factors. The margins for 2006 were lower for
the pipeline work due to the fact that C.J. Hughes had four items that
negatively impacted the margins. First, the company made a decision to exit two
geographic areas and the reduced margins associated with exiting those markets
cost approximately $300,000. Also, two projects incurred losses of approximately
$800,000 due to missing our deadline due to inclement weather on one project
and inaccurate estimates by a subcontractor regarding costs on another project.
In 2007, gross profit margins were lower than they historically would have been
due to the fact that the electrical portion of the business had lower gross
profits (8.2%) than the remainder of the business, which had a margin of 10.8%.
The electrical portion of C.J. Hughes revenues will likely continue to have
lower gross profit margins since this aspect of C.J. Hughes operations has a
higher percentage of costs associated with labor than the pipeline portion of
the business.
Selling,
General and Administrative Expenses.
Selling, general
and administrative expenses increased by $1.4 million (72.9%) to $3.2 million
for the year ended December 31, 2007, from $1.8 million for the year ended
December 31, 2006. This increase is primarily related to the added selling
general and administrative expenses associated with the addition of Nitro
electric and the added revenue volumes. The portion of this increase that
relates to the inclusion of Nitro Electric from the date of acquisition was
$1.3 million. The remaining $100,000 was due to added expenses related to the
increase in projects.
Income
from Operations.
Income from operations increased by $3.5 million, or 783%, to $4.0 million for
the year ended December 31, 2007, from $500,000 for the year ended December 31,
2006. Of this increase, $1.6 million was derived from income from operations for
the Nitro Electric beginning May 2007. The remaining $1.9 million increase was
due to improved margins on projects completed in 2007.
Interest
Expense.
Interest expense increased $543,000 to $1.1
million for the year ended December 31, 2007, from $520,000 for the year ended
December 31, 2006. This increase was primarily due to increased interest
expense in 2007 relating to the purchase of Nitro Electric in the amount of
$300,000, as well as the financing of added equipment needed for new projects
during the year.
Income
Taxes
. Income
taxes have not been provided, except for income taxes attributable to a
variable interest entity consolidated into C.J. Hughes, because C.J. Hughes has
elected by consent of its shareholders to be taxed as an S-Corporation.
Accordingly, income or loss is passed through to its
129
shareholders and taxed at their individual rates. If C.J. Hughes were
taxed at the corporate rate, its income tax expense for the year ended December
31, 2007 would have been approximately $1.3 million.
Net
Income
. Net income increased by $ 2.8 million to
$ 2.8 million for the year ended December 31, 2007, from a loss of $5 8 ,000
for the year ended December 31, 2006. $1.4 million of this increase was the net
income derived from Nitro Electric after the date of acquisition and
$1.6 million of increase was from improved profitability on the other revenues
of the company which was partially offset by absorbing a $242,000 loss
from Contractors Rental, a variable interest entity that is included in the consolidated
financial statements.
Comparison
of Operating Results of the Years ended December 31, 2006 and 2005
Revenues.
Revenues increased by $2.2 million, or 7.6%, to $31.6
million for the year ended December 31, 2006, compared to $29.4 million for the
year ended December 31, 2005.
Cost
of Revenues
. Cost of revenues increased for 2006 by
$4.1 million, or 16.4%, to $29.3 million for the year ended December 31, 2006,
compared to $25.2 million for the year ended December 31, 2005. As noted above,
cost of revenues in 2006 were higher as a percentage of revenue due the factors
discussed in the section above, including exiting certain geographic areas and
two projects having poor performances due to inclement weather and adverse
working conditions.
Gross
Profit.
Gross profit decreased $1.9 million, or 81.5%,
to $2.3 million for the year ended December 31, 2006, from $4.2 million for the
year ended December 31, 2005. As a percentage of revenue, gross profit
decreased from 14.3% to 7.3%. The primary reasons for this decrease were the
factors discussed in the Cost of Revenue section above.
Selling,
General and Administrative Expenses.
Selling, general
and administrative expenses decreased by $161,000 or 84.7% to $1.8 million for
the year ended December 31, 2006 from $2.0 million for the year ended December
31, 2005. This decrease was primarily due to slightly lower payroll and related
taxes.
Income
from Operations.
Income from operations decreased $1.7 million or 63% to $500,000 for
the year ended December 31, 2006 from $2.2 million for the year ended December
31, 2005. This decline was due to lower profitability on the projects as
previously discussed in the
Costs of
Revenues
section above.
Interest
Expense.
Interest expense increased $282,000 to
$520,000 for the year ended December 31, 2006, from $238,000 for the year ended
December 31, 2005. This increase was primarily due to interest expense
associated with our line of credit in addition to additional costs from
financing additional equipment.
Income
Taxes.
Income
taxes have not been provided, except for income taxes attributable to a
variable interest entity consolidated into C.J. Hughes, because C.J. Hughes has
elected by consent of its shareholders to be taxed as an S-Corporation.
Accordingly, income or loss is passed through to its shareholders and taxed at
their individual rates. If C.J. Hughes were taxed at the corporate rate, its
income tax expense for the year ended December 31, 2007 would have been
approximately $1.3 million.
Net
Income.
Net
income decreased by $1.9 million, or 100%, to a loss of $57,000 for the year
ended December 31, 2006, from net income of $1.9 million for the year ended
December 31, 2005. This decrease was due to the lower profitability on projects
completed in 2006, as previously discussed in the
Gross Profit
section above .
130
Comparison
of Financial Condition
Assets.
The
consolidated assets of C.J. Hughes increased from $14.4 million at December 31,
2006 to $27.2 million at December 31, 2007, an increase of $12.8 million. The
primary reason for this increase was the acquisition of Nitro Electric and the
subsequent growth of its assets, which accounted for $11.8 million of the
increase in assets during the year ended December 31, 2007. The remainder of
the increase was primarily due to additional fixed assets which C.J. Hughes
acquired in 2007 to enable it to accommodate new and larger projects. Net fixed
assets (excluding those of Nitro Electric) increased by $2.8 million to $7.5
million at December 31, 2007, from $4.7 million at December 31, 2006.
Liabilities.
The
consolidated liabilities of C.J. Hughes increased by $10.1 million to $21.9
million at December 31, 2007, from $11.7 million at December 31, 2006. $6.0
million of this increase related to the debt assumed by C.J. Hughes relating to
the purchase of Nitro Electric ($2.7 million) and providing working capital for
Nitro Electric ($3.3 million). The remaining increase in liabilities was due to
additional borrowings to finance equipment purchases.
Stockholders
Equity.
Stockholders Equity increased by $ 2.8
million to $5. 4 million at December 31, 2007, from $2.6 million at
December 31, 2006. This increase derived from the addition of net income for
2007. C.J. Hughes paid no distributions in 2007. However, it is anticipated
that a distribution of approximately 50% of 2007 net income will be paid to
stockholders in 2008.
Nitro Electric
Effective
April 30, 2007, C.J. Hughes acquired Nitro Electric for $2.7 million in cash.
The transaction was accounted for, using the purchase method of accounting for
business combinations. The fair value of the fixed assets acquired were
estimated to be $987,400. The fair value of the liabilities associated with
those assets was $284,287. The purchase price and costs associated with the
acquisition exceeded the preliminary estimated fair value of the assets
acquired, net of liabilities assumed by approximately $2.0 million, which was
accounted for as goodwill. During the period of 2007 that C.J. Hughes owned
Nitro Electric, the latter had revenues of $36.1 million and net income of $1.5
million.
Liquidity and Capital Resources
Cash Requirements
Cash
and cash equivalents on hand at December 31, 2007 totaled $2.3 million. C.J.
Hughes credit facilities consisted of a line of credit with a bank in an
amount not to exceed $2.0 million and, when combined with anticipated future
cash flows from operations, should provide sufficient cash to meet C.J. Hughes
operating needs. However, with the current energy demand and associated
increased demand for C.J. Hughes services, C.J. Hughes may require additional
working capital in order to capitalize on prospective business opportunities.
Cash
provided from operations decreased from $1.9 million in 2006 to $400,000 in
2007. The primary reason for this decrease was that with the higher levels of
revenue in 2007, accounts receivables and costs in excess of billings on
uncompleted contracts increased by $5.9 million over 2006 levels to result in
the decrease. Much of the increase was attributable to the addition of the
accounts receivable from the operations of Nitro Electric.
131
Sources and Uses of Cash
As
of December 31, 2007, C.J. Hughes had $2.3 million in cash, working capital of
$8.2 million and long-term debt net of current maturities of $13.0 million. The
long-term debt consists of:
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|
|
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|
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|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012 and
thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
$
|
1,844,192
|
|
$
|
1,899,589
|
|
$
|
1,629,245
|
|
$
|
891,233
|
|
$
|
8,575,276
|
|
Off-Balance Sheet Transactions
Due
to the nature of C.J. Hughes business, it will occasionally enter into certain
off-balance sheet arrangements in the ordinary course of business that result
in risks not directly reflected in its balance sheets. Though for the most part
not material in nature, some of these off-balance sheet arrangements include:
Leases.
C.J. Hughes projects often require leasing various
facilities, equipment and vehicles. These leases usually are short term in
nature, (one year or less), although C.J. Hughes may enter into longer term
leases when warranted. By leasing equipment, vehicles and facilities, C.J. Hughes
is able to reduce its capital outlay requirements for equipment, vehicles and
facilities. C.J. Hughes has a lease for Nitro Electrics offices that expires
on December 31, 2008 but is renewable under the same terms and conditions
through August 31, 2010. C.J. Hughes is evaluating whether or not to renew that
lease.
Letters
of Credit
. Certain of C.J. Hughes customers and
vendors may require letters of credit to secure payments that the vendors are
making on C.J. Hughes behalf or to secure payments to subcontractors, vendors,
etc. on various customer projects. At December 31, 2007, C.J. Hughes had no
letters of credit outstanding.
Performance
Bonds.
Some customers, particularly new customers or
governmental agencies, require C.J. Hughes to post bid bonds, performance bonds
and payment bonds. These bonds are obtained through insurance carriers and
guarantee to the customer that C.J. Hughes will perform under the terms of a
contract and that it will pay subcontractors and vendors. If C.J. Hughes fails
to perform under a contract or to pay subcontractors and vendors, the customer
may demand that the insurer make payments or provide services under the bond.
C.J. Hughes must reimburse the insurer for any expenses or outlays it is
required to make. Depending upon the size and conditions of a particular
contract, C.J. Hughes may be required to post letters of credit or other
collateral in favor of the insurer. Posting of these letters or other
collateral will reduce its borrowing capabilities. Historically, C.J. Hughes
has never had a payment made by an insurer under these circumstances and does
not anticipate any claims in the foreseeable future. At December 31, 2007, C.J.
Hughes had no such bonds issued by the insurer outstanding.
Contractual
Obligations
. At December 31, 2007, C.J. Hughes had
future contractual obligations as follows:
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|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012 and
thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term
Debt
|
|
$
|
1,844,192
|
|
$
|
1,899,589
|
|
$
|
1,629,245
|
|
$
|
891,233
|
|
$
|
8,575,276
|
|
Lease
Payments
|
|
|
111,418
|
|
|
1,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T otal
|
|
$
|
1,955,610
|
|
$
|
1,900,629
|
|
$
|
1,629,245
|
|
$
|
891,233
|
|
$
|
8,575,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
Concentration
of Credit Risk
. In the ordinary course of business,
C.J. Hughes grants credit under normal payment terms, generally without
collateral, to its customers, which include gas companies, electric power
companies, governmental entities, general contractors, and various commercial
and industrial customers located within the United States. Consequently, C.J.
Hughes is subject to potential credit risk related to business and economic
factors that would affect these companies. However, C.J. Hughes generally has
certain statutory lien rights with respect to services provided. Under certain
circumstances such as foreclosure, C.J. Hughes may take title to the underlying
assets in lieu of cash in settlement of receivables. C.J. Hughes had two
customers that exceeded ten percent of revenues for the year ended December 31,
2007. These were Hitachi of America which accounted for 30.2% of revenues and
Columbia Gas of Ohio which accounted for 10.5% of revenues.
Litigation.
C.J. Hughes is
a party from time to time to various lawsuits, claims and other legal
proceedings that arise in the ordinary course of business. These actions
typically seek, among other things, compensation for alleged personally injury,
breach of contract and/or property damages, punitive damages, civil penalties
or other losses, or injunctive or declaratory relief. With respect to all such
lawsuits, claims, and proceedings, C.J. Hughes records reserves when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. C.J. Hughes does not believe that any of these
proceedings, separately or in aggregate, would be expected to have a material
adverse effect on its financial position, results of operations or cash flows.
Related
Party Transactions
. In the normal course of business, C.J. Hughes enters into
transactions from time to time with related parties. These transactions
typically would not be material in nature and would relate to vehicle or
equipment rentals. However, in 2007 to facilitate the purchase of Nitro
Electric, the Company borrowed a total of $6.0 million from Marshall T.
Reynolds, a shareholder of C.J. Hughes. The purpose of the loan was to
provide $2.7 million for the purchase of Nitro Electric and $3.3 million in
working capital for Nitro Electric. That note is unsecured and is subject
normal and customary business terms. In accordance with an agreement with
Mr. Reynolds, there are no amounts due in 2008. Therefore, the entire amount
has been classified as long-term in the 2007 financial statements.
In
addition, each of C.J. Hughes and Nitro Electric periodically purchase office
supplies from Chapman Printing Company, an affiliate of Mr. Reynolds. In 2007
C.J. Hughes spent $18,155 and Nitro Electric spent $12,823 on such purchases.
Inflation
Due
to relatively low levels of inflation during the years ended December 31, 2007,
2006 and 2005, inflation did not have a significant effect on C.J. Hughes
results.
New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements SFAS
No. 157 defines fair value, establishes methods used to measure fair value and
expands disclosure requirements about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal periods, as it
relates to financial assets and liabilities that are carried at fair value.
SFAS No. 157 also requires certain tabular disclosures related to results of
applying SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets and SFAS No. 142, Goodwill and Other Intangible Assets. On November
14, 2007, the FASB provided a one year deferral for the implementation of SFAS
No. 157 for non-financial assets and liabilities. SFAS No. 157 excludes from
its scope SFAS No. 123 (R), Share-Based Payment and its related interpretive
accounting pronouncements that address share-based payment transactions.
133
Based on the
assets and liabilities on our balance sheet as of December 31, 2007, we do not
expect the adoption of SFAS No. 157 to have a material impact on our
consolidated financial position, results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115. SFAS No. 159 permits entities to choose to measure at fair
value many financial instruments and certain other items at fair value that are
not currently required to be measured. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS No.
159 does not affect any existing accounting literature that requires certain
assets and liabilities to be carried at fair value. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. Based on the assets and
liabilities on our balance sheet as of December 31, 2007, we do not expect the
adoption of SFAS No. 159 to have any impact on our consolidated financial
position, results of operations or cash flows.
Critical Accounting Policies
The
discussion and analysis of C.J. Hughes financial condition and results of
operations are based on its consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles generally
accepted in the United States. The preparation of these consolidated financial
statements requires C.J. Hughes to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities known to exist at the date of the consolidated financial
statements and reported amounts of revenues and expenses during the reporting
period. C.J. Hughes evaluates its estimates on an ongoing basis, based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. There can be no assurance that actual
results will not differ from those estimates. Management believes the following
accounting policies affect its more significant judgments and estimates used in
the preparation of C.J. Hughes consolidated financial statements.
Revenue
Recognition.
C.J. Hughes recognizes revenue when
services are performed except when work is being performed under a fixed price
contract. Revenue from fixed price contracts are recognized under the
percentage of completion method, measured by the percentage of costs incurred
to date to total estimated costs for each contract. Such contracts generally
provide that the customer accept completion of progress to date and compensates
C.J. Hughes for services rendered, measured typically in terms of units
installed, hours expended or some other measure of progress. Contract costs
typically include all direct material, labor and subcontract costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the
revisions are determined.
Substantially
all of the contract work in 2007 for C.J. Hughes was for a fixed price or fixed
unit price. The units, such as a foot of pipeline or a mile of construction,
are measured as work progresses. The total number of units is not known until
the completion of the job, but is billed at the bid rate per unit. The
percentage of completion is based on the number of units completed and number
of units in progress, and is measured in the field and on large projects
verified by a representative of the customer
Self
Insurance.
C.J. Hughes is insured on employee health
care subject to a deductible of $40,000 per person. Due to the high level of
unpredictability in these claims, expense related to those claims is normally
recorded as incurred. Payments of expenses incurred are paid twice monthly at
the middle and end of the month. However, in the event that a material claim is
known though not presented, appropriate accruals would be made for such
instances. Management believes that at December 31, 2007,
134
any risks for
unknown claims would not be material to the financial condition or results of
operations of C.J. Hughes and therefore no accrual was recorded at that date.
Current
and Non Current Accounts Receivable and Provision for Doubtful Accounts.
C.J.
Hughes provides an allowance for doubtful accounts when collection of an
account is considered doubtful. Inherent in the assessment of the allowance for
doubtful accounts are certain judgments and estimates relating to, among
others, a customers access to capital, willingness or ability to pay, general
economic conditions and the ongoing relationship with the customer. While most
of C.J. Hughes customers are large well capitalized companies, should they
experience material changes in their revenues and cash flows or incur other
difficulties and not be able to pay the amounts owed, this could cause reduced
cash flows and losses in excess of current reserves.
135
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND
MANAGEMENT
The
following table sets forth, as of _____________, 2008, certain information
regarding beneficial ownership of our common stock by each person who is known
by Energy Services to beneficially own more than 5% of Energy Services common
stock. The table also identifies the stock ownership of each of Energy Services
directors, each of Energy Services officers, and all directors and officers as
a group. Except as otherwise indicated, the stockholders listed in the table
have sole voting and investment powers with respect to the shares indicated.
|
|
|
|
|
|
Name and
Address of
Beneficial Owners
|
Amount of Shares
Owned and Nature
of Beneficial
Ownership
(1)
|
Percent of Shares
of Common Stock
Outstanding
|
|
|
|
|
|
|
|
|
|
Marshall T. Reynolds
|
|
862,500
|
|
|
8.0%
|
|
|
|
|
|
|
Jack M. Reynolds
|
|
430,000
|
|
|
4.0
|
|
|
|
|
|
|
Edsel R. Burns
|
|
537,500
|
|
|
5.0
|
|
|
|
|
|
|
Neal W. Scaggs
|
|
107,500
|
|
|
1.0
|
|
|
|
|
|
|
Joseph L. Williams
|
|
107,500
|
|
|
1.0
|
|
|
|
|
|
|
All Directors and Executive
Officers
|
|
2,045,000
|
|
|
19.0%
|
as a Group (5 persons)
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
Marshall T. Reynolds
|
|
862,500
|
|
|
8.0%
|
2450 First
Avenue,
|
|
|
|
|
|
Huntington,
West Virginia 25703
|
|
|
|
|
|
|
|
|
|
|
|
HBK Investments L.P.
(2)
|
|
755,400
|
|
|
7.0%
|
HBK Services LCC
|
|
|
|
|
|
HBK Partners L.P.
|
|
|
|
|
|
HBK Management LLC
|
|
|
|
|
|
HBK Master Fund L.P.
|
|
|
|
|
|
300 Crescent Court
|
|
|
|
|
|
Dallas, Texas 75201
|
|
|
|
|
|
|
|
|
|
|
|
Edsel R. Burns
|
|
537,500
|
|
|
5.0%
|
2450 First
Avenue,
|
|
|
|
|
|
Huntington,
West Virginia 25703
|
|
|
|
|
|
|
|
|
|
|
|
Andrew M. Weiss
(3)
|
|
611,650
|
|
|
5.7%
|
Weiss Asset Management, LLC
|
|
|
|
|
|
Weiss Capital, LLC
|
|
|
|
|
|
29 Commonwealth Avenue
|
|
|
|
|
|
10
th
Floor
|
|
|
|
|
|
Boston, Massachusetts 02116
|
|
|
|
|
|
|
|
|
(1)
|
In
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table of any
shares of common stock if he has sole or shared voting or investment power
with respect to such security, or has a right to acquire beneficial ownership
at any time within 60 days from the date as of which beneficial ownership is
being determined. As used herein, voting power is the power to vote or
direct the voting of shares and investment power is the power to dispose or
direct the disposition of shares. Includes all shares held directly as well
as by spouses and minor children, in trust and other indirect ownership, over
which shares the named individuals effectively exercise sole or shared voting
and investment power. Beneficially owned shares do not include any warrants which
are exercisable only upon the later of August 29, 2007 or the successful
completion of a business combination.
|
|
|
(2)
|
Based solely on a Schedule
13G filed with the Securities and Exchange Commission on April 18, 2008. The
reporting persons claimed shares voting and investment power over all securities
reported by the reporting persons.
|
|
|
(3)
|
Based solely upon a
Schedule 13G filed with the Securities and Exchange Commission by the
reporting persons on January 25, 2008. The reporting persons claimed shared
voting and investment power over all securities reported.
|
136
EXECUTIVE COMPENSATION
Until
the consummation of the acquisition, no executive officer of Energy Services
will receive any cash compensation for services rendered. Energy Services pays,
and until the acquisitions are consummated will reimburse, at cost, an
affiliate up to $5,000 per month for providing Energy Services with certain
administrative, technology and secretarial services. The total amount of
reimbursed expenses that have been paid by Energy Services to an affiliate is
approximately $13,000 as of December 31, 2007. The affiliate will also provide
the use of certain limited office space in Huntington, West Virginia. Other
than this $5,000 per-month fee, no compensation of any kind, including finders
and consulting fees, is paid to any of Energy Services officers or directors,
or any of their respective affiliates, for services rendered prior to or in
connection with a business combination. Following the acquisitions, the
executive officers and directors will be compensated in such manner, and in
such amounts, as determined by the independent directors of Energy Services
board of directors. At present, there have been no agreements or discussions
regarding the terms of employment with Energy Services officers. It is
contemplated that if the business combinations are approved, the compensation
and other terms of employment of Energy Services officers will be determined
by a compensation committee which has not yet been established and will be
commensurate with the compensation packages of comparable level executives at
similarly situated companies in the energy services industry. Such compensation
committee will be comprised of independent directors as such term is defined by
the rules of the American Stock Exchange, or such other exchange as Energy
Services securities may in the future be listed. Because Energy Services has
made a determination to postpone such discussions until after the closing of
the transactions and the formation of the compensation committee, you will not
have information you may deem material to your decision on whether or not to
vote in favor of the acquisitions. Energy Services may retain compensation
consultants in determining such compensation.
Energy
Services officers and directors are reimbursed for any out-of-pocket expenses
incurred in connection with activities on Energy Services behalf such as
identifying potential target businesses and performing due diligence on
suitable business combinations. There is no limit on the amount of these
out-of-pocket expenses and there will be no review of the reasonableness of the
expenses by anyone other than Energy Services board of directors, which
includes persons who may seek reimbursement, or a court of competent
jurisdiction if such reimbursement is challenged. As of December 31, 2007,
Energy Services officers and directors were reimbursed an aggregate of
approximately $13,000 for out-of-pocket expenses. All such expenses were
reviewed and approved by Energy Services Chief Executive Officer.
QUOTATION
OR LISTING
Energy
Services common stock, warrants to purchase common stock and units consisting
of one share of common stock and two warrants to purchase common stock are
listed on the American Stock Exchange under the symbols ESA, ESA-WT and ESA-U,
respectively.
TRANSFER
AGENT AND REGISTRAR
The
Transfer Agent and Registrar for the shares of Energy Services common stock,
warrants and units is Continental Stock Transfer & Trust Company.
STOCKHOLDER
PROPOSALS
If
Proposals I and II are approved, Energy Services intends to hold its 2008
annual meeting of stockholders as soon as practicable after the closing of the
acquisitions, and in any event no later than ____________, 2008. If the
acquisitions are consummated, Energy Services annual meeting of stockholders
is expected to be held on or about _____________, 2008, unless the date is
changed by the
137
board of
directors. If you are a stockholder and you want to include a proposal in the
proxy statement for that annual meeting, pursuant to Rule 14a-8 (Rule 14a-8),
as promulgated under the Securities Exchange Act of 1934, as amended, and under
Energy Services by-laws you must give timely notice of the proposal, in
writing, along with any supporting materials to our secretary at Energy
Services principal office in Huntington, West Virginia. To be timely, the
notice has to be received no later than _____________, 200_. As to any proposal
submitted for presentation at the 2009 annual meeting outside the processes of
Rule 14a-8, the proxies named in the form of proxy for that annual meeting will
be entitled to exercise discretionary authority on that proposal unless Energy
Services receives notice of the matter on or before _____________, 2008.
WHERE
YOU CAN FIND MORE INFORMATION
Energy
Services files reports, proxy statements and other information with the
Securities and Exchange Commission as required by the Securities Exchange Act
of 1934, as amended.
You
may read and copy reports, proxy statements and other information filed by
Energy Services with the Securities and Exchange Commission at the Securities
and Exchange Commission public reference room located at Headquarters Office,
100 F Street, N.E., Room 1580, Washington, DC 20549.
You
may obtain information on the operation of the public reference room by calling
the Securities and Exchange Commission at 1-800-SEC-0330. You may also obtain
copies of the materials described above at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Section, Headquarters
Office, 100 F Street, N.E., Room 1580, Washington, DC 20549.
Energy
Services files its reports, proxy statements and other information
electronically with the Securities and Exchange Commission. You may access
information on Energy Services at the Securities and Exchange Commission web
site containing reports, proxy statements and other information at:
http://www.sec.gov.
Information
and statements contained in this document, or any annex to this document, are
qualified in all respects by reference to the copy of the relevant contract or
other annex filed as an exhibit to this document.
All
information contained in this document relating to Energy Services has been
supplied by Energy Services, and all such information relating to each of ST
Pipeline and C.J. Hughes has been supplied by ST Pipeline and C.J. Hughes,
respectively. Information provided by each party does not constitute any
representation, estimate or projection of any other party.
If
you would like additional copies of this document, or if you have questions
about the acquisitions, you should contact:
|
|
|
Georgeson
Inc.
|
|
199 Water
Street
|
|
26
th
floor
|
|
New York,
New York 10038
|
|
(212)
___-____ (for banks and brokers)
|
|
or
|
138
INDEX TO FINANCIAL STATEMENTS
ENERGY SERVICES ACQUISITION CORP.
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors
Energy Services Acquisition Corp.
Huntington, West Virginia
We
have audited the accompanying balance sheets of Energy Services Acquisition
Corp. (a development stage enterprise) (the Company) as of September 30, 2007
and 2006 and the related statements of income, stockholders equity and cash
flows for the year ended September 30, 2007 as well as the periods from March
31, 2006 (inception) to September 30, 2007 and 2006. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of Energy Services Acquisition Corp. as of September 30, 2007 and
2006, and the results of its operations and its cash flows for the year ended
September 30, 2007 and for the periods from March 31, 2006 (inception) to
September 30, 2007 and 2006 in conformity with United States generally accepted
accounting principles.
/s/ Castaing,
Hussey & Lolan, LLC
New Iberia, LA
December 19, 2007
F-2
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
|
756,782
|
|
$
|
77,381
|
|
Investments held
in trust
|
|
|
49,711,430
|
|
|
49,149,173
|
|
Investments held in
trust from Underwriter
|
|
|
1,032,000
|
|
|
1,032,000
|
|
Prepaid
Expenses
|
|
|
26,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
51,526,659
|
|
$
|
50,258,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
offering costs
|
|
$
|
|
|
$
|
178,015
|
|
Accrued
Expenses
|
|
|
167,564
|
|
|
87,525
|
|
Loans from
Stockholders
|
|
|
150,000
|
|
|
150,000
|
|
Due to
Underwriter
|
|
|
1,032,000
|
|
|
1,032,000
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,349,564
|
|
|
1,447,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock subject to Possible redemption 1,719,140 shares at
redemption value
|
|
|
10,143,000
|
|
|
9,988,200
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value
|
|
|
|
|
|
|
|
Authorized 1,000,000 shares; none issued
|
|
|
|
|
|
|
|
Common Stock, $.0001 par value
|
|
|
|
|
|
|
|
Authorized 50,000,000 shares
|
|
|
|
|
|
|
|
Issued and outstanding 10,750,000 Shares,
inclusive of 1,719,140 shares subject to possible redemption
|
|
|
903
|
|
|
903
|
|
Additional paid-in capital
|
|
|
38,564,710
|
|
|
38,734,491
|
|
Earnings accumulated during the development
stage
|
|
|
1,468,482
|
|
|
87,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
40,034,095
|
|
|
38,822,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
51,526,659
|
|
$
|
50,258,554
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
F-3
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
September
30
2007
|
|
Inception
March
31, 2006-
September
30, 2006
|
|
Inception
March
31, 2006-
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Formation
and operating costs
|
|
$
|
337,221
|
|
$
|
18,754
|
|
$
|
355,975
|
|
Franchise
taxes
|
|
|
48,552
|
|
|
30,000
|
|
|
78,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
from operations before taxes
|
|
|
(385,773
|
)
|
|
(48,754
|
)
|
|
(434,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from
trust fund investments
|
|
|
2,612,835
|
|
|
177,174
|
|
|
2,790,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
before tax
|
|
|
2,227,062
|
|
|
128,420
|
|
|
2,355,482
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
846,000
|
|
|
41,000
|
|
|
887,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,381,062
|
|
$
|
87,420
|
|
$
|
1,468,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding- basic
|
|
|
10,750,000
|
|
|
3,607,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares- diluted
|
|
|
12,688,930
|
|
|
3,607,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
per share- basic
|
|
$
|
0.13
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
per share- diluted
|
|
$
|
0.11
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
F-4
Energy Services Acquisition Corp
.
(A Development Stage Enterprise
)
Statements of Changes in
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid in
Capital
|
|
|
Treasury
Stock
|
|
|
Earnings
Accumulated
During the
Development Stage
|
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to initial
stockholders on March 31, 2006 at $.01 Per share
|
|
|
2,500,000
|
|
$
|
250
|
|
$
|
24,750
|
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of 350,000 Shares on August 30, 2006
by initial Shareholders
|
|
|
|
|
|
|
|
|
1,645,000
|
|
|
(1,645,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of Common Stock to Initial
Shareholders
|
|
|
(350,000
|
)
|
|
(35
|
)
|
|
(1,644,965
|
)
|
|
1,645,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Private Placement Warrants
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of 8,600,000 units net of
underwriters discount and offering expenses
|
|
|
8,600,000
|
|
|
860
|
|
|
46,697,634
|
|
|
|
|
|
|
|
|
46,698,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of underwriter option
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reclassified to Common Stock
subject To possible redemption
|
|
|
(1,719,140
|
)
|
|
(172
|
)
|
|
(9,988,028
|
)
|
|
|
|
|
|
|
|
(9,988,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,420
|
|
|
87,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
9,030,860
|
|
|
903
|
|
|
38,734,491
|
|
|
|
|
|
87,420
|
|
|
38,822,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional offering costs
|
|
|
|
|
|
|
|
|
(14,981
|
)
|
|
|
|
|
|
|
|
(14,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion relating to common stock subject
to possible redemption
|
|
|
|
|
|
|
|
|
(154,800
|
)
|
|
|
|
|
|
|
|
(154,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,381,062
|
|
|
1,381,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
9,030,860
|
|
$
|
903
|
|
$
|
38,564,710
|
|
$
|
|
|
$
|
1,468,482
|
|
$
|
40,034,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
F-5
Energy Services Acquisition Corp
.
(A Development Stage Enterprise
)
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
Year Ended
September 30,
2007
|
|
For the Period
from March 31,
2006 (inception)
to September 30,
2006
|
|
For the Period
from March 31,
2006 (inception)
to September 30,
2007
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,381,062
|
|
$
|
87,420
|
|
$
|
1,468,482
|
|
Adjustment to reconcile net income to net cash
provided by (used) in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
Accrued Income and accretion on investments
held in trust fund
|
|
|
(562,257
|
)
|
|
(177,173
|
)
|
|
(739,430
|
)
|
Accrued Expenses and Prepaids
|
|
|
53,592
|
|
|
87,525
|
|
|
141,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash provided (used) in operating
activities
|
|
$
|
872,397
|
|
$
|
(2,228
|
)
|
$
|
870,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments held in Trust Fund
|
|
|
(41,071,000
|
)
|
|
(50,004,000
|
)
|
|
(91,075,000
|
)
|
Proceeds from maturities of Investments
held in trust fund
|
|
|
41,071,000
|
|
|
|
|
|
41,071,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used) by Investing Activities
|
|
|
|
|
|
(50,004,000
|
)
|
|
(50,004,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Public Offering
|
|
|
|
|
|
51,600,000
|
|
|
51,600,000
|
|
Proceeds from Private Placement of warrants
|
|
|
|
|
|
2,000,000
|
|
|
2,000,000
|
|
Proceeds from issuance of underwriting
options
|
|
|
|
|
|
100
|
|
|
100
|
|
Proceeds from issuance of common stock to
initial stockholders
|
|
|
|
|
|
25,000
|
|
|
25,000
|
|
Loans from Stockholder
|
|
|
|
|
|
375,000
|
|
|
375,000
|
|
Payment of Loan from Stockholder
|
|
|
|
|
|
(225,000
|
)
|
|
(225,000
|
)
|
Payment of Offering Costs
|
|
|
(192,996
|
)
|
|
(3,691,491
|
)
|
|
(3,884,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used) provided by Financing
Activities
|
|
|
(192,996
|
)
|
|
50,083,609
|
|
|
49,890,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
679,401
|
|
|
77,381
|
|
|
756,782
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at beginning of
Period
|
|
|
77,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end of Period
|
|
$
|
756,782
|
|
$
|
77,381
|
|
$
|
756,782
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
financing activity:
|
|
|
|
|
|
|
|
|
|
|
Accrued and unpaid offering costs
|
|
$
|
|
|
$
|
178,015
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes paid
|
|
$
|
764,375
|
|
$
|
|
|
$
|
764,375
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
F-6
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
|
|
1.
|
Organization, Business Operations and Significant Policies
|
Nature of Business
Energy
Services Acquisition Corp. (the Company) was incorporated in Delaware on
March 31, 2006 as a blank check company whose objective is to acquire an
operating business.
Activity
through September 30, 2007 relates to the Companys formation and the public
offering described below as well as costs related to the investigation of
potential acquisition candidates. The Company has selected September 30 as its
fiscal year-end.
The
registration statement for the Companys initial public offering (the Public
Offering) (as described in note 2) was declared effective August 29, 2006. The
Company consummated the Public Offering on September 6, 2006 and preceding the
consummation of the Public Offering on September 6, 2006, certain officers,
directors and initial shareholders of the Company purchased an aggregate of
3,076,923 warrants at $0.65 per warrant from the Company in a private placement
(the private placement). The warrants sold in the Private Placement were
identical to the warrants sold in the offering, except that the private
placement warrants are not registered at this time. The Company received net
proceeds from the Private Placement and the Offering of approximately
$48,698,494 (note 2).
The
Companys management has broad discretion with respect to the specific
application of the net proceeds of this Public Offering, although substantially
all of the net proceeds of this Public Offering are intended to be generally
applied toward consummating a business combination with an operating business
(Business Combination). Furthermore, there is no assurance that the company
will be able to successfully affect a Business Combination. Upon the closing of
the Public Offering, $50,004,000 (including $1,032,000 for the Underwriters
non-accountable expense allowance) was deposited in a trust account (Trust
Account) and invested in United States Government Securities defined as any
Treasury Bill issued by the United States having a maturity of one hundred and
eighty days or less or in money market funds meeting certain conditions under
Rule 2a-7 promulgated under the Investment Company Act of 1940. Such funds will
be invested in the manner outlined until the earlier of (i) the consummation of
its first Business Combination or (ii) liquidation of the Company. The placing
of the funds in the Trust Account may not protect those funds from third party
claims against the Company. Although the Company will seek to have all vendors,
prospective target businesses or other entities it engages, execute agreements
with the Company waiving any right, title, interest or claim of any kind in or
to any monies held in the Trust Account, there is no guarantee that they will
execute such agreements. If the Company liquidates prior to the consummation of
a Business Acquisition, the officers and directors shall under certain
circumstances, be personally liable to pay any debts, obligations and
liabilities of the Company to various vendors, prospective target businesses or
other entities that are owed money by it for services rendered or contracted
for or products sold to it in excess of the working capital not held in the
Trust Fund. Interest or earnings from funds invested in the Trust Account up to
$1,200,000 net of taxes may be used to pay for business, legal and accounting
due diligence on prospective acquisitions, continuing general and
administrative expenses, and income taxes. The Company, after signing a
definitive agreement for the acquisition of a target business, is required to
submit such transaction for stockholder approval. In the event that
stockholders owning 20% or more of the shares sold in the Public Offering vote
against the Business Combination and exercise their conversion rights described
below, the Business Combination will not be consummated. All of the Companys
stockholders prior to the public offering, including all of the officers and
directors of the Company (Initial Stockholders), have agreed to vote their
2,150,000 founding shares of common stock in accordance with the vote of the
majority in interest of all other stockholders of the Company (Public
Stockholders) with respect to any Business Combination. After consummation of
a Business Combination, these voting safeguards will no longer be applicable.
F-7
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
With
respect to a Business Combination which is approved and consummated, any public
stockholder presented with the right to approve a Business Acquisition can
instead demand that his stock be converted into his pro rata share of the Trust
Fund upon the consummation of the transaction if he votes against such
transaction. Such Public Stockholders are entitled to receive their per share
interest in the Trust Account computed without regard to the shares held by the
Initial Stockholders.
The
Companys Certificate of Incorporation provides for mandatory liquidation of
the Company in the event that the Company does not consummate a Business
Combination within 18 months from the date of the consummation of the Public Offering,
or 24 months from the consummation of the Public offering if certain extension
criteria have been satisfied. In the event of liquidation, it is likely that
the per share value of the residual assets remaining available for distribution
(including Trust Fund assets) will be less than the initial public offering
price per share in the Public Offering.
Investments Held in Trust
The
Companys restricted investments held in the Trust Fund at September 30, 2007
are comprised of an institutional money fund and a United States Treasury Bill
with a maturity of November 01, 2007 in the amounts of $40,242,191 and
$10,501,239, respectively. The balances making up the account at September 30,
2006 were an institutional money fund and a United States Treasury Bill in the
amounts of $40,148,572 and $10,032,601 respectively.
Income Taxes
The
Company follows Statement of Financial Accounting Standards No. 109 (SFAS No.
109), Accounting for Income Taxes which establishes financial accounting and
reporting standards for the effects of income taxes that result from an
enterprises activities during the current and preceding years. It requires an
asset and liability approach for financial accounting and reporting for income
taxes.
Earnings Per Share
Net
earnings per share is computed on the basis of the weighted average number of
common shares outstanding during the period.
Fair Value of Financial Instruments
The
fair values of the Companys assets and liabilities that qualify as financial
instruments under SFAS No. 107 approximate their carrying amounts at September
30, 2007 and 2006.
Use of Estimates
The
preparation of financial statements in conformity with United States 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For financial statement purposes, the Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents.
Recently Issued Accounting Pronouncements
Energy
Services Acquisition Corp. does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Companys results of
operations, financial position or cash flow.
F-8
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
On
September 6, 2006, the Company sold 8,600,000 units (Units) in the Public
Offering at a price of $6.00 per Unit. Each Unit consists of one share of the
Companys common stock, $.0001 par value, and two Redeemable Common Stock
Purchase Warrants (Warrants). Each Warrant entitles the holder to purchase
from the Company one share of common stock at an exercise price of $5.00 per
share commencing on the later of the consummation by the Company of a Business
Acquisition, as defined below, or one year after the Effective Date and
terminating on the fifth anniversary of the date of the Public Offering. The
Company may redeem the Warrants for a redemption price of $0.01 per Warrant at
any time if notice of not less than 30 days is given and the last sale price of
the Common Stock has been at least $8.50 on 20 of the 30 trading days ending on
the third day prior to the day on which notice is given.
On
the 90
th
day after the date of the prospectus or earlier, at the
discretion of the Underwriter, the warrants separated from the units and begin
to trade. Separate trading of the warrants and the share of common stock began
on or about October 3, 2006. At September 30, 2007 there were 7,817,429 shares,
2,932,571 units and 14,411,781 warrants outstanding.
For
the warrants, the Company is only required to use its best efforts to cause a
registration statement covering issuance of the shares of common stock
underlying the warrants to be declared effective and, once effective, only to use
its best efforts to maintain the effectiveness of the registration statement.
The Company will not be obligated to deliver securities, and there are no
contractual penalties for failure to deliver securities, if a registration
statement is not effective at the time of exercise. Additionally, in no event
is the Company obligated to settle any warrant, in whole or in part, for cash
in the event it is unable to deliver registered shares of common stock and, if
it is unable to do so, the warrants could expire unexercised. The holders of
warrants do not have the rights or privileges of holders of common stock,
including any voting rights, until such holders exercise their warrants and
receive shares of the Companys common stock.
In
connection with the offering, the Company paid the underwriters of the Public
Offering an underwriting discount of 6% of the gross proceeds of the Public
Offering ($3,096,000) and a non-accountable expense allowance of 2% of the
gross proceeds ($1,032,000). However, the underwriters have agreed that the
expense allowance amount will be placed in the Trust Account until the earlier
of the completion of a business combination or the liquidation of the Trust
Account. In the event that the business combination is not consummated, the
underwriter will forfeit the 2.0% being deferred.
The
Company also issued to the underwriter at the time of closing of the Offering a
unit purchase option, for $100, to purchase up to 450,000 units at an exercise
price of $7.50. The unit purchase option shall be exercisable any time, in
whole or in part, between the first anniversary date and the fifth anniversary
date of the Public Offering.
For
the unit purchase option, the Company is only required to use its best efforts
to cause a registration statement covering the resale of the units and the
securities comprising the units and, once effective, only to use its best
efforts to maintain the effectiveness of the registration statement. There are
no contractual penalties for failure to effect the registration of the units
and the securities comprising the units. Additionally, in no event, is the
Company obligated to settle the option, the units or the warrants included in
the units, in whole or in part, for cash in the event it is unable to effect
the registration of the units and the securities comprising the units. The
holder or holders of the options do not have the rights or privileges of
holders of common stock, including any voting rights, until such holder or
holders exercise the options and receive shares of the Companys common stock.
The
Company accounted for the fair value of the unit purchase option, inclusive of
the receipt of $100 cash payment, as an expense of the Public Offering
resulting in a charge directly to stockholders equity. The Company estimates
that the fair value of this unit purchase option is approximately $1,642,500 ($
3.65 Per Unit) using a Black-Scholes option pricing model. The fair value of
the unit purchase option granted to the underwriter is estimated as of the date
of grant using the following assumptions: (1) expected volatility of 75.7 %,
(2) risk free interest rate of 5.1 %and (3) expected life of 5 years.
F-9
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
The
Company presently occupies office space provided by an affiliate of one of the
Companys executive officers. Such affiliate has agreed that until the Company
consummates a Business Combination, it will make such office space, as well as
certain office and secretarial services available to the Company, as may be
required by the Company from time to time. The Company has agreed to pay such
affiliate up to $5,000 per month for reimbursement of expenses expended on
behalf of the Company commencing on the date of the effective date of the
Public Offering.
Pursuant
to letter agreements with the Company and the Underwriter, the Initial
Stockholders have waived their right to receive distributions with respect to
their founding shares upon the Companys liquidation.
The
Companys Initial Stockholders purchased in the aggregate, 3,076,923 of the
Warrants from the Company at a purchase price of $.65 per Warrant ($2,000,000
in the aggregate) in a private placement. These warrants, and the warrants
issued as part of the Units in the Public Offerings, do not have any
liquidation rights.
The
Initial Stockholders are entitled to registration rights with respect to their
founding shares pursuant to an agreement signed on the effective date of the
Public Offering. The Holders of the majority of these shares are entitled to
make up to two demands that the Company register these shares at any time and
from time to time, commencing with the date the initial shares are disbursed
from the escrow account. In addition, the Initial Stockholders have certain
piggyback registration rights on the registration statements filed subsequent
to the release date from escrow.
At
any time and from time to time after the release date from escrow and prior to
the fifth anniversary date hereof, the holders of at least 51 % of the
Registrable Securities initially held by the underwriters may make two written
demands for a Demand Registration.
Prior
to the offering, the Company issued an unsecured non-interest bearing
promissory note for $150,000 to Marshall T. Reynolds, Chairman and Chief
Executive Officer. The note was repaid on September 6, 2006 from the proceeds
of the Public Offering. On September 6, 2006, Mr. Reynolds loaned the Company
$150,000. The loan will be repaid without interest from working capital and is
also unsecured.
The
Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors.
On
March 31, 2006, the Company issued 2,500,000 shares to the initial
stockholders. On August 30, 2006 the Company entered into an underwriting
agreement with respect to the public sale of up to 8,600,000 units, reflecting
a reduction in the size of the Public Offering from 10,000,000 units as
previously contemplated to 8,600,000 units. In connection with such
modification, and in order to maintain the percentage ownership of its
stockholders prior to the Public Offering, the Companys initial stockholders
surrendered for cancellation an aggregate of 350,000 shares of common stock. On
the date the shares were surrendered, management determined the fair value of
the Companys common stock to be $4.70 per share.
F-10
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
|
|
7.
|
Concentration of Credit Risk
|
At
September 30, 2007, the Company maintained a checking account at a financial
institution, the balance of which exceeded the federally insured limit by
$664,395.
The
Company uses the liability method, where deferred tax assets and liabilities
are determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for
financial and income tax reporting purposes. There are no timing differences
and therefore no deferred tax asset or liability at September 30, 2006 or 2007.
There are no net operating loss carry forwards at September 30, 2007.
At
September 30, 2007 and September 30, 2006, income tax expense consisted of the
following:
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
|
|
|
|
|
|
Taxes currently payable
|
|
|
|
|
|
|
|
Federal
|
|
$
|
695,000
|
|
$
|
32,000
|
|
State
|
|
|
151,000
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
846,000
|
|
$
|
41,000
|
|
|
|
|
|
|
|
|
|
The Company is
incorporated in Delaware and is subject to franchise taxes, which are shown as
a component of operating expenses.
|
|
9.
|
Selected Quarterly Information (unaudited)
|
Following
is unaudited selected financial information for the year ended September 30,
2007 and the period from March 31, 2006 (inception) through September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31
|
|
Mar. 31
|
|
June 30
|
|
Sept. 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
591,312
|
|
|
555,580
|
|
|
503,358
|
|
|
576,812
|
|
Net income (loss)
|
|
|
348,312
|
|
|
368,480
|
|
|
307,458
|
|
|
356,812
|
|
Earnings (loss) per sharebasic
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.04
|
|
Earnings (loss) per sharediluted
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.02
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from March 31, 2006 (Inception) to
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
N/A
|
|
|
(2,200
|
)
|
|
|
|
|
130,620
|
|
Net income (loss)
|
|
|
N/A
|
|
|
(2,200
|
)
|
|
|
|
|
89,620
|
|
Earnings (loss) per sharebasic
|
|
|
N/A
|
|
$
|
|
|
$
|
|
|
$
|
0.02
|
|
Earnings (loss) per sharediluted
|
|
|
N/A
|
|
$
|
|
|
$
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Balance Sheets
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
470,410
|
|
$
|
756,782
|
|
Investments held in trust
|
|
|
50,326,033
|
|
|
49,711,430
|
|
Investments held in trust from Underwriter
|
|
|
1,032,000
|
|
|
1,032,000
|
|
Prepaid Expenses
|
|
|
22,163
|
|
|
26,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
51,850,606
|
|
$
|
51,526,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
$
|
136,725
|
|
$
|
167,564
|
|
Notes Payable Stockholder
|
|
|
150,000
|
|
|
150,000
|
|
Due to Underwriter
|
|
|
1,032,000
|
|
|
1,032,000
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,318,725
|
|
|
1,349,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock subject to Possible redemption 1,719,140 shares at redemption value
|
|
|
10,263,000
|
|
|
10,143,000
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value
|
|
|
|
|
|
|
|
Authorized 1,000,000 shares; none issued
|
|
|
|
|
|
|
|
Common Stock, $.0001 par value
|
|
|
|
|
|
|
|
Authorized 50,000,000 shares
|
|
|
|
|
|
|
|
Issued and outstanding 10,750,000 Shares,
inclusive of 1,719,140 shares
subject to possible redemption
|
|
|
903
|
|
|
903
|
|
Additional paid-in capital
|
|
|
38,444,710
|
|
|
38,564,710
|
|
Retained Earnings
|
|
|
1,823,268
|
|
|
1,468,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
40,268,881
|
|
|
40,034,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
51,850,606
|
|
$
|
51,526,659
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
F-12
Energy Services Acquisition Corp.
(A Development Stage Enterprise
)
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three
months ended
December 31,
2007
|
|
For the three
months ended
December 31,
2006
|
|
For the Period
from March 31,
2006 (inception)
To December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Formation and operating costs
|
|
|
47,169
|
|
|
48,570
|
|
|
403,143
|
|
Franchise taxes
|
|
|
11,205
|
|
|
14,937
|
|
|
89,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations before taxes
|
|
|
(58,374
|
)
|
|
(63,507
|
)
|
|
(492,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from
trust fund investments
|
|
|
619,160
|
|
|
654,819
|
|
|
3,409,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
560,786
|
|
|
591,312
|
|
|
2,916,268
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
206,000
|
|
|
243,000
|
|
|
1,093,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
354,786
|
|
|
348,312
|
|
|
1,823,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
10,750,000
|
|
|
10,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
13,193,218
|
|
|
11,966,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share- basic
|
|
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share- diluted
|
|
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
F-13
Energy Services Acquisition Corp
.
(A Development Stage Enterprise
)
Statements of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Accumulated
During the
Development Stage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid in
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
Stock
|
|
|
Stockholders
Equity
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to initial
stockholders on March 31, 2006 at $.01 Per share
|
|
|
2,500,000
|
|
$
|
250
|
|
$
|
24,750
|
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of 350,000 Shares on August 30, 2006
by initial Shareholders
|
|
|
|
|
|
|
|
|
1,645,000
|
|
|
(1,645,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of Common Stock to Initial
Shareholders
|
|
|
(350,000
|
)
|
|
(35
|
)
|
|
(1,644,965
|
)
|
|
1,645,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Private Placement Warrants
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of 8,600,000 units net of
underwriters discount and offering expenses
|
|
|
8,600,000
|
|
|
860
|
|
|
46,697,634
|
|
|
|
|
|
|
|
|
46,698,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of underwriter option
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reclassified to Common Stock
subject To possible redemption
|
|
|
(1,719,140
|
)
|
|
(172
|
)
|
|
(9,988,028
|
)
|
|
|
|
|
|
|
|
(9,988,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
87,420
|
|
|
87,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
9,030,860
|
|
|
903
|
|
|
38,734,491
|
|
|
|
|
|
87,420
|
|
|
38,822,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional offering costs
|
|
|
|
|
|
|
|
|
(14,981
|
)
|
|
|
|
|
|
|
|
(14,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion relating to common stock subject
to possible redemption
|
|
|
|
|
|
|
|
|
(154,800
|
)
|
|
|
|
|
|
|
|
(154,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,381,062
|
|
|
1,381,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
9,030,860
|
|
|
903
|
|
|
38,564,710
|
|
|
|
|
|
1,468,482
|
|
|
40,034,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion relating to common stock subject
to possible redemption
|
|
|
|
|
|
|
|
|
(120,000
|
)
|
|
|
|
|
|
|
|
(120,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,786
|
|
|
354,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
9,030,860
|
|
$
|
903
|
|
$
|
38,444,710
|
|
$
|
|
|
$
|
1,823,268
|
|
$
|
40,268,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
F-14
Energy
Services Acquisition Corp.
(A Development Stage Enterprise)
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three
Months Ended
December 31,
2007
|
|
For the three Months Ended
December 31,
2006
|
|
For the Period
from March 31,
2006 (inception)
to December 31,
2007
|
|
Cash flow from operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
354,786
|
|
|
348,312
|
|
$
|
1,823,268
|
|
Adjustment to reconcile net
income to net
cash provided by (used) in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
Accrued Income and accretion on
investments held in Trust Fund
|
|
|
(614,603
|
)
|
|
(235,601
|
)
|
|
(1,354,033
|
)
|
Accrued Expenses and
Prepaids
|
|
|
(26,555
|
)
|
|
231,967
|
|
|
114,562
|
|
Other Assets
|
|
|
|
|
|
(72,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used in) provided by operating
activities
|
|
$
|
(286,372
|
)
|
$
|
272,009
|
|
$
|
583,797
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments held in Trust
Fund
|
|
|
(10,543,000
|
)
|
|
(10,113,000
|
)
|
|
(101,618,000
|
)
|
Proceeds from maturities of Investments
held in Trust Fund
|
|
|
10,543,000
|
|
|
10,113,000
|
|
|
51,614,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used in) Investing
Activities
|
|
|
|
|
|
|
|
|
(50,004,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Public Offering
|
|
|
|
|
|
|
|
|
51,600,000
|
|
Proceeds from Private Placement of
warrants
|
|
|
|
|
|
|
|
|
2,000,000
|
|
Proceeds from issuance of underwriting
options
|
|
|
|
|
|
|
|
|
100
|
|
Proceeds from issuance of common stock to
initial stockholders
|
|
|
|
|
|
|
|
|
25,000
|
|
Loans from Stockholder
|
|
|
|
|
|
|
|
|
375,000
|
|
Payment of Loan from Stockholder
|
|
|
|
|
|
|
|
|
(225,000
|
)
|
Payment of Offering Costs
|
|
|
|
|
|
(147,308
|
)
|
|
(3,884,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used in) provided by Financing
Activities
|
|
|
|
|
|
(147,308
|
)
|
|
49,890,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
|
(286,372
|
)
|
|
124,701
|
|
|
470,410
|
|
|
Cash and Cash Equivalents at beginning of
Period
|
|
|
756,782
|
|
|
77,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end of
Period
|
|
$
|
470,410
|
|
$
|
202,082
|
|
$
|
470,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
financing activity:
|
|
|
|
|
|
|
|
|
|
|
Accrued and unpaid offering
costs
|
|
$
|
|
|
$
|
77,381
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes paid
|
|
$
|
217,500
|
|
$
|
41,000
|
|
$
|
981,875
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
F-15
Energy
Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
|
|
1.
|
Organization, Business Operations and Significant Policies
|
Nature of Business
Energy
Services Acquisition Corp. (the Company) was incorporated in Delaware on
March 31, 2006 as a blank check company whose objective is to acquire a
operating business or businesses.
Activity
through September 30, 2006 relates to the Companys formation and the public
offering described below. The Company has selected September 30 as its fiscal
year-end. Activity from September 30, 2006 through December 31, 2007 has been
limited to the identification and analysis of potential acquisition candidates
for the Company.
The
registration statement for the Companys initial public offering (the Public
Offering) (as described in note 2) was declared effective August 29, 2006. The
Company completed the Public Offering on September 6, 2006. Preceding the
completion of the Public Offering certain officers, directors and initial
shareholders of the Company purchased an aggregate of 3,076,923 warrants at
$0.65 per warrant from the Company in a private placement (the Private
Placement). The warrants sold in the Private Placement were identical to the
warrants sold in the public offering, except that the Private Placement
warrants are not registered at this time. The Company received net proceeds
from the Private Placement and the Offering of approximately $48,698,494 (note
2).
The
Companys management has broad discretion with respect to the specific
application of the net proceeds of this Public Offering, although substantially
all of the net proceeds of this Public Offering are intended to be generally
applied toward consummating a business combination with an operating business
(Business Combination). Furthermore, there is no assurance that the company
will be able to successfully affect a Business Combination. Upon the closing of
the Public Offering, $50,004,000 (including $1,032,000 for the Underwriters
non-accountable expense allowance) was deposited in a trust account (Trust
Account) and invested in United States Government Securities defined as any
Treasury Bill issued by the United States having a maturity of one hundred and
eighty days or less or in money market funds meeting certain conditions under
Rule 2a-7 promulgated under the Investment Company Act of 1940. Such funds will
be invested in the manner outlined until the earlier of (i) the consummation of
its first Business Combination or (ii) liquidation of the Company. The placing
of the funds in the Trust Account may not protect those funds from third party
claims against the Company. Although the Company will seek to have all vendors,
prospective target businesses or other entities it engages, execute agreements
with the Company waiving any right, title, interest or claim of any kind in or
to any monies held in the Trust Account, there is no guarantee that they will
execute such agreements. If the Company liquidates prior to the consummation of
a Business Acquisition, the officers and directors shall under certain
customary circumstances, be personally liable to pay any debts, obligations and
liabilities of the Company to various vendors, prospective target businesses or
other entities that are owed money by it for services rendered or contracted
for or products sold to it in excess of the working capital not held in the
Trust Fund. Interest or earnings from funds invested in the Trust Account up to
$1,200,000 net of taxes may be used to pay for business, legal and accounting
due diligence on prospective acquisitions, continuing general and
administrative expenses, and income taxes. The Company, after signing a
definitive agreement for the acquisition of a target business, is required to
submit such transaction for stockholder approval. In the event that
stockholders owning 20% or more of the shares sold in the Public Offering vote
against the Business Combination and exercise their conversion rights described
below, the Business Combination will not be consummated. All of the Companys
stockholders prior to the public offering, including all of the officers and
directors of the Company (Initial Stockholders), have agreed to vote their
2,150,000 founding shares of common stock in accordance with the vote of the
majority in interest of all other stockholders of the Company (Public
Stockholders) with respect to any Business Combination. After consummation of
a Business Combination, these voting safeguards will no longer be applicable.
F-16
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
With
respect to a Business Combination which is approved and consummated, any public
stockholder presented with the right to approve a Business Acquisition can
instead demand that his stock be converted into his pro rata share of the Trust
Fund upon the consummation of the transaction if he votes against such
transaction. Such Public Stockholders are entitled to receive their per share
interest in the Trust Account computed without regard to the shares held by the
Initial Stockholders.
The
Companys Certificate of Incorporation provides for mandatory liquidation of
the Company in the event that the Company does not consummate a Business
Combination within 18 months from the date of the consummation of the Public
Offering, or 24 months from the consummation of the Public offering if certain
extension criteria have been satisfied. In the event of liquidation, it is likely
that the per share value of the residual assets remaining available for
distribution (including Trust Fund assets) will be less than the initial public
offering price per share in the Public Offering.
We
have neither engaged in any business operations nor generated any operating
revenue to date. Our only activities since inception have been organizational
activities and those necessary to prepare for our public offering, and
thereafter, pursuing potential acquisitions of target businesses. We will not
generate any operating revenues until after completion of a business
combination. We have generated non-operating income in the form of interest
income on our cash and cash equivalents and short term investments.
Interim Financial Statements
The
accompanying unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) and
should be read in conjunction with the Companys audited financial statements
and footnotes thereto for the year ended September 30, 2007 and for the periods
from inception (March 31, 2006) through September 30, 2007 and 2006 included in
the Companys Form 10-K filed December 19, 2007. 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 omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The financial statements reflect all adjustments
(consisting primarily of normal recurring adjustments) that are, in the opinion
of management necessary for a fair presentation of the Companys financial position
and results of operations. The operating results for the period ended December
31, 2007 are not necessarily indicative of the results to be expected for any
other interim period of any future year.
Investments Held in Trust
The
Companys restricted investments held in the Trust Fund at December 31, 2007
are comprised of an institutional money fund and a United States Treasury Bill
with a maturity of January 31, 2008 in the amounts of $40,887,273 and
$10,470,760, respectively.
Income Taxes
The
Company follows Statement of Financial Accounting Standards No. 109 (SFAS No.
109), Accounting for Income Taxes which establishes financial accounting and
reporting standards for the effects of income taxes that result from an
enterprises activities during the current and preceding years. It
F-17
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
requires an
asset and liability approach for financial accounting and reporting for income
taxes.
Earnings Per Share
Net
income per share is computed on the basis of the weighted average number of
common shares outstanding during the period.
Basic
net income per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding for the period
including shares subject to possible redemption. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then share in the earnings of
the entity.
Fair Value of Financial Instruments
The
fair values of the Companys assets and liabilities that qualify as financial
instruments under SFAS No. 107 approximate their carrying amounts at September
30, 2007 and at December 31, 2007.
Use of Estimates
The
preparation of financial statements in conformity with United States 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For financial statement purposes, the Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents.
Recently Issued Accounting Pronouncements
Energy
Services Acquisition Corp. does not expect the adoption of recently issued
accounting pronouncements to have a significant impact on the Companys results
of operations, financial position or cash flows.
On
September 6, 2006, the Company sold 8,600,000 units (Units) in the Public
Offering at a price of $6.00 per Unit. Each Unit consists of one share of the
Companys common stock, $.0001 par value, and two Redeemable Common Stock
Purchase Warrants (Warrants). Each Warrant entitles the holder to purchase
from the Company one share of common stock at an exercise price of $5.00 per
share commencing on the later of the consummation by the Company of a Business
Acquisition, as defined below, or one year after the Effective Date and
terminating on the fifth anniversary of the date of the Public Offering. The
Company may redeem the Warrants for a redemption price of $0.01 per Warrant at
any time if notice of not less than 30 days is given and the last sale price of
the Common Stock has been at least
F-18
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
$8.50 on 20 of
the 30 trading days ending on the third day prior to the day on which notice is
given. Separate trading of the warrants and the share of common stock began on
or about October 3, 2006.
For
the warrants, the Company is only required to use its best efforts to cause a
registration statement covering issuance of the shares of common stock
underlying the warrants to be declared effective and, once effective, only to
use its best efforts to maintain the effectiveness of the registration
statement. The Company will not be obligated to deliver securities, and there
are no contractual penalties for failure to deliver securities, if a
registration statement is not effective at the time of exercise. Additionally,
in no event is the Company obligated to settle any warrant, in whole or in
part, for cash in the event it is unable to deliver registered shares of common
stock and, if it is unable to do so, the warrants could expire unexercised. The
holders of warrants do not have the rights or privileges of holders of common
stock, including any voting rights, until such holders exercise their warrants
and receive shares of the Companys common stock.
In
connection with the offering, the Company paid the underwriters of the Public
Offering an underwriting discount of 6% of the gross proceeds of the Public
Offering ($3,096,000) and a non-accountable expense allowance of 2% of the
gross proceeds ($1,032,000). However, the underwriters have agreed that the
expense allowance amount will be placed in the Trust Account until the earlier
of the completion of a business combination or the liquidation of the Trust
Account. In the event that the business combination is not consummated, the
underwriter will forfeit the 2.0% being deferred.
The
Company also issued to the underwriter at the time of closing of the Offering a
unit purchase option, for $100, to purchase up to 450,000 units at an exercise
price of $7.50. The unit purchase option shall be exercisable any time, in
whole or in part, between the first anniversary date and the fifth anniversary
date of the Public Offering.
For
the option, the Company is only required to use its best efforts to cause a
registration statement covering the resale of the units and the securities
comprising the units and, once effective, only to use its best efforts to
maintain the effectiveness of the registration statement. There are no
contractual penalties for failure to effect the registration of the units and
the securities comprising the units. Additionally, in no event, is the Company
obligated to settle the option, the units or the warrants included in the
units, in whole or in part, for cash in the event it is unable to effect the
registration of the units and the securities comprising the units. The holder
or holders of the options do not have the rights or privileges of holders of
common stock, including any voting rights, until such holder or holders
exercise the options and receive shares of the Companys common stock.
The
Company accounted for the fair value of the unit purchase option, inclusive of
the receipt of $100 cash payment, as an expense of the Public Offering
resulting in a charge directly to stockholders equity. The Company estimated
the fair value of this unit purchase option at $1,642,500 ($3.65 Per Unit)
using a Black-Scholes option pricing model. The fair value of the unit purchase
option granted to the underwriter is estimated as of the date of grant using
the following assumptions: (1) expected volatility of 75.7%, (2) risk free
interest rate of 5.1% and (3) expected life of 5 years.
The
Company presently occupies office space provided by an affiliate of one of the
Companys executive officers. Such affiliate has agreed that until the Company
consummates a Business Combination, it will make such office space, as well as
certain office and secretarial services available to the Company, as may be
required by the Company from time to time. The Company has agreed to pay such
affiliate up to $5,000 per month for reimbursement of expenses expended on
behalf of the Company commencing on the date of the effective date of the
Public Offering.
F-19
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
Pursuant
to letter agreements with the Company and the Underwriter, the Initial
Stockholders have waived their right to receive distributions with respect to
their founding shares upon the Companys liquidation.
The
Companys Initial Stockholders purchased in the aggregate, 3,076,923 of the
Warrants from the Company at a purchase price of $.65 per Warrant ($2,000,000
in the aggregate) in a private placement. These warrants, and the warrants
issued as part of the Units in the Public Offerings, do not have any
liquidation rights.
The
Initial Stockholders are entitled to registration rights with respect to their
founding shares pursuant to an agreement signed on the effective date of the
Public Offering. The Holders of the majority of these shares are entitled to
make up to two demands that the Company register these shares at any time and
from time to time, commencing with the date the initial shares are disbursed
from the escrow account. In addition, the Initial Stockholders have certain piggyback
registration rights on the registration statements filed subsequent to the
release date from escrow.
At
any time and from time to time after the release date from escrow and prior to
the fifth anniversary date hereof, the holders of at least 51% of the
Registrable Securities initially held by the underwriters may make two written
demands for a Demand Registration.
Prior
to the offering, the Company issued an unsecured non-interest bearing
promissory note for $150,000 to Marshall T. Reynolds, Chairman and Chief
Executive Officer. The note was repaid on September 6, 2006 from the proceeds
of the Public Offering. On September 6, 2006, Mr. Reynolds loaned the Company
$150,000. The loan will be repaid without interest from working capital and is
also unsecured.
The
Company is authorized to issue 1,000,000 shares of preferred stock with such
designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors.
On
March 31, 2006, the Company issued 2,500,000 shares to the initial
stockholders. On August 30, 2006 the Company entered into an underwriting
agreement with respect to the public sale of up to 8,600,000 units, reflecting
a reduction in the size of the Public Offering from 10,000,000 units as
previously contemplated to 8,600,000 units. In connection with such
modification, and in order to maintain the percentage ownership of its
stockholders prior to the Public Offering, the Companys initial stockholders
surrendered for cancellation an aggregate of 350,000 shares of common stock. On
the date the shares were surrendered, management determined the fair value of
the Companys common stock to be $4.70 per share.
|
|
7.
|
Concentration of Credit Risk
|
At
December 31, 2007, the Company maintained a checking account at a financial
institution, the balance of which exceeded the federally insured limit by
$664,395 at September 30, 2007 and by $609,117 at December 31, 2007.
F-20
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
Energy
Services Acquisition Corp. (ESA) uses the liability method, where deferred tax
assets and liabilities are determined based on the expected future tax
consequences of temporary differences between the carrying amounts of assets
and liabilities for financial and income tax reporting purposes. There are no
timing differences and therefore no deferred tax asset or liability at December
31, 2007. There are no net operating loss carry forwards at December 31, 2007.
At
December 31, 2007, income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended December 31,
2007
|
|
|
Three months
ended December 31,
2006
|
|
|
March 31, 2006-
December 31,
2007
|
|
Taxes
currently payable
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
166,000
|
|
$
|
43,000
|
|
$
|
893,000
|
|
State
|
|
|
40,000
|
|
|
200,000
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
206,000
|
|
$
|
243,000
|
|
$
|
1,093,000
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is
incorporated in Delaware and is subject to franchise taxes, which are shown as
a component of operating expenses.
On
January 24, 2008 Energy Services Acquisition Corp. (ESA) announced separate
agreements to acquire two companies, ST Pipeline and GasSearch Drilling
Services (GDS). Pursuant to the agreement to acquire S.T. Pipeline,
shareholders of S.T. Pipeline shall have a right to receive up to $15,200 per
share in cash, or $19.0 million in the aggregate, subject to a reduction to
reflect the book value of certain assets and a further reduction of $3.0
million that will be paid to S.T. Pipeline shareholders on a deferred basis.
The agreement to Acquire GDS calls for the Shareholder of GDS to receive Stock
valued at $3.5 million based upon the arithmetic average of the closing price
of Energy Services common stock as reported on the American Stock Exchange for
the five consecutive trading days beginning three trading days before the
announcement of the GDS Acquisition, $2.5 million dollars in cash and $17.5
million in cash to pay GDS current debt and capital expenditures. The
transactions closing is conditioned on receipt of ESA shareholders approval and
holders of less than 20% of the shares of Energy Services common stock voting
against the transaction and electing to convert their Energy Services common
stock into cash from the trust fund established in connection with Energy
Services initial public offering, among other conditions.
On
February 12. 2008, ESA was advised that COG Finance Corporation elected to
exercise an option to acquire GDS pursuant to a provision in a finance
agreement between COG finance and GDS. Energy Services is currently assessing
the viability of proceeding with this transaction.
On
February 13, 2008, ESA entered into a letter of intent to acquire C J Hughes
Construction Company, Inc. C. J. Hughes is an underground utility service
company located in Huntington, West Virginia. C. J. Hughes may be considered an
affiliate of ESA since Marshall T. Reynolds and Neal Scaggs are shareholders,
and Edsel R. Burns is the President and a shareholder of C.J. Hughes. Mr.
Reynolds is the Chairman of the Board, Chief Executive officer and Secretary of
ESA. Mr. Scaggs and Mr. Burns are directors of ESA.
F-21
INDEPENDENT AUDITORS REPORT
To the Board of Directors
ST Pipeline, Inc., and subsidiaries
Clendenin, West Virginia
We have audited the
accompanying balance sheets of ST Pipeline, Inc., as of December 31, 2007 and
2006, and the related statements of income and retained earnings, and cash
flows for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Companys 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. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ST Pipeline, Inc., as of December
31, 2007 and 2006, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of America.
|
|
|
ARNETT & FOSTER, P.L.L.C.
|
|
|
Charleston, West Virginia
March 4, 2008
AF Center 101 Washington Street, East P.O. Box
2629 Charleston,
West Virginia 25329
304/346-0441 800/642-3601
www.afnetwork.com
F-22
ST PIPELINE, INC.
BALANCE SHEETS
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
Assets
|
|
2007
|
|
2006
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,960,685
|
|
$
|
617,872
|
|
Accounts receivable
|
|
|
26,485,359
|
|
|
6,805,527
|
|
Costs and estimated earnings in excess of billings
on uncompleted
contracts
|
|
|
|
|
|
293,258
|
|
Prepaid expenses and other
|
|
|
205,064
|
|
|
261,623
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
30,651,108
|
|
|
7,978,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and
Equipment, net of accumulated depreciation
|
|
|
2,661,453
|
|
|
3,086,957
|
|
|
|
|
|
|
|
|
|
Long-term notes
receivable and other assets
|
|
|
100,781
|
|
|
72,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
33,413,342
|
|
$
|
11,137,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
262,247
|
|
$
|
312,247
|
|
Lines of credit
|
|
|
6,935,419
|
|
|
2,654,563
|
|
Accounts payable
|
|
|
1,281,133
|
|
|
596,609
|
|
Accrued and withheld liabilities
|
|
|
425,641
|
|
|
1,624,630
|
|
Billings in excess of costs and estimated earnings
on uncompleted
contracts
|
|
|
604,589
|
|
|
718,234
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,509,029
|
|
|
5,906,283
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
175,996
|
|
|
376,306
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,685,025
|
|
|
6,282,589
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
Common stock ($20 par value; 3,750 shares authorized
and issued;
3,700 shares outstanding)
|
|
|
75,000
|
|
|
75,000
|
|
Retained earnings
|
|
|
24,609,007
|
|
|
5,735,899
|
|
Less: cost of treasury stock, 50 shares
|
|
|
(955,690
|
)
|
|
(955,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
23,728,317
|
|
|
4,855,209
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
33,413,342
|
|
$
|
11,137,798
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
F-23
ST PIPELINE, INC.
STATEMENTS OF INCOME AND RETAINED
EARNINGS
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Contract revenues
|
|
$
|
100,385,098
|
|
$
|
49,771,580
|
|
$
|
22,936,383
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
70,948,130
|
|
|
45,122,584
|
|
|
20,537,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,436,968
|
|
|
4,648,996
|
|
|
2,398,806
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative
expenses
|
|
|
1,547,125
|
|
|
1,295,761
|
|
|
980,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
27,889,843
|
|
|
3,353,235
|
|
|
1,418,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
45,939
|
|
|
60,053
|
|
|
17,210
|
|
Other nonoperating income
|
|
|
306,147
|
|
|
180,029
|
|
|
131,709
|
|
Interest expense
|
|
|
(298,799
|
)
|
|
(288,818
|
)
|
|
(71,917
|
)
|
Gain on sale of equipment
|
|
|
1,377
|
|
|
32,006
|
|
|
155,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,664
|
|
|
(16,730
|
)
|
|
232,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
27,944,507
|
|
|
3,336,505
|
|
|
1,650,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings,
beginning of year, as previously stated
|
|
|
5,735,899
|
|
|
5,165,891
|
|
|
3,740,857
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment applicable to
prior year
|
|
|
|
|
|
|
|
|
(60,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings,
beginning of year, as restated
|
|
|
5,735,899
|
|
|
5,165,891
|
|
|
3,680,004
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend distributions
|
|
|
(9,071,399
|
)
|
|
(2,766,497
|
)
|
|
(164,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of
year
|
|
$
|
24,609,007
|
|
$
|
5,735,899
|
|
$
|
5,165,891
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
F-24
ST PIPELINE, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,944,507
|
|
$
|
3,336,505
|
|
$
|
1,650,569
|
|
Adjustments to reconcile net income to net cash
provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
973,199
|
|
|
921,193
|
|
|
892,555
|
|
Gain on sale of property, plant, and
equipment
|
|
|
(1,377
|
)
|
|
(32,006
|
)
|
|
(155,346
|
)
|
Change in current assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19,679,833
|
)
|
|
(1,476,559
|
)
|
|
(3,951,836
|
)
|
Prepaid expenses and other
|
|
|
56,558
|
|
|
(43,684
|
)
|
|
(81,308
|
)
|
Costs and estimated earnings in excess of billings
on uncompleted
contracts
|
|
|
293,258
|
|
|
214,958
|
|
|
(508,216
|
)
|
Accounts payable
|
|
|
684,524
|
|
|
(66,068
|
)
|
|
630,968
|
|
Accrued liabilities
|
|
|
(1,198,990
|
)
|
|
1,224,593
|
|
|
224,260
|
|
Billings in excess of costs and estimated earnings
on uncompleted
contracts
|
|
|
(113,645
|
)
|
|
(3,427,172
|
)
|
|
4,145,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities
|
|
|
8,958,201
|
|
|
651,760
|
|
|
2,847,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
Net collections from long-term notes
receivable
|
|
|
(28,219
|
)
|
|
17,220
|
|
|
2,850
|
|
Purchases of property, plant and equipment
|
|
|
(583,566
|
)
|
|
(1,534,421
|
)
|
|
(606,220
|
)
|
Proceeds from sales of property, plant, and
equipment
|
|
|
37,248
|
|
|
71,886
|
|
|
270,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
|
(574,537
|
)
|
|
(1,445,315
|
)
|
|
(332,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
Dividend distributions
|
|
|
(9,071,399
|
)
|
|
(2,766,497
|
)
|
|
(164,682
|
)
|
Proceeds from line of credit, net of
(repayments)
|
|
|
4,280,857
|
|
|
2,598,340
|
|
|
(194,487
|
)
|
Net repayment of bank overdraft balances
|
|
|
|
|
|
|
|
|
(261,804
|
)
|
Payments on long-term debt
|
|
|
(313,909
|
)
|
|
(367,992
|
)
|
|
(451,812
|
)
|
Proceeds from long-term debt
|
|
|
63,600
|
|
|
376,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
financing activities
|
|
|
(5,040,851
|
)
|
|
(159,625
|
)
|
|
(1,072,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
in cash and cash equivalents
|
|
|
3,342,813
|
|
|
(953,180
|
)
|
|
1,441,846
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
617,872
|
|
|
1,571,052
|
|
|
129,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
3,960,685
|
|
$
|
617,872
|
|
$
|
1,571,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
298,799
|
|
$
|
288,818
|
|
$
|
71,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of
noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment acquired through
long-term debt
|
|
$
|
|
|
$
|
91,611
|
|
$
|
546,310
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
F-25
ST PIPELINE, INC.
|
NOTES TO FINANCIAL STATEMENTS
|
|
|
|
Note 1.
|
Summary of Significant Accounting Policies
|
ST Pipeline,
Inc. (the Company) was incorporated in May 1990 under the laws of the State of
West Virginia to engage in the construction of natural gas pipelines for
utility companies. The Companys contracts are primarily under fixed-price and
occasional cost-plus service contracts. The Company grants credit to all its
customers, most of whom are located in West Virginia and the surrounding mid-Atlantic
states.
All of the
Companys production personnel are union members of the various related
construction trade unions and are subject to collective bargaining agreements
that expire at varying time intervals.
A summary of
the significant accounting policies consistently applied in the preparation of
the accompanying financial statements follows:
Revenue and cost recognition:
Revenues from construction contracts are recognized on the
percentage-of-completion method in the ratio that costs incurred bear to total
estimated costs. Contract costs include all direct material, labor,
subcontracted, and equipment costs and those indirect costs related to contract
performance. General and administrative expenses are charged to operations as
incurred. Revenues related to claims are recognized when collected.
The asset
costs and estimated earnings in excess of billings on uncompleted contracts
represents revenues recognized in excess of amounts billed. Such revenues are
expected to be billed and collected within one year on uncompleted contracts.
The liability billings in excess of costs and estimated earnings on
uncompleted contracts represents billings in excess of revenues recognized.
Revisions in
revenues, costs, profit estimates, and measurements of the extent of progress
toward completion are made in the year such revisions can be reasonably
estimated. At the time a loss on a contract becomes known, the entire amount of
the estimated loss is accrued.
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At times, such
balances may be in excess of Federal Deposit Insurance Corporation insurance
limits.
Accounts receivable:
The Company grants credit to its customers on terms contractually established
by the construction contracts with each customer. Accounts receivables are
carried at original invoice amount less an estimate made for doubtful
receivables based on a review of all outstanding amounts on a monthly basis.
Management has determined that no allowance for doubtful receivables is
necessary as of December 31, 2007 and 2006. Trade receivables are written off
when deemed uncollectible. Recoveries of trade receivables previously written
off are recorded when received. The Company generally does not have collateral
for its receivables, but rely upon its right to file liens on the owners
property. Interest is not charged on trade accounts receivable.
Property, plant, and equipment:
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations on a straight line basis over their
estimated service lives of 5 to 7 years for equipment and 15 to 40 years for
buildings and related improvements.
Income tax status and distributions:
The stockholders of ST Pipeline, Inc. elected S Corporation status. By electing
S Corporation status, income taxes on the earnings of the Company will be
payable personally by the stockholders of the Company. Accordingly, no provision
has been made in the accompanying financial statements for federal and state
income taxes.
Dividend
distributions may be declared periodically in amounts that will cover the
individual income tax liabilities arising from the taxable income of the Company.
F-26
ST PIPELINE, INC.
|
NOTES TO FINANCIAL STATEMENTS
|
|
In July 2006,
the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
,
effective for years beginning after December 15, 2007. This interpretation is
intended to clarify the accounting for uncertainty in income taxes recognized
in a companys financial statements, in accordance with FASB 109,
Accounting for Income Taxes
, by
prescribing a more-likely-than-not threshold to recognize any benefit of a tax
position taken or expected to be taken in a tax return. Tax positions that meet
the recognition threshold are reported at the largest amount that is
more-likely-than-not to be realized. The adoption of this standard will not
have a material impact on the Companys financial condition, results of
operations or cash flows.
Fair Value Measurement:
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157,
Fair Value Measurement,
effective for fiscal years beginning
after November 15, 2007. This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. The adoption of this
standard will not have a material impact on the Companys financial condition,
results of operations or cash flows.
Fair Value Option:
In February 2007, FASB issued Statement of Financial Accounting Standards No.
159,
The Fair Value Option for Financial
Assets and Financial Liabilities including an amendment to FASB Statement No.
115
, effective for fiscal years beginning after November 15, 2007.
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. The
amendment to FASB Statement No. 115,
Accounting
for Certain Investments in Debt and Equity Securities,
applies to
all entities with available-for-sale and trading securities. The adoption of
this standard will not have a material impact on the Companys financial
condition, results of operations or cash flows.
Use of estimates in preparation of financial
statements:
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
|
|
Note 2.
|
Cash Concentrations
|
As of December
31, 2007 and 2006, the Company had amounts on deposit at financial institutions
of which approximately $2,141,000 and $1,446,000, respectively, were uninsured
under current banking insurance regulations.
|
|
Note 3.
|
Accounts Receivable
|
Accounts
receivable as of December 31, 2007 and 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Billed receivables
|
|
|
|
|
|
|
|
Completed contracts
|
|
$
|
790,962
|
|
$
|
1,253,000
|
|
Contracts in progress
|
|
|
15,391,212
|
|
|
3,987,234
|
|
Unbilled
receivables
|
|
|
|
|
|
|
|
Retainages on completed contracts
|
|
|
1,921,035
|
|
|
153,098
|
|
Retainages on contracts in progress
|
|
|
8,382,150
|
|
|
1,412,195
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,485,359
|
|
$
|
6,805,527
|
|
|
|
|
|
|
|
|
|
F-27
ST PIPELINE, INC.
|
NOTES TO FINANCIAL STATEMENTS
|
|
The primary
industry served by the Company within its market area has traditionally been
the natural gas transmission and distribution industry. As of December 31, 2007
and 2006, all of the Companys outstanding accounts receivable was unsecured
and due directly from business entities operating within this industry. Payment
of these receivables depends primarily upon the available revenues generated by
these business entities.
|
|
Note 4.
|
Uncompleted Contracts
|
Costs,
estimated earnings, and billings on uncompleted contracts as of December 31,
2007 and 2006, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Costs
incurred on uncompleted contracts
|
|
$
|
63,454,130
|
|
$
|
2,577,863
|
|
Estimated
earnings
|
|
|
29,145,461
|
|
|
349,176
|
|
|
|
|
|
|
|
|
|
|
|
|
92,599,591
|
|
|
2,927,039
|
|
Billings
through December 31
|
|
|
(93,204,180
|
)
|
|
(3,352,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(604,589
|
)
|
$
|
(424,976
|
)
|
|
|
|
|
|
|
|
|
Included in
the accompanying balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of
billings on uncompleted contracts
|
|
$
|
|
|
$
|
293,258
|
|
|
|
|
|
|
|
|
|
Billings in excess of costs and estimated
earnings on uncompleted contracts
|
|
|
(604,589
|
)
|
|
(718,234
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(604,589
|
)
|
$
|
(424,976
|
)
|
|
|
|
|
|
|
|
|
The following
schedule summarizes changes in backlog on contracts during the years ended
December 31, 2007, 2006, and 2005. Backlog represents the amount of revenue the
Company expects to realize from work to be performed on uncompleted contracts
in progress as of the balance sheet date and from contractual agreements on
which work has not yet begun.
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Backlog balance, January 1
|
|
$
|
57,280,068
|
|
$
|
11,633,244
|
|
$
|
|
|
New contracts entered into during the year
ended December 31
|
|
|
48,523,794
|
|
|
95,418,404
|
|
|
34,569,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,803,862
|
|
|
107,051,648
|
|
|
34,569,627
|
|
Less contract revenue earned during the
year ended December 31
|
|
|
(100,385,098
|
)
|
|
(49,771,580
|
)
|
|
(22,936,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Backlog balance, December 31
|
|
$
|
5,418,764
|
|
$
|
57,280,068
|
|
$
|
11,633,244
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
also entered into additional contracts with estimated revenues of approximately
$16,000,000 between January 1, 2008 and February 21, 2008.
F-28
ST PIPELINE, INC.
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
|
Note 6.
|
Major Customers
|
Revenues for
the years ended December 31, 2007, 2006 and 2005, include $100,379,587,
$43,343,023 and $15,220,346, respectively, in revenues which represents
approximately 99%, 87% and 66%, respectively, of total revenues, from two major
customers during 2007 and 2006 and one major customer during 2005. Receivables
from major customers as of December 31, 2007 and 2006, amount to $26,376,953
and $3,616,854, respectively, which represents approximately 99% and 53%,
respectively, of total accounts receivable.
Virtually all work performed for major customers was awarded under
competitive bid fixed price arrangements.
During the year ended December 31, 2007 and 2006, the Companys major
customers operated within the natural gas transmission and distribution
industry within the Companys market area.
The loss of a major customer could have a severe impact on the
profitability of operations of the Company. However, due to the nature of the
Companys operations, the major customers and sources of revenues may change
from year to year.
|
|
Note 7.
|
Property, Plant and Equipment
|
A summary of
property plant and equipment as of December 31, 2007 and 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land and
land improvements
|
|
$
|
47,446
|
|
$
|
47,446
|
|
Building and
building improvements
|
|
|
202,957
|
|
|
161,454
|
|
Office
furniture, fixtures, and equipment
|
|
|
52,704
|
|
|
52,704
|
|
Construction
equipment
|
|
|
6,420,601
|
|
|
6,295,619
|
|
Vehicles and
trailers
|
|
|
4,550,687
|
|
|
4,215,969
|
|
|
|
|
|
|
|
|
|
|
|
|
11,274,395
|
|
|
10,773,192
|
|
Less
accumulated depreciation
|
|
|
(8,612,942
|
)
|
|
(7,686,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,661,453
|
|
$
|
3,086,957
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Lines of Credit, Letter of Credit, and Subsequent Event
|
The Company
has available a line of credit agreement with a local community bank which
provides that the Company may borrow up to $3,000,000. Borrowings under the line bear interest
payable monthly at the Wall Street Journal Prime Rate plus 1% and are secured
by all of the equipment of the Company and assignment of personal life
insurance policies of the stockholder-officers of the Company. The balances payable under this arrangement
are due on demand. As of December 31,
2007 and 2006, outstanding borrowings were $2,335,146 and $61,414,
respectively. The amount available for
additional borrowings under this arrangement as of December 31, 2007, amounted
to $664,854. This arrangement is due to
expire June 2, 2008.
The Company
also has available a line of credit agreement with a large regional bank which
provides that the Company may borrow up to $3,500,000. Borrowings under the line bear interest
payable monthly at the lending banks prime rate and are secured by all assets
of the Company. The balances payable
under this arrangement are due on demand.
As of December 31, 2007 and 2006, outstanding borrowings were $2,600,273
and $2,593,149, respectively. The amount
available for additional borrowings under this arrangement as of December 31, 2007,
amounted to $899,727. This arrangement
is due to expire June 5, 2008.
On January 26,
2007, the Company entered into another line of credit agreement permitting the
Company to borrow up to $5,000,000 from the aforementioned large regional
bank. This lending agreement expires on
July 5, 2008, and borrowings under the line bear interest payable monthly at
the lending banks prime rate and are secured by all assets of the
Company. The balances payable under this
arrangement are due on demand. As of December
31, 2007, outstanding borrowings were $2,000,000. The amount
F-29
ST PIPELINE, INC.
|
NOTES TO FINANCIAL STATEMENTS
|
|
available for
additional borrowings under this arrangement as of December 31, 2007, amounted
to $3,000,000.
The Company was
also contingently liable on an irrevocable standby letter of credit in the
amount of $825,280 as of December 31, 2007.
This arrangement was entered into by the Company and the aforementioned
large regional bank to guarantee the payment of insurance premiums to the group
captive insurance company through which the Company obtains its general
liability insurance coverage (Note 11).
On February 5, 2008, the irrevocable standby letter of credit was
increased to $950,542. Any amounts
advanced under this arrangement bear interest payable monthly at the banks
prime lending rate with the principal amounts due upon demand.
A summary of
long-term debt as of December 31, 2007 and 2006, follows:
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Note payable to a Bank, payable in monthly
installments of
$9,217, including interest at 8%, maturity date of June 10, 2010,
secured by equipment acquired with the proceeds of this note.
|
|
$
|
249,334
|
|
$
|
335,920
|
|
|
Note payable to a finance company, payable
in monthly
installments of $2,180, including interest at 8.375%,
maturity date of September 14, 2009, secured by equipment
acquired with this note.
|
|
|
42,944
|
|
|
64,004
|
|
|
Note payable to a finance company, payable
in monthly
installments of $3,361, including interest at 5.5%,
maturity date of August 6, 2008, secured by equipment
acquired with this note.
|
|
|
19,828
|
|
|
57,892
|
|
|
Notes payable to various finance companies,
payable in monthly
installments totaling $9,672, including interest at rates ranging
between 0% and 8%, with varying maturity dates from March,
2008, through December, 2008, secured by vehicles and
equipment acquired with the notes.
|
|
|
64,174
|
|
|
33,314
|
|
|
Notes payable to banks and credit unions,
payable in monthly
installments totaling $11,925, including interest at rates ranging
between 4.5% and 8.0%, maturity dates varying between June, 2008,
through March, 2009, secured by vehicles acquired with the notes.
|
|
|
61,963
|
|
|
197,423
|
|
|
|
|
|
|
|
|
|
|
|
|
438,243
|
|
|
688,553
|
|
Less current maturities
|
|
|
262,247
|
|
|
312,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
175,996
|
|
$
|
376,306
|
|
|
|
|
|
|
|
|
|
Maturities of
long term debt are as follows
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
262,247
|
|
2009
|
|
|
122,704
|
|
2010
|
|
|
53,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
438,243
|
|
|
|
|
|
|
Interest paid
on debt during the years ended December 31, 2007, 2006 and 2005 was $298,799,
$288,818 and $71,917, respectively.
F-30
ST PIPELINE, INC.
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
|
Note 10.
|
Leases and Related Party Lease Commitments
|
The Company
frequently leases equipment on a short-term basis for use on its construction
projects. Rental expense for these
instances during the years ended December 31, 2007, 2006 and 2005, was
approximately $6,393,000, $2,432,000 and $1,104,000, respectively.
The Company
rents real estate and related facilities that are owned by stockholder-officers
of the Company under long-term lease agreements. The monthly rental for these facilities is $3,750 per month, and
the expense incurred and paid under these arrangements for the years ended
December 31, 2007, 2006 and 2005, amounted to $45,000, $45,000 and $45,000,
respectively. These leases are set to
run through January 1, 2012. Future minimum lease amounts are as follows:
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
45,000
|
|
2009
|
|
|
45,000
|
|
2010
|
|
|
45,000
|
|
2011
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
180,000
|
|
|
|
|
|
|
The Company
obtains its business general liability insurance coverage through a group
captive insurance company domiciled in the Cayman Islands, within which the
Company has an 8% equity interest.
Premiums expense incurred with this related entity for the years ended
December 31, 2007, 2006 and 2005 approximated $1,967,000, $1,234,000 and
$450,000, respectively. No amounts were
due to the captive insurance company for premium payments as of December 31,
2007 and 2006.
|
|
Note 12.
|
Employee Benefit and Retirement Plans
|
The Company
contributes to union-sponsored, multi-employer retirement plans. Contributions are made in accordance with
negotiated labor contracts. The passage
of the Multi-Employer Pension Plan Amendments Act of 1980 (the Act) may, under
certain circumstances, cause the Company to become subject to liabilities in
excess of contributions made under collective bargaining agreements. Generally, liabilities are contingent upon
the termination, withdrawal, or partial withdrawal from the plans. As of December 31, 2007, the Company has not
undertaken to terminate, withdraw, or partially withdraw from any of the plans within
which union employees are currently participating. However, the Company has been assessed a withdrawal liability of
$161,719 by the Steelworkers Pension Fund resulting from the Companys
discontinuance of contributions during the year ended December 31, 2003, as the
employees of the Company that were represented by the Steelworkers local union
no longer desired to be represented by that union (Note 15). Under the Act, liabilities would be based
upon the Companys proportionate share of each plans unfunded vested
benefits. The Company has not received
information from the plans administrators to determine its share of unfunded
vested benefits, if any. During the
years ended December 31, 2007, 2006 and 2005, the Company contributed
approximately $3,531,000, $1,666,000 and $661,000, respectively, to these
multi-employer union retirement plans.
The Company
also contributes to union-sponsored, multi-employer plans that provide health
and welfare and other benefits.
Contributions are made in accordance with negotiated labor contracts. During the years ended December 31, 2007,
2006 and 2005, the Company contributed approximately $5,974,000, $3,526,000 and
$1,326,000, respectively, to these multi-employer union plans.
F-31
ST PIPELINE,
INC.
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
|
Note 13.
|
Contingencies
|
During the
normal course of operations, the Company is subject to certain claims from
subcontractors, mechanic liens and other litigation. Management is of the opinion that no material obligation will
arise from any pending litigation, and that any such loss obligations are fully
insured. Accordingly, no provision has
been included in the financial statements for such litigation.
|
|
Note 14.
|
Subsequent Event
|
On January 22,
2008, the Company entered into a merger agreement with Energy Services
Acquisition Corp. The agreement calls for the stockholders of the Company to
receive total consideration of $19 million, reduced by the book value of
certain assets to be distributed to the stockholders of the Company. All except $3 million is to be paid to the
stockholders at closing. The remaining
$3 million consists of deferred payments to the stockholders over three years
with an interest at a simple rate of 7.5% per annum. The agreement is subject to approval of at least 80% of the
stockholders of Energy Services Acquisition Corp. at a special meeting of its
stockholders for that purpose. It is
anticipated that once the approval is received, the transaction will close
within a short time thereafter.
|
|
Note 15.
|
Prior Period Adjustment
|
The Company
discovered errors made in prior years in accounting for certain cash equivalent
assets of the Company, for an unrecorded pension plan withdrawal liability, and
for errors resulting from the recording of personal financial assets of the
stockholder-officers as assets of the Company.
During the year ended December 31, 2003, the employees of the Company
that were represented by a Steelworkers local union no longer desired to be
represented by that union, and the Company ceased making contributions to the
unions retirement plan. After the
cessation of the contributions and because the plan had unfunded vested
benefits, the Company was assessed a withdrawal liability of $161,719 (Note
12). During the year ended December 31,
2004, the Company had expensed the acquisition of a cash equivalent asset as
insurance expense when such asset was acquired to secure payment of liability
insurance premiums to the group captive insurance company that provides
insurance coverage to the Company (Note 11).
Additionally, during the year ended December 31, 2004, the Company
recorded as an asset the cash surrender value of a life insurance policy that
was personally owned by an officer-stockholder. The adjustment related to correcting these errors increased
beginning retained earnings as of January 1, 2005 by $100,866.
F-32
[Letterhead of Suttle & Stalnaker]
INDEPENDENT
AUDITORS REPORT
The Board of
Directors
C.J. Hughes Construction Company, Inc.
Huntington, West Virginia
We have
audited the accompanying consolidated balance sheet of C.J. Hughes Construction
Company, Inc. and affiliates (the Companies) as of December 31, 2007, and the
related consolidated statements of income and retained earnings, and cash flows
for the year then ended. These financial statements are the responsibility of
the Companies management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of C.J. Hughes Construction Company, Inc. and affiliates as of December 31,
2006 and for the years ended December 31, 2006 and 2005, were audited by other
auditors whose report dated April 12, 2007, expresses an unqualified opinion on
those statements.
We conducted
our audit in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the
Companies internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Companies
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also 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
audit provides a reasonable basis for our opinion.
In our
opinion, the 2007 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Companies as of
December 31, 2007, and the consolidated results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
F-33
/s/ Suttle
& Stalnaker, PLLC
Charleston, West Virginia
March 17, 2008
F-34
C. J. HUGHES CONSTRUCTION CO., INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,319,045
|
|
$
|
893,869
|
|
Contracts receivable, less allowance for doubtful accounts of $37,500
for 2007 and $40,000 for 2006
|
|
|
7,864,873
|
|
|
4,707,263
|
|
Retainage receivable
|
|
|
1,379,482
|
|
|
690,462
|
|
Costs and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
3,751,245
|
|
|
1,669,273
|
|
Inventories
|
|
|
1,483,736
|
|
|
1,451,685
|
|
Prepaid expenses and other current assets
|
|
|
246,812
|
|
|
336,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,045,193
|
|
|
9,749,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
19,596,827
|
|
|
14,738,822
|
|
Less accumulated depreciation
|
|
|
(11,362,336
|
)
|
|
(10,073,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
8,234,491
|
|
|
4,664,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,968,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
27,248,499
|
|
$
|
14,413,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders equity
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
1,844,192
|
|
$
|
1,223,742
|
|
Line of credit
|
|
|
|
|
|
525,000
|
|
Current portion of capital lease obligations
|
|
|
110,220
|
|
|
|
|
Accounts payable
|
|
|
3,778,952
|
|
|
2,742,296
|
|
Billings in excess of costs and estimated earnings
|
|
|
386,616
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
2,725,275
|
|
|
1,853,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,845,255
|
|
|
6,344,293
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
|
Debt to banks and finance companies
|
|
|
6,995,343
|
|
|
5,376,588
|
|
Capital lease obligations
|
|
|
13,461
|
|
|
|
|
Advance from shareholder
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
21,854,059
|
|
|
11,720,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
69,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
Class A, voting, $10 par value; authorized 1,000 shares; issued and
outstanding 10 shares
|
|
|
100
|
|
|
100
|
|
Class B, non-voting, $10 par value; authorized 4,000 shares; issued
and outstanding 490 shares
|
|
|
4,900
|
|
|
4,900
|
|
Additional paid-in capital
|
|
|
4,727,551
|
|
|
4,727,551
|
|
Retained earnings (deficit)
|
|
|
1,007,990
|
|
|
(1,762,738
|
)
|
Less treasury stock, 39 shares, at cost
|
|
|
(346,101
|
)
|
|
(346,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
5,394,440
|
|
|
2,623,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
27,248,499
|
|
$
|
14,413,914
|
|
|
|
|
|
|
|
|
|
The Accompanying Notes Are An Integral Part Of These Financial Statements
F-35
C. J. HUGHES CONSTRUCTION CO., INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Percent of
Revenues
|
|
Amount
|
|
Percent of
Revenues
|
|
Amount
|
|
Percent of
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
75,305,234
|
|
|
100.0
|
%
|
$
|
31,604,911
|
|
|
100.0
|
%
|
$
|
29,368,850
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
68,096,279
|
|
|
90.4
|
%
|
|
29,291,954
|
|
|
92.7
|
%
|
|
25,172,068
|
|
|
85.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,208,955
|
|
|
9.6
|
%
|
|
2,312,957
|
|
|
7.3
|
%
|
|
4,196,782
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
|
3,218,114
|
|
|
4.3
|
%
|
|
1,861,002
|
|
|
6.0
|
%
|
|
2,022,635
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,990,841
|
|
|
5.3
|
%
|
|
451,955
|
|
|
1.3
|
%
|
|
2,174,147
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,063,198
|
)
|
|
-1.4
|
%
|
|
(519,980
|
)
|
|
-1.6
|
%
|
|
(238,207
|
)
|
|
-0.8
|
%
|
Finance and other
|
|
|
48,812
|
|
|
0.1
|
%
|
|
29,959
|
|
|
0.1
|
%
|
|
(29,112
|
)
|
|
-0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,014,386
|
)
|
|
-1.3
|
%
|
|
(490,021
|
)
|
|
-1.5
|
%
|
|
(267,319
|
)
|
|
-0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
2,976,455
|
|
|
4.0
|
%
|
|
(38,066
|
)
|
|
-0.2
|
%
|
|
1,906,828
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
275,050
|
|
|
0.4
|
%
|
|
|
|
|
0.0
|
%
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before variable interest
entity
|
|
|
2,701,405
|
|
|
3.6
|
%
|
|
(38,066
|
)
|
|
-0.2
|
%
|
|
1,906,828
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss attributable to variable
interest entity related to minority interest
|
|
|
69,321
|
|
|
0. 1
|
%
|
|
(19,556
|
)
|
|
-0.1
|
%
|
|
(42,186
|
)
|
|
-0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
|
2,770,728
|
|
|
3.7
|
%
|
|
(57,622
|
)
|
|
-0.3
|
%
|
|
1,864,642
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit), beginning of
period
|
|
|
(1,762,738
|
)
|
|
|
|
|
(772,796
|
)
|
|
|
|
|
(2,637,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
(932,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit), end of period
|
|
$
|
1,007,990
|
|
|
|
|
$
|
(1,762,738
|
)
|
|
|
|
$
|
(772,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Accompanying Notes Are In An Integral
Part Of These Financial Statements
F-36
C. J. HUGHES CONSTRUCTION CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,770,728
|
|
$
|
(57,622
|
)
|
$
|
1,864,642
|
|
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Income attributable to
noncontrolling interest
|
|
|
(69,321
|
)
|
|
19,556
|
|
|
42,186
|
|
Depreciation and
amortization
|
|
|
1,295,630
|
|
|
748,734
|
|
|
686,308
|
|
Provision for bad
debts
|
|
|
19,622
|
|
|
8,732
|
|
|
21,382
|
|
Gain on sale of property and
equipment
|
|
|
(7,871
|
)
|
|
|
|
|
(78,991
|
)
|
Deferred tax benefit
|
|
|
|
|
|
|
|
|
22,648
|
|
(Increase) decrease in
operating assets, net of effects of acquired
company
|
|
|
|
|
|
|
|
|
|
|
Contracts receivable
|
|
|
(3,177,232
|
)
|
|
802,808
|
|
|
(3,529,324
|
)
|
Retainage receivable
|
|
|
(689,020
|
)
|
|
284,013
|
|
|
(946,008
|
)
|
Cost in excess of billings on
uncompleted contracts
|
|
|
(2,081,972
|
)
|
|
(825,777
|
)
|
|
(105,607
|
)
|
Inventories
|
|
|
(32,051
|
)
|
|
(569,882
|
)
|
|
(104,199
|
)
|
Prepaid and other
|
|
|
89,675
|
|
|
52,164
|
|
|
262,040
|
|
Increase (decrease) in
operating liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,036,656
|
|
|
1,008,123
|
|
|
1,234,019
|
|
Billings in excess of cost and
estimated earnings
|
|
|
386,616
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
835,637
|
|
|
434,487
|
|
|
1,021,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
377,095
|
|
|
1,905,336
|
|
|
390,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired from asset
acquisition
|
|
|
(2,722,484
|
)
|
|
|
|
|
|
|
Purchase of property and
equipment
|
|
|
(1,047,651
|
)
|
|
(733,374
|
)
|
|
(911,056
|
)
|
Proceeds from sale of property
and equipment
|
|
|
30,877
|
|
|
|
|
|
161,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(3,739,258
|
)
|
|
(733,374
|
)
|
|
(749,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Cash distributed to
stockholders
|
|
|
|
|
|
(932,320
|
)
|
|
|
|
Net borrowings (proceeds) on
line of credit
|
|
|
(525,000
|
)
|
|
(1,250,000
|
)
|
|
575,000
|
|
Proceeds from issuance of
long-term debt
|
|
|
506,650
|
|
|
1,711,800
|
|
|
452,142
|
|
Principal payments on long-term
debt
|
|
|
(1,064,246
|
)
|
|
|
|
|
(717,890
|
)
|
Payments on capital lease
obligations
|
|
|
(130,065
|
)
|
|
|
|
|
|
|
Proceeds from shareholder
advances
|
|
|
6,000,000
|
|
|
|
|
|
|
|
Purchases of treasury
stock
|
|
|
|
|
|
(108,140
|
)
|
|
(108,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
4,787,339
|
|
|
(578,660
|
)
|
|
201,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
1,425,176
|
|
|
593,302
|
|
|
(157,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of
period
|
|
|
893,869
|
|
|
300,567
|
|
|
457,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
2,319,045
|
|
$
|
893,869
|
|
$
|
300,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
Purchases of equipment under financing or borrowing agreement
|
|
$
|
2,796,801
|
|
$
|
776,322
|
|
$
|
684,498
|
|
|
|
|
|
|
|
|
|
|
|
|
The Accompanying Notes Are An Integral Part Of These Financial Statements
F-37
1. Description of Business and Entity Structure
C.J. Hughes
Construction Company, Inc. (C.J. Hughes) is a general contractor primarily
engaged in pipeline construction for utility companies. C.J. Hughes is licensed
in six eastern states with the majority of its contracts concentrated in West
Virginia, Virginia, Ohio, Kentucky and North Carolina. Nitro Electric Company,
Inc. (Nitro Electric), a wholly-owned subsidiary of C.J. Hughes, is primarily
involved in the electrical contracting industry, providing electrical
construction services to industrial and commercial markets. Nitro Electric
(formerly known as NEC Acquisition Company, Inc.) was formed on April 29, 2007
for the purpose of buying certain assets and assuming certain liabilities of an
unrelated entity.
In accordance
with Financial Accounting Standards Board (FASB) Interpretation No. 46R
(FIN 46R),
Consolidation of Variable Interest Entities
, these financial
statements include the accounts of Contractors Rental Corporation (CRC), entity
considered a variable interest entity for which C.J. Hughes is the primary
beneficiary. All significant intercompany transactions and balances have been
eliminated. C.J. Hughes leases equipment from CRC on a job-by-job basis and
also provides management services, including purchasing materials, supervising
construction, and performing accounting services. CRC also performs subcontract
work for C.J. Hughes on certain construction contracts.
C.J. Hughes,
Nitro Electric and CRC are collectively referred to as the Companies.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The
consolidated financial statements include the accounts of C.J. Hughes and Nitro
Electric, its wholly-owned subsidiary, as well as CRC for which management has
determined that C.J. Hughes is the primary beneficiary as defined by FIN 46R.
All significant intercompany transactions are eliminated.
Cash
The Companies
consider cash deposits and temporary investments having an original maturity of
less than three months to be cash. Cash is stated at cost which approximates
fair value.
Financial Instruments
Financial
instruments include cash and cash equivalents, contracts receivable, retainage
receivable, accounts payable, and long-term debt. The carrying value of such
amounts reported at the applicable balance sheet dates approximates fair value.
F-38
2. Summary of Significant Accounting Policies
(Continued)
Contracts Receivable
Contracts
receivable are recorded at the invoiced amount, net of the allowance for
doubtful accounts, and do not bear interest. Contracts receivable are written
off when they are deemed to be uncollectible. The allowance for doubtful
accounts is estimated based on factors such as the financial condition of
customers, age of receivables and payment history.
Retainage Receivable
Retainage
receivable represents amounts previously billed to customers that are withheld
for a certain period of time generally until project acceptance by the
customer. At December 31, 2007, Management considers all amounts classified as
a retainage receivable to be collectible.
Inventories
Inventories
consist primarily of supplies and equipment parts and are valued at the lower
of cost or market. Cost is based upon the first-in, first-out method.
Property and Equipment
Property and
equipment are recorded at cost. Costs which extend the useful lives or increase
the productivity of the assets are capitalized, while normal repairs and
maintenance that do not extend the useful life or increase the productivity of
the asset are expensed as incurred. Plant and equipment are depreciated principally
on the straight-line method over the estimated useful lives of the assets : buildings 35 years;
machinery and equipment 3-7 years; furniture and fixtures 5 years;
and automotive equipment
3-7 years.
Goodwill
On April 27,
2007, NEC Acquisition Company, Inc. (now known as Nitro Electric) completed the
purchase of certain assets and the assumption of certain liabilities from an
unrelated third-party. The transaction was accounted for using the purchase
method of accounting for business combinations. The following is the allocation
of the purchase price of $2,722,484, which exceeded the preliminary estimated
fair value of the net assets acquired by approximately $1,969,000 as follows:
|
|
|
|
|
Property and
equipment
|
|
$
|
1,043,801
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,043,801
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
36,386
|
|
Capital
lease obligations
|
|
|
253,745
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
290,131
|
|
|
|
|
|
|
Net assets
acquired
|
|
|
753,670
|
|
Purchase
price
|
|
|
2,722,484
|
|
|
|
|
|
|
|
|
|
|
|
Excess
allocated to goodwill
|
|
$
|
1,968,814
|
|
|
|
|
|
|
F-39
2. Summary of Significant Accounting Policies
(Continued)
Goodwill is accounted for in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, and accordingly is not
amortized but is evaluated at least annually for impairment. As of December 31,
2007, Management has determined that there has been no goodwill impairment, and
as such, no loss has been recognized for the year then ended. Management determined that the factors which contributed to the goodwill were the management that would be
acquired, the seasoned workforce, ability to obtain entry into other markets, and the future earnings potential
of the entity.
Other Long-Lived Assets
If facts and
circumstances suggest that a long-lived asset may be impaired, the carrying
value is reviewed for recoverability. If this review indicates that the
carrying value of the assets will not be recovered, as determined based on
projected undiscounted cash flows related to the asset over its remaining life,
the carrying value of the asset is reduced to its estimated fair value through
an impairment loss.
Revenue and Cost Recognition
Revenues from
contracts are recognized using the percentage-of-completion method. Revenue is
calculated by dividing the actual direct costs incurred by the total estimated cost s
multiplied by the contract price. This method is used
because management considers it to be the best available measure of the
progress on contracts. Contract costs include all direct material, direct
labor, and subcontractor costs. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Advertising
All
advertising costs are expensed as incurred. Total advertising expense was
$10,253, $9,658 and $7,631 for the years ended December 31, 2007, 2006 and
2005, respectively.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and loss during the
reporting period. Actual results could differ from those estimates.
F-40
2. Summary of Significant Accounting Policies
(Continued)
Income Taxes
C.J. Hughes
and Nitro Electric with the consent of their stockholders have each elected
under the Internal Revenue Code to be an S-Corporation. As such, these entities
are not subject to income tax and all taxable income is passed through to the
individual stockholders. CRC is a C-Corporation as defined by the Internal
Revenue Code. Current income tax expense for the years ended December 31, 2007,
2006 and 2005 was $275,050, $0, and $0, respectively. At December 31, 2007 CRC
did not have any deferred tax assets or liabilities. In the event of an
examination of the tax return, the tax liability of the stockholders could be
changed if an adjustment in the Companies income is ultimately sustained by
the taxing authorities.
Reclassifications
Certain reclassifications have been made to the 2006 and 2005
presentation to make it consistent with the 2007 presentation.
3. Property and Equipment
Property and
equipment consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
328,274
|
|
$
|
328,274
|
|
|
Buildings
|
|
|
631,550
|
|
|
631,550
|
|
|
Machinery and Equipment
|
|
|
12,002,368
|
|
|
8,864,004
|
|
|
Furniture and Fixtures
|
|
|
289,505
|
|
|
226,348
|
|
|
Automotive Equipment
|
|
|
6,345,130
|
|
|
4,688,646
|
|
|
Less Accumulated Depreciation
|
|
|
(11,362,336
|
)
|
|
(10,073,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,234,491
|
|
$
|
4,664,875
|
|
|
|
|
|
|
|
|
|
|
F-41
4. Uncompleted
Contracts
Costs and
estimated earnings in excess of billings on uncompleted contracts are as follows
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues earned on uncompleted contracts
|
|
$
|
39,316,412
|
|
$
|
7,737,844
|
|
|
Less billings to date
|
|
|
35,565,167
|
|
|
6,068,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,751,245
|
|
$
|
1,669,273
|
|
|
|
|
|
|
|
|
|
|
5. Related-Party Transactions
The Companies
received advances from a stockholder of $6,013,000 during the year ended
December 31, 2007. The unsecured advance bears interest at prime, resulting in
interest expense of $324,417 recognized during the year ended December 31,
2007. In accordance with the agreement with the stockholder, there are no amounts due in 2008, therefore the entire
amount has been classified as long term on the balance sheet.
In addition,
the affiliates of the Companies routinely engage in transactions in the normal
course of business with each other, including sharing employee benefit plan
coverage, payment for insurance and other expenses on behalf of other
affiliates, and other services incidental to business of each of the
affiliates. All revenue and related expense transactions, as well as the
related accounts payable and accounts receivable, have been eliminated.
A summary of
transactions among the Companies is as follows for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subcontractor Revenue - CRC
|
|
$
|
9,799,187
|
|
$
|
9,543,750
|
|
$
|
7,868,486
|
|
|
Subcontractor Expense - CJ Hughes
|
|
|
9,799,187
|
|
|
9,543,750
|
|
|
7,868,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Rental Income - CRC
|
|
|
79,911
|
|
|
79,911
|
|
|
79,911
|
|
|
Equipment Rental Expense - CJ Hughes
|
|
|
79,911
|
|
|
79,911
|
|
|
79,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subcontractor Revenue - Nitro Electric
|
|
|
224,441
|
|
|
|
|
|
|
|
|
Subcontractor Expense - CJ Hughes
|
|
|
224,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee income - CJ Hughes
|
|
|
300,000
|
|
|
400,000
|
|
|
350,000
|
|
|
Management fee expense - CRC
|
|
|
300,000
|
|
|
400,000
|
|
|
350,000
|
|
F-42
6. Long-term Debt
Long-term debt
consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to bank, due in monthly
installments of $5,000, including interest at 7.26%, final payment due
September 2012, secured by real estate, vehicles, and equipment
|
|
$
|
420,432
|
|
$
|
450,009
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to finance companies, due in
monthly installments totaling $89,366, including interest ranging from 0% to
7.46%, final payments due January 2008 through December 2012, secured by
equipment
|
|
|
3,259,163
|
|
|
1,177,615
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to banks, due in monthly
installments totaling $64,616, including interest at prime plus .5%, final
payments due April 2010 through July 2011, secured by equipment, inventory,
receivables, and intangibles
|
|
|
4,046,224
|
|
|
4,840,133
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to banks, due in monthly
installments totaling $12,168, including interest ranging from prime to 6.5%,
final payments due May 2008 through August 2010, secured by equipment
|
|
|
237,359
|
|
|
132,573
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to banks, due in monthly
installments of $31,713, including interest at 8.75%, final payment due
August 2010, unsecured
|
|
|
876,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,839,535
|
|
|
6,600,330
|
|
|
Less current maturities
|
|
|
1,844,192
|
|
|
1,223,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,995,343
|
|
$
|
5,376,588
|
|
|
|
|
|
|
|
|
|
|
F-43
6. Long-term Debt (Continued)
Maturities of
long-term debt for the next five years are as follows:
|
|
|
|
|
2008
|
|
$
|
1,844,192
|
|
2009
|
|
|
1,899,589
|
|
2010
|
|
|
1,629,245
|
|
2011
|
|
|
891,233
|
|
2012
|
|
|
299,961
|
|
Thereafter
|
|
|
2,275,315
|
|
Interest paid
during the years ended December 31, 2007, 2006 and 2005, was $702,259, $519,980
and $238,207, respectively.
The Company
has a line of credit with a bank in an amount not to exceed $2,000,000.
Advances under the line bear interest at prime plus .5%. Advances are available
up to the lesser of $2,000,000 or a borrowing base calculated on the Companys
contracts receivable and equipment. The line is secured by contracts receivable
and equipment, and is guaranteed by a shareholder. The line of credit, which
expires June 2008, imposes certain financial covenants upon the Company,
including a minimum tangible net worth and a minimum current ratio.
7. Lease Obligations
The Companies lease various equipment and office space under operating
lease agreements with terms up through 48 months. The Companies also lease
vehicles from certain stockholders and spouses under cancelable operating
leases. Rent expense paid for operating lease obligations for the years ended
December 31, 2007, 2006 and 2005 was $123,233, $58,687 and $84,572 respectively.
Rent expense paid to related parties was $89,524, $52,752 and $18,212 for the
years ended December 31, 2007, 2006 and 2005, respectively.
The future
minimum lease payments under operating leases as of December 31, 2007, are as
follows:
|
|
|
|
|
2008
|
|
$
|
111,418
|
|
2009
|
|
|
1,040
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
112,458
|
|
|
|
|
|
|
F-44
7. Lease Obligations (Continued)
The Companies lease certain automotive equipment under agreements that
are classified as capital leases. The cost of the automotive equipment under
capital leases is included in the balance sheets as property and equipment and
was $322,635 at December 31, 2007. Accumulated amortization of the leased
equipment at December 31, 2007 was approximately $91,081. Amortization of
assets under capital leases is included in depreciation expense.
The future
minimum lease payments required under the capital leases and the present value
of the net minimum lease payments as of December 31, 2007, are as follows:
|
|
|
|
|
|
2008
|
|
$
|
121,432
|
|
2009
|
|
|
13,387
|
|
2010
|
|
|
667
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
|
135,486
|
|
Less:
|
Amount
representing estimated taxes, maintenance and insurance costs included in the
total amounts above
|
|
|
(854
|
)
|
|
|
|
|
|
|
Net minimum
lease payments
|
|
|
134,632
|
|
Less:
|
Amount representing
interest
|
|
|
(10,951
|
)
|
|
|
|
|
|
|
Present
value of minimum lease payments
|
|
|
123,681
|
|
Less:
|
Current
maturities of capital lease obligations
|
|
|
(110,220
|
)
|
|
|
|
|
|
|
Long-term
capital lease obligations
|
|
$
|
13,461
|
|
|
|
|
|
|
8. Retirement and Employee Benefit Plans
C.J. Hughes
has a 401(k) retirement plan for union employees under which the employees can
contribute up to 15% of eligible wages and C.J. Hughes will match $.25 for each
dollar contributed up to 6% of eligible wages. During the year ended December
31, 2007, 2006 and 2005, C.J. Hughes contributed $14,834, $14,170 and $15,816
to the plan, respectively.
Additionally,
C.J. Hughes has a 401(k) retirement plan for all non-union employees under
which the employees can contribute up to 15% of eligible wages and C.J. Hughes
will match $.25 for each dollar contributed up to 6% of eligible wages. During
the year ended December 31, 2007, 2006 and 2005, C.J. Hughes contributed
$33,083, $28,014 and $25,212 to the plan, respectively.
Nitro Electric
has a 401(k) retirement plan for all eligible employees under which the
employees can contribute up to 15% of eligible wages and Nitro Electric will
match $.50 for each dollar contributed up to 6% of eligible wages. During the
year ended December 31, 2007, Nitro Electric contributed $23,374 to the plan.
F-45
8. Retirement and Employee Benefit Plans
(Continued)
The Companies
have an employee benefit trust (the Trust) which provides health and death
benefits covering substantially all employees of the Company. The Trust is
non-contributory for most non-union employees. Union employees and some
administrative employees make partial contributions to the Trust. The Companies
make periodic contributions to the Trust based on funding policies and methods
which are consistent with the objectives of the Trust. The contributions made
by the Companies for the years ended December 31, 2007, 2006 and 2005 were
$1,143,150, $873,400 and $248,042, respectively. At December 31, 2007, 2006 and
2005, the Company accrued for an estimated liability for claims incurred but
unpaid of $75,000, $75,000 and $75,000, respectively.
9. Credit Risk
Financial
instruments which potentially subject the Companies to credit risk consist
primarily of cash and cash equivalents and contract receivables. The Companies
place their cash with high quality financial institutions. At times, the
balances in such institutions may exceed the FDIC insurance limit of $100,000.
As of December 31, 2007, the Companies uninsured bank balances totaled
approximately $3,311,488. The Companies performs periodic credit evaluations of
its customers financial condition and generally does not require collateral.
Credit losses consistently have been within managements expectations. At
December 31, 2007, eleven customers comprised 77% of the contracts receivable
balance. Nitro Electric generated 29% from one customer and C.J. Hughes Construction Company generated 16% from one
customer of the total consolidated revenue for the year ended December 31, 2007. As of December 31, 2007,
Nitro Electric had one customer which comprised 23% and C.J. Hughes Construction Company had one customer which
comprised 17% of the total consolidated accounts receivable.
C.J. Hughes generated 27%, 29% and 11% of its revenues from three customers, respectively, during the year ended
December 31, 2006 and 12%, 26% and 12% of their revenues from three customers during the year ended December 31,
2005. As of December 31, 2006, C.J. Hughes Construction Company had three customers which comprised 17%, 52% and
19%, respectively, of the total consolidated accounts receivable.
10. Commitments and Contingencies
During the
normal course of operations, the Companies are subject to certain subcontractor
claims, mechanics liens, and other litigation. Management is of the opinion
that no material obligations will arise from any pending legal proceedings.
Accordingly, no provision has been made in the financial statements for such
litigation.
11. Subsequent Event
Note
On February
21, 2008 C.J. Hughes entered into an agreement and plan of Merger with Energy
Services Acquisition Corp. (Energy Services). The Agreement and Plan of Merger
calls for the shareholders of C.J. Hughes Construction Company to receive
$36,896 in cash and 6,434.7 shares of Energy Services common stock for each
share of C.J. Hughes stock held. The total merger consideration will be
approximately 50% cash and 50% common stock with a total value of $34.0 million
as of the date of the agreement. Under certain circumstances the number of
shares to be issued may be increased in order to ensure that at least 40% of
the value to be paid to C.J. Hughes shareholders is in common stock.
F-46
11. Subsequent Event
Note (Continued)
The closing of the C.J. Hughes
acquisition is subject to various closing conditions, including the acquisition
of another business or businesses, such that the total value of the businesses
acquired has an aggregate fair value of 80% of Energy Services net assets, as
defined in its initial public offering. In addition, the closing of the
acquisition is further conditioned on holders of less than 20% of the shares of
Energy Services common stock voting against the transaction and electing to
convert their Energy Services common stock into cash from the trust fund
established in connection with Energy Services initial public offering.
F-47
Annex A
Agreement and Plan of Merger by and between
Energy Services Acquisition Corp.
and S.T. Pipeline, Inc.
EXECUTION COPY
|
|
|
AGREEMENT AND PLAN OF MERGER
|
|
BY AND BETWEEN
|
|
ENERGY SERVICES ACQUISITION CORP.
|
|
AND
|
|
S. T. PIPELINE, INC.
|
|
DATED AS OF JANUARY 22, 2008
|
TABLE OF CONTENTS
i
ii
AGREEMENT AND PLAN OF MERGER
This
AGREEMENT AND PLAN OF MERGER (this Agreement) is dated as of January 22,
2008, by and between Energy Services Acquisition Corp., a Delaware corporation
(the Purchaser), Energy Services Merger Sub (Merger Sub), a to-be-formed
West Virginia corporation and a wholly-owned subsidiary of Purchaser, and S. T.
Pipeline, Inc., a West Virginia corporation (the Seller).
WHEREAS
, the Board of Directors of each of
Purchaser and Seller has (i) determined that this Agreement and the business
combination and related transactions contemplated hereby are in the best
interests of their respective companies and stockholders, and (ii) has approved
this Agreement at meetings of each of such Boards of Directors;
WHEREAS
, in accordance with the terms of
this Agreement, Merger Sub will merge with and into Seller;
WHEREAS
, as a condition to the willingness
of Purchaser to enter into this Agreement, each of James E. Shafer and Pauletta
Sue Shafer has entered into a Voting Agreement, substantially in the form of
Exhibit A hereto, dated as of the date hereof, with Purchaser (the Voting
Agreement), pursuant to which each of James E. Shafer and Pauletta Sue Shafer
has agreed, among other things, to vote all shares of common stock of Seller
owned by each such person in favor of the approval of this Agreement and the
transactions contemplated hereby, upon the terms and subject to the conditions
set forth in such Voting Agreement; and
WHEREAS
, the parties desire to make certain
representations, warranties and agreements in connection with the business
transactions described in this Agreement and to prescribe certain conditions
thereto.
NOW, THEREFORE
in consideration of the
mutual covenants, representations, warranties and agreements herein contained
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE
I
.
CERTAIN
DEFINITIONS
Section 1.01 Certain
Definitions.
As
used in this Agreement the following terms have the following meanings (unless
the context otherwise requires, references to Articles and Sections refer to
Articles and Sections of this Agreement).
Agreement
means this agreement, and any written amendment hereto.
Certificate
shall mean a certificate evidencing shares of Seller Common Stock.
Closing
shall have the meaning set forth in Section 2.05.
Closing
Date shall have the meaning set forth in Section 2.05.
COBRA
shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
Code
shall mean the Internal Revenue Code of 1986, as amended.
Compensation
and Benefit Plans shall have the meaning set forth in Section 3.16(a).
Confidentiality
Agreements shall mean the confidentiality agreements referred to in Section
10.01 of this Agreement.
Continuing
Employees shall have the meaning set forth in Section 6.08(c).
DGCL
shall mean the Delaware General Corporation Law.
Disclosure Letter shall have
the meaning set forth in Section 3.01.
Effective
Time shall mean the date and time specified pursuant to Section 2.05 hereof as
the effective time of the Merger.
Environmental
Laws means any applicable Federal, state or local law, statute, ordinance,
rule, regulation, code, license, permit, authorization, approval, consent,
order, judgment, decree, injunction or agreement with any governmental entity
relating to (1) the protection, preservation or restoration of the environment
(including, without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and animal life or
any other natural resource), and/or (2) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Materials of Environmental
Concern. The term Environmental Law includes without limitation (a) the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, 42 U.S.C. §9601, et seq; the Resource Conservation and Recovery Act,
as amended, 42 U.S.C. §6901, et seq; the Clean Air Act, as amended, 42 U.S.C.
§7401, et seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C.
§1251, et seq; the Toxic Substances Control Act, as amended, 15 U.S.C. §2601,
et seq; the Emergency Planning and Community Right to Know Act, 42 U.S.C. §11001,
et seq; the Safe Drinking Water Act, 42 U.S.C. §300f, et seq; the Comprehensive
Environmental Responses Compensation and Liability Information System List and
all comparable state and local laws, and (b) any common law (including without
limitation common law that may impose strict liability) that may impose
liability or obligations for injuries or damages due to the presence of or
exposure to any Materials of Environmental Concern.
EPA
shall mean the Environmental Protection Agency.
ERISA
shall mean the Employee Retirement Income Security Act of 1974, as amended.
ERISA
Affiliate shall have the meaning set forth in Section 3.16(c).
ERISA
Affiliate Plan shall have the meaning set forth in Section 3.16(c).
Exchange
Act shall mean the Securities Exchange Act of 1934, as amended.
GAAP
shall mean accounting principles generally accepted in the United States of
America.
Governmental
Entity shall mean any federal, state, local or other government, governmental,
regulatory or administrative authority, agency or commission (including, but
not limited to, the SEC, NASDAQ, or EPA) or any court, tribunal or judicial or
arbitral body.
HIPAA
shall mean the Health Insurance Portability and Accountability Act of 1996, as
amended.
2
Intellectual
Property shall mean all (i) trademarks, service marks, brand names, d/b/a/s,
Internet domain names, logos, symbols, trade dress, trade names, and other
indicia of origin, all applications and registrations for the foregoing, and
all goodwill associated therewith and symbolized thereby, including all
renewals of same, (ii) inventions and discoveries, whether patentable or not,
and all patents, registrations, invention disclosures and applications
therefor, including divisions, continuations, continuations-in-part and renewal
applications, and including renewals, extensions and reissues, (iii) Trade
Secrets, (iv) published and unpublished works of authorship, whether
copyrightable or not (including without limitation databases and other
compilations of information), copyrights therein and thereto, and registrations
and applications therefor, and all renewals, extensions, restorations and
reversions thereof, and (v) all other intellectual property or proprietary
rights.
IRS
shall mean the United States Internal Revenue Service.
IT
Assets shall mean Sellers computers, computer software, firmware, middleware,
servers, workstations, routers, hubs, switches, data communications lines, and
all other information technology equipment, and all associated documentation.
Knowledge
as used with respect to a Person (including references to such Person being
aware of a particular matter) means those facts that are known by any officer
with the title ranking not less than vice president or a director of such
Person, or a consultant, or full-time or part-time employee of Seller and
includes any facts, matters or circumstances set forth in any written notice
from any regulatory agency or any other material written notice received by an
officer with the title ranking not less than vice president or a director of
that Person. For purposes of this definition, an officer or director will be
deemed to have Knowledge of a particular fact or other matter if a prudent
individual could be expected to discover or otherwise become aware of such fact
or other matter in the course of conducting a reasonably comprehensive
investigation concerning the existence of such fact or other matter.
Licensed
Intellectual Property means Intellectual Property that Seller has licensed or
otherwise permitted by other Persons to use.
Listed
Intellectual Property shall have the meaning set forth in Section 3.10(a).
Material
Adverse Effect shall mean an effect which (A) is material and adverse to the
assets, business, financial condition, results of operations or prospects of
Seller or Purchaser, as the context may dictate, or (B) adversely affects the
ability of Seller or Purchaser, as the context may dictate, to perform its
material obligations hereunder or (C) materially and adversely affects the
timely consummation of the transactions contemplated hereby.
Materials
of Environmental Concern means pollutants, contaminants, wastes, toxic
substances, petroleum and petroleum products, and any other materials regulated
under Environmental Laws, including, but not limited to, radon, radioactive
material, asbestos, asbestos-containing material, urea formaldehyde foam
insulation, lead, polychlorinated biphenyl, flammables and explosives.
Merger
shall mean the merger of Seller with and into Merger Sub pursuant to the terms
hereof.
Merger
Consideration shall mean the cash in an aggregate per share amount to be paid
by Purchaser for each share of Seller Common Stock, as set forth in Section
2.02(a).
NASD
shall mean the National Association of Securities Dealers, Inc.
3
Paying
Agent shall mean such bank or trust company or other agent designated by
Purchaser, which shall act as agent for Purchaser in connection with the
exchange procedures for exchanging Certificates for the Merger Consideration.
Purchaser may act as its own Paying Agent.
PBGC
shall mean the Pension Benefit Guaranty Corporation or any successor thereto.
Person
shall mean any individual, consultant (including part-time employee)
corporation, partnership, joint venture, association, trust or group (as that
term is defined under the Exchange Act).
Pre-Effective
Time Tax Period means any taxable period (or the allocable portion of a
Straddle Period) ending on or before the close of business on the date the
Effective Time occurs.
Proxy
Statement shall have the meaning set forth in Section 7.02.
Purchaser
shall mean Energy Services Acquisition Corp., a Delaware corporation, with its
principal executive offices located at 2450 First Avenue, Huntington, West
Virginia 25703.
Rights
shall mean warrants, options, rights, convertible securities, stock
appreciation rights and other arrangements or commitments which obligate an
entity to issue or dispose of any of its capital stock or other ownership
interests or which provide for compensation based on the equity appreciation of
its capital stock.
SEC
shall mean the Securities and Exchange Commission or any successor thereto.
Securities
Act shall mean the Securities Act of 1933, as amended.
Securities
Laws shall mean the Securities Act; the Exchange Act; the Investment Company
Act of 1940, as amended; the Investment Advisers Act of 1940, as amended; the
Trust Indenture Act of 1939, as amended; and the rules and regulations of the
SEC promulgated thereunder.
Seller
shall have the meaning set forth in the preamble.
Seller
Group means any combined, unitary, consolidated or other affiliated group
within the meaning of Section 1504 of the Code or otherwise, of which Seller
has been a member for Tax purposes.
Seller
Stock shall mean the shares of issued and outstanding stock of the Seller held
by James E. Shafer and Pauletta Sue Shafer.
Seller
Stockholders Meeting shall have the meaning set forth in Section 7.01.
Stockholder
Approval shall have the meaning set forth in Section 8.01(a).
Straddle
Period means any taxable period that includes (but does not end on) the
Closing Date.
Superior
Proposal shall mean an Acquisition Proposal, which the Board of Directors of
Seller reasonably determines (after consultation with a financial advisor of
nationally recognized reputation) to be (i) more favorable to the stockholders
of Seller from a financial point of view than the Merger (taking into account
all the terms and conditions of such proposal and this Agreement (including any
changes to the financial terms of this Agreement proposed by Purchaser in
response to such offer or otherwise)) and (ii) reasonably capable of being
completed, taking into account all financial, legal, regulatory and other
aspects of such proposal.
4
Surviving
Corporation shall have the meaning set forth in Section 2.01.
Tax
means any and all (a) federal, state, local or foreign tax, fee or other like
assessment or charge of any kind, including, without limitation, any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, value-added, transfer, franchise, profits, license, payroll,
employment, social security (or similar), unemployment, disability,
registration, estimated, excise, severance, stamp, capital stock, occupation,
property, environmental or windfall tax, premium, customs duty or other tax,
together with any interest, penalty or additions thereto, whether disputed or
not; (b) liability for the payment of Tax as the result of membership in the
Seller Group; and (c) transferee or secondary liability in respect of any Tax
(whether imposed by law or contractual arrangement).
Tax
Return means any return (including estimated returns), declaration, report,
claim for refund, or information return or statement or any amendment thereto
relating to Taxes, including any such document prepared on an affiliated,
consolidated, combined or unitary group basis and any schedule or attachment
thereto.
Taxing
Authority means any governmental or regulatory authority, body or
instrumentality exercising any authority to impose, regulate or administer the
imposition of Taxes.
Termination
Date shall mean August 30, 2008.
Trade
Secrets means confidential information, trade secrets and know-how, including
confidential processes, schematics, business methods, formulae, drawings, prototypes,
models, designs, customer lists and supplier lists.
Treasury
Stock means all shares of Seller Stock held in the treasury of Seller (other
than shares held in a fiduciary capacity or in connection with debts previously
contracted).
Voting
Agreement shall have the meaning set forth in the recitals to this Agreement.
WVBCA
shall mean the West Virginia Business Corporation Act.
Other
terms used herein are defined in the preamble and elsewhere in this Agreement.
ARTICLE
II.
THE MERGER
Section 2.01
Structure of the Merger.
Subject
to the terms and conditions of this Agreement, Purchaser will cause a West
Virginia corporation to be organized as a wholly owned special purpose
Subsidiary of Purchaser (Merger Sub). At the Effective Time, Merger Sub will
merge with and into Seller, with Seller being the surviving entity (the
Surviving Corporation), pursuant to the provisions of, and with the effect
provided in, the WVBCA and pursuant to the terms and conditions of an agreement
and plan of merger (Plan of Merger) to be entered into between Merger Sub and
Seller in the form attached hereto as Exhibit B. The separate corporate
existence of Merger Sub shall thereupon cease. The Surviving Corporation shall
be governed by the laws of the State of West Virginia and its separate
corporate existence with all of its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger. At the Effective Time, the
certificate of incorporation and bylaws of Seller shall be amended in their
entirety to conform to the certificate of incorporation and bylaws of Merger
Sub in effect immediately prior to the Effective Time
5
and shall
become the certificate of incorporation and bylaws of the Surviving
Corporation. At the Effective Time, the directors and officers of Merger Sub
shall become the directors and officers of the Surviving Corporation. As part
of the Merger, each share of Seller Common Stock will be converted into the
right to receive the Merger Consideration pursuant to the terms of Section
2.03. Seller acknowledges that the structure may change in the event Purchaser
enters into an agreement to engage in an Additional Transaction as defined in
Section 4.09. Notwithstanding the foregoing, Purchaser may, at its own
discretion, alter the means by which the Merger is affected provided that such
alteration does not change the (i) form and amount of the Merger Consideration
or (ii) tax consequences of the Merger to Sellers shareholders.
Section 2.02 Effect
on Outstanding Shares
.
(a)
By virtue of the Merger, automatically and without any action on the part of
the holder thereof, each share of Seller Stock, issued and outstanding at the
Effective Time shall become and be converted into the right to receive up to
$15,200 in cash without interest (the Merger Consideration), provided that
the total cash payment due shall not exceed $19.0 million which shall be
reduced by the book value of certain assets set forth at Schedule 2.02 and a
reduction of $3.0 million. The $3.0 million reduction shall constitute a
deferred payment to be paid proportionally to each shareholder based on their
respective ownership interests in Seller three annual installments on the
anniversary date of the Closing Date, and the installment payments shall earn
interest at a simple rate of 7.5% per annum. The third installment shall be
reduced in an amount equal to 50% of any loss (up to $2.0 million) on the
Equitrans Project reflected in the financial statements from the Closing Date
until the Equitrans Project is completed. Purchaser reserves the right, in its
sole discretion, to make the deferred payments prior to the installment due
date. Any such payments due under this Section 2.02 shall be adjusted to
reflect any payments due pursuant to Section 6.12. Any such payments due under
Section 6.12 shall be due no later than 30 days following the execution of IRS
Form 8023.
(b)
As of the Effective Time, all shares of Seller Stock shall no longer be
outstanding and shall be automatically cancelled and retired and shall cease to
exist, and each holder of a Certificate formerly representing any such share of
Seller Stock shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration. After the Effective Time, there
shall be no transfers on the stock transfer books of Seller.
Section 2.03
Exchange Procedures.
(a)
Immediately prior to the Effective Time, each Certificate previously
representing shares of Seller Stock shall represent only the right to receive
the Merger Consideration.
(b)
As of the Effective Time, Purchaser shall deposit, or shall cause to be
deposited with the Paying Agent pursuant to the terms of an agreement (the
Paying Agent Agreement) in form and substance reasonably satisfactory to
Purchaser, for the benefit of the holders of shares of Seller Stock, for
exchange in accordance with this Section 2.03, an amount of cash sufficient to
pay the aggregate Merger Consideration to be paid pursuant to Section 2.02(a).
Purchaser may act as its own paying agent.
(c)
At the Effective Time, each Seller shall present their stock certificate to
Purchaser for payment of the Merger Consideration as described at Section 2.02.
(d)
From and after the Effective Time, there shall be no transfers on the stock
transfer records of Seller of any shares of Seller Stock that were outstanding
immediately prior to the Effective Time. If after the Effective Time
Certificates are presented to Purchaser or the Surviving Corporation,
6
they shall be
canceled and exchanged for the Merger Consideration deliverable in respect
thereof pursuant to this Agreement in accordance with the procedures set forth
in this Section 2.03.
Section 2.04
Dissenters Rights
.
Each
of the holders of Seller Stock hereby waive their rights to perfect their
dissenters rights of appraisal under the WVBCA.
Section 2.05
Closing; Effective Time.
Subject
to the satisfaction or waiver of all conditions to closing contained in Article
VIII hereof, the Closing shall occur (i) no later than five business days
following the latest to occur of (a) the receipt of all required regulatory
approvals and the expiration of any applicable waiting periods, or (b) the
approval of the Merger by the stockholders of Seller, or (ii) at such other
date or time upon which Purchaser and Seller mutually agree (the Closing).
The Merger shall be effected by the filing of a certificate of merger with the
West Virginia Secretary of State on the day of the Closing (the Closing
Date), in accordance with the WVBCA. The Effective Time means the date and
time upon which the certificate of merger is filed with the Delaware and the
West Virginia Office of the Secretary of State, or as otherwise stated in the
certificate of merger, in accordance with the WVBCA.
Section 2.06
Additional Transaction.
Notwithstanding
anything contained in this Agreement, the parties acknowledge that in order to
consummate the Merger the Purchaser must enter into a business combination or
combinations in which the fair market value of the business or businesses
acquired simultaneously with the transaction contemplated by this Agreement is
equal to at least 80% of Purchasers net assets (excluding any deferred
compensation held by Ferris Baker Watts, Incorporated) when combined with the
transactions contemplated by this Agreement. The Seller acknowledges that the
Merger must be completed simultaneously with such other business combination or
combinations, referenced to in this Section.
ARTICLE
III.
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller
represents and warrants to Purchaser that the statements contained in this
Article III are true and correct as of the date of this Agreement and will be
true and correct as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
Article III), except as set forth in the Disclosure Letter (as defined below)
delivered by Seller to Purchaser prior to the execution of this Agreement.
Section 3.01
Disclosure Letter.
On
or prior to the date hereof, Seller has delivered to Purchaser a letter (the
Disclosure Letter) setting forth, among other things, facts, circumstances
and events the disclosure of which are required or appropriate in relation to
any or all of its covenants, representations and warranties (and making
specific reference to the section of this Agreement to which such section of
the Disclosure Letter relates); provided, that the mere inclusion of a fact,
circumstance or event in the Disclosure Letter shall not be deemed an admission
by a party that such item represents a material exception or that such item is
reasonably likely to result in a Material Adverse Effect. The Disclosure Letter
is true, correct and complete in all material respects.
7
Section 3.02
Organization.
(a)
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the State of West Virginia. Seller has all requisite
corporate power and authority to own, lease and operate its properties and
carry on its business as now conducted. Seller is duly licensed or qualified to
do business in each jurisdiction where its ownership or leasing of property or
the conduct of its business requires such qualification.
(b)
Seller has no subsidiaries. The Disclosure Letter sets forth all entities
(whether corporations, partnerships, or similar organizations), including the
corresponding percentage ownership in which Seller owns, directly or
indirectly, 5% or more of the ownership interests as of the date of this
Agreement, indicates its jurisdiction of organization and the jurisdiction
wherein it is qualified to do business.
(c)
Prior to the date of this Agreement, Seller has made available to Purchaser
true and correct copies of the certificate of incorporation or charter and
bylaws of Seller.
Section 3.03
Capitalization.
(a)
The authorized capital stock of Seller consists of 1,250 shares of Seller
Stock. As of the date of this Agreement: 1,250 shares of Seller Stock were
issued and outstanding. James E. Shafer owns 610 shares of Seller Stock and
Pauletta Sue Shafer owns 640 shares of Seller Stock. All outstanding shares of
Seller Stock are validly issued, fully paid and nonassessable and not subject
to any preemptive rights and, with respect to shares held by Seller in its
treasury, are free and clear of all liens, claims, encumbrances or restrictions
and there are no agreements or understandings with respect to the voting or
disposition of any such shares.
(b)
No bonds, debentures, notes or other indebtedness having the right to vote on
any matters on which stockholders of Seller may vote are issued or outstanding.
Set forth in the Disclosure Letter is a listing of all the seller debt
outstanding including interest rate and payment terms.
(c)
As of the date of this Agreement and, except for this Agreement, Seller does
not have or is bound by any Rights obligating Seller to issue, deliver or sell,
or cause to be issued, delivered or sold, any additional shares of capital
stock of Seller or obligating Seller to grant, extend or enter into any such
Right. As of the date hereof, there are no outstanding contractual obligations
of Seller to repurchase, redeem or otherwise acquire any shares of capital
stock of Seller.
Section 3.04
Authority; No Violation.
(a)
Seller has full corporate power and authority to execute and deliver this
Agreement, the Plan of Merger and, subject to the receipt of any required
regulatory approvals and the approval of this Agreement by Sellers
stockholders, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by Seller and the completion by Seller of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Seller. This Agreement has been duly and validly executed
and delivered by Seller, and subject to approval by the stockholders of Seller
and receipt of any required approvals or consents, constitutes the valid and
binding obligation of Seller, enforceable against Seller in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors rights generally, and subject, as to enforceability, to general
principles of equity, whether applied in a court of law or a court of equity.
8
(b)
Subject to receipt of any required approvals and consents and receipt of the
approval of the stockholders of Seller, the consummation of the transactions
contemplated hereby and compliance by Seller with any of the terms or
provisions hereof will not: (i) conflict with or result in a breach or
violation of or a default under any provision of the Certificate of
Incorporation or Bylaws of Seller; (ii) violate any statute, code, ordinance,
rule, regulation, judgment, order, writ, decree, governmental permit or license
or injunction applicable to Seller or any of their respective properties or
assets or enable any person to enjoin the Merger or the other transactions
contemplated hereby; or (iii) violate, conflict with, result in a breach of any
provisions of, constitute a default (or an event which, with notice or lapse of
time, or both, would constitute a default) under, result in the termination of,
accelerate the performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest, charge or other
encumbrance upon any of the properties or assets of Seller under any of the
terms, conditions or provisions of any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Seller is a party, or by which they or any of their
respective properties or assets may be bound or affected.
Section 3.05
Consents.
Except
for any required vote of the stockholders of Seller and Purchaser, no consents,
waivers or approvals of, or filings, registrations or authorizations with, any
Governmental Entity is necessary, and no consents, waivers or approvals of, or
filings, registrations or authorizations with, any other third parties are
necessary, in connection with (a) the execution and delivery of this Agreement
by Seller, and the completion by Seller of the Merger. Seller has no reason to
believe that (i) any required approvals or other required consents or approvals
will not be received, or that (ii) any public body or authority, the consent or
approval of which is not required or to which a filing is not required, will
object to the completion of the transactions contemplated by this Agreement.
Seller is not subject to regulation of its business or operations under any
Federal law (to the extent Seller is required to register or file reports with
any Government Entity) or state public utilities laws.
Section 3.06 Absence
of Certain Changes or Events.
Since
December 31, 2005 (i) Seller has not incurred any liability, except in the
ordinary course of its business consistent with past practice; (ii) Seller has
conducted its business only in the ordinary and usual course of such business;
and (iii) there has not been any condition, event, change or occurrence that,
individually or in the aggregate, has had, or is reasonably likely to have, a
Material Adverse Effect.
Section 3.07 Taxes.
(a)
(i) Seller has filed or caused to be filed, and with respect to Tax Returns due
between the date of this Agreement and the date the Effective Time occurs, will
timely file (including any applicable extensions) all Tax Returns required to
be filed, (ii) all such Tax Returns are, or in the case of such Tax Returns not
yet filed, will be, true, complete and correct in all material respects and
such Tax Returns correctly reflected (or in the case of such Tax Returns not
yet filed, will correctly reflect) the facts regarding the income, business,
assets, operations, activities, status and other matters of Seller and any
other information required to be shown thereon, and (iii) all Taxes of Seller
(whether or not reflected on any such Tax Returns) attributable to a
Pre-Effective Time Tax Period have been, or in the case of Taxes the due date
for payment of which is between the date of this Agreement and the date the
Effective Time occurs, timely paid in full, including, without limitation, all
Taxes which Seller is obligated to withhold for amounts paid or owing to
employees, independent contractors, stockholders creditors and other third
parties other than Taxes that have been reserved or accrued and which the
Seller is contesting in good faith.
9
(b)
The most recent financial statements for Seller reflect an adequate reserve for
all Taxes payable by Seller for all taxable periods and portions thereof
through the date of such financial statements, and, in the case of Taxes owed
as of the date hereof, an adequate reserve is (and until the date the Effective
Time occurs will continue to be) reflected in the accruals for Taxes payable,
other than accruals established to reflect timing differences and accruals
reflected only in the notes thereto.
(c)
There are no liens for Taxes, except for statutory liens not yet due with
respect to any of the assets or properties of Seller.
(d)
(i) No Tax Return of Seller has within the past ten (10) years been examined by
the Internal Revenue Service or state taxing authority, (ii) no Tax Return of
Seller is under audit or examination by any other Taxing Authority, and (iii)
no notice of such an audit or examination has been received by Seller.
(e)
Each deficiency, if any, resulting from any audit or examination relating to
Taxes by any Taxing Authority has been timely paid. No issues relating to Taxes
were raised by the relevant Taxing Authority in any completed audit or
examination that can reasonably be expected to recur in a later taxable period.
The relevant statute of limitations is closed with respect to the Tax Returns
of Seller for all years through 2001. Seller has made available to Purchaser
documents setting forth the dates of the most recent audits or examinations of
the Seller by any Taxing Authority in respect of Taxes for all taxable periods
for which the statute of limitations has not yet expired.
(f)
Seller is not a party to or is bound by any Tax sharing agreement, Tax
indemnity obligation or similar agreement, arrangement or practice with respect
to Taxes (including, without limitation, any advance pricing agreement, closing
agreement or other agreement relating to Taxes with any Taxing Authority).
(g)
Seller will not be required to include in a taxable period ending after the
date of the Effective Time any taxable income attributable to income that
accrued, but was not recognized, in a Pre-Effective Time Tax Period (or the portion
of a Straddle Period allocable to the Pre-Effective Time Tax Period) as a
result of an adjustment under Section 481 of the Code, the installment method
of accounting, the long-term contract method of accounting, the cash method of
accounting, any comparable provision of state, local, or foreign Tax law, or
for any other reason.
(h)
There are no outstanding agreements or waivers extending, or having the effect
of extending, the statutory period of limitation applicable to any Tax Returns
required to be filed with respect to Seller, and Seller has not requested any
extension of time within which to file any Tax Return, which return has not yet
been filed. No power of attorney with respect to any Taxes has been executed or
filed with any Taxing Authority by or on behalf of Seller.
(i)
Seller has complied in all respects with all applicable laws relating to the
payment and withholding of Taxes (including withholding of Taxes pursuant to
Sections 1441, 1442, 3121 and 3402 of the Code or any comparable provision of
any state, local or foreign laws) and have, within the time and in the manner
prescribed by applicable law, withheld from and paid over to the proper Taxing
Authorities all amounts required to be so withheld and paid over under such
laws.
(j)
Seller has not been a party to any distribution occurring during the last five
years in which the parties to such distribution treated the distribution as one
to which Section 355 of the Code applied.
10
(k)
Seller is not a party to any listed transaction as defined in Treasury
Regulation Section 1.6011-4(b)(2).
(l)
The Tax Returns filed by Seller do not contain a disclosure statement under
former Section 6661 of the Code or Section 6662 of the Code (or any similar
provision of state, local or foreign Tax law).
(m)
Seller has not been, at any time during the applicable time period set forth in
Section 897(c)(1) of the Code, a United States real property holding company
within the meaning of Section 897(c)(2) of the Code.
(n)
Seller has made available to Purchaser for inspection (i) complete and correct
copies of all material Tax Returns of Seller relating to Taxes for all taxable
periods for which the applicable statute of limitations has not yet expired,
and (ii) complete and correct copies of all private letter rulings, revenue
agent reports, information document requests, notices of proposed deficiencies,
deficiency notices, protests, petitions, closing agreements, settlement agreements,
pending ruling requests, and any similar documents, submitted by, received by
or agreed to by or on behalf of Seller or, to the extent related to the income,
business, assets, operations, activities or status of Seller and relating to
Taxes for all taxable periods for which the statute of limitations has not yet
expired.
(o)
The Disclosure Letter sets forth each state, county, local, municipal or
foreign jurisdiction in which Seller files, or is or has been required to file,
a Tax Return relating to state and local income, franchise, license, excise,
net worth, property or sales and use taxes or is or has been liable for any
Taxes on a nexus basis at any time for a taxable period for which the
relevant statutes of limitation have not expired. Seller has not received
notice of any claim by a Taxing Authority in a jurisdiction where Seller does
not file Tax Returns that Seller is or may be subject to taxation by such
jurisdiction.
(p)
Seller has made a valid election under Section 1362 of the Code to be treated
as an S corporation for federal income tax purposes, and made a similar
election under comparable provisions of state, local or foreign Tax law. At all
times since making its election to be treated as an S Corporation Seller has
been treated as an S Corporation or a QSub (as defined below) for income tax
purposes. Seller is in compliance with requirements for maintaining its
election as an S Corporation.
(q)
Seller has two stockholders. Each stockholder of Seller has been, as of the
date they acquired Seller Stock, and continue to be eligible shareholders as
defined under Section 1361 of the Code.
(r)
Each controlled corporation that had or has any of its stock owned by Seller
was, is, and will be properly treated as a qualified S Corporation Subsidiary
(QSubs), as defined under Section 1361 of the Code, of Seller. All QSub
elections required to be made to satisfy the condition expressed in the
previous sentence were properly made on a timely basis.
(s)
Seller has no liability or potential liability for any tax under Code Section
1374. Seller has not in the past 10 years, (A) acquired assets from another
corporation in a transaction in which Sellers tax basis for the acquired
assets was determined, in whole or in part, by reference to the tax basis of
the acquired assets (or any other property) in the hands of the transferor or
(B) acquired the controlling stock of any corporation that is not a qualified
Corporation Subsidiary.
11
Section 3.08 Material Contracts; Leases;
Defaults.
(a)
Except as set forth in the Disclosure Letter, Seller is not a party to or
subject to: (i) any employment, consulting or severance contract with any past
or present officer, director or employee of Seller, except for at will
arrangements; (ii) any plan or contract providing for bonuses, pensions,
options, or other equity deferred compensation, retirement payments, profit
sharing, insurance benefits, death benefits, health, medical or disability
benefits or similar material arrangements for or with any past or present
officers, directors or employees of Seller; (iii) any collective bargaining
agreement with any labor union relating to employees of Seller; (iv) any
agreement which by its terms limits the payment of Dividends by Seller; (v) any
instrument evidencing or related to indebtedness for borrowed money whether
directly or indirectly, by way of purchase money obligation, conditional sale,
lease purchase, guaranty or otherwise; (vi) any other agreement, written or
oral, not terminable on 60 days notice, that obligates Seller for the payment
of more than $100,000 annually; or (vii) any agreement (other than this
Agreement), contract, arrangement, commitment or understanding (whether written
or oral) that restricts or limits in any material way the conduct of business
by Seller (it being understood that any non-compete or similar provision shall
be deemed material).
(b)
Subject to any consents that may be required as a result of the transactions
contemplated by this Agreement, Seller is not in default under any material
contract, agreement, commitment, arrangement, lease, insurance policy or other
instrument to which it is a party, by which its assets, business, or operations
may be bound or affected, or under which it or its assets, business, or
operations receive benefits, and there has not occurred any event that, with
the lapse of time or the giving of notice or both, would constitute such a
default.
(c)
True and correct copies of agreements, contracts, leases, arrangements and
instruments referred to in Sections 3.08(a) and (b) have been made available to
Purchaser on or before the date hereof, are listed on the Disclosure Letter and
are in full force and effect on the date hereof and enforceable against the
counterparty to which it relates.
(d)
The Disclosure Letter provides a complete and accurate description of all debt
and guaranties of debt of Seller outstanding as of the date of this Agreement.
Section 3.09 Ownership of Property; Insurance
Coverage.
(a)
Except as set forth in the Disclosure Letter, Seller has good and, as to real
property, marketable title to all assets and properties owned by Seller in the
conduct of its businesses, whether such assets and properties are real or
personal, tangible or intangible, including assets and property reflected in
the balance sheet contained in the most recent Seller financial statements or
acquired subsequent thereto (except to the extent that such assets and
properties have been disposed of in the ordinary course of business, since the
date of such balance sheet and except to the extent that the failure to have
good title to any personal property would not reasonably be expected to have a
Material Adverse Effect), subject to no encumbrances, liens, mortgages,
security interests or pledges. All existing leases and commitments to lease
constitute or will constitute operating leases for both tax and financial
accounting purposes and the lease expense and minimum rental commitments with
respect to such leases and lease commitments are as disclosed in all respects
in the notes to the Seller financial statements. Each real estate lease that
will require the consent of the lessor or its agent to consummate the effects
intended by the Merger or otherwise as a result of the Merger by virtue of the
terms of any such lease is listed in the Disclosure Letter identifying the
section of the lease that contains such prohibition or restriction.
(b)
With respect to all agreements pursuant to which Seller has purchased
securities subject to an agreement to resell, if any, Seller, as the case may
be, has a lien or security interest (which to
12
Sellers
Knowledge is a valid, perfected first lien) in the securities or other
collateral securing the repurchase agreement, and the value of such collateral
equals or exceeds the amount of the debt secured thereby.
(c)
Seller currently maintains insurance for reasonable amounts with financially
sound and reputable insurance companies, against such risks as companies
engaged in a similar business would, in accordance with good business practice,
customarily be insured. Seller has not received notice from any insurance
carrier that (i) such insurance will be canceled or that coverage thereunder
will be reduced or eliminated, or (ii) premium costs with respect to such
policies of insurance will be substantially increased. There are presently no
material claims pending under such policies of insurance and no notices have
been given by Seller under such policies. All such insurance is valid and
enforceable and in full force and effect. The Seller Disclosure Letter
identifies all policies of insurance maintained by Seller as well as the other
matters required to be disclosed under this Section.
Section 3.10 Intellectual Property.
(a)
The Disclosure Letter sets forth a true and complete list of all (i) registered
and/or material Intellectual Property owned by Seller indicating for each
registered item the registration or application number and the applicable
filing jurisdiction (collectively, the Listed Intellectual Property). Seller
exclusively owns (beneficially, and of record where applicable) all Listed
Intellectual Property, free and clear of all encumbrances, exclusive licenses
and non-exclusive licenses not granted in the ordinary course of business. The
Listed Intellectual Property is valid, subsisting and enforceable, and is not
subject to any outstanding order, judgment, decree or agreement adversely
affecting the Sellers use thereof or its rights thereto. Seller has sufficient
rights to use all Intellectual Property used in its business as currently
conducted. To Sellers Knowledge, Seller does not and has not in the past five
years infringed or otherwise violated the Intellectual Property rights of any
third party. There is no material litigation, opposition, cancellation,
proceeding, objection or claim pending, asserted or threatened against the
Seller concerning the ownership, validity, registerability, enforceability,
infringement or use of, or licensed right to use, any Intellectual Property. To
the Sellers Knowledge, (x) no valid basis for any such litigation, opposition,
cancellation, proceeding, objection or claim exists, (y) no Person is violating
any Listed Intellectual Property or other Intellectual Property right owned or
held exclusively by Seller, and (z) the Licensed Intellectual Property is
valid, subsisting and enforceable and is not subject to any outstanding order,
judgment, decree or agreement adversely affecting the Sellers use thereof or
its rights thereto. Consummation of the transactions contemplated by this
Agreement will not terminate or alter the terms pursuant to which the Seller is
permitted to use any Licensed Intellectual Property and will not create any
rights by third parties to use any Intellectual Property owned by the Purchaser
(other than any termination, alteration or creation of any rights that results
from action of the Purchaser and its Affiliates).
(b)
The Seller has taken commercially reasonable measures to protect the
confidentiality of all Trade Secrets that are owned, used or held by Seller,
and to the Sellers Knowledge, such Trade Secrets have not been used, disclosed
to or discovered by any Person except pursuant to valid and appropriate
non-disclosure and/or license agreements which have not been breached. Seller
has exercised commercially reasonable efforts to ensure that Sellers current
and prior employees who have access to confidential information have executed
valid intellectual property and confidentiality agreements or are obligated,
pursuant to Seller policies, to maintain the confidentiality of such
information for the benefit of Seller on terms and conditions consistent with
industry standards. All Intellectual Property developed under contract to
Seller has been assigned to Seller.
(c)
To Sellers Knowledge, the IT Assets operate and perform in all respects in
accordance with their documentation and functional specifications and otherwise
as required by Seller in connection with its business, and have not
malfunctioned or failed within the past three years. To Sellers
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Knowledge, the
IT Assets do not contain any time bombs, Trojan horses, back doors, trap
doors, worms, viruses, bugs, faults or other devices or effects that (i)
enable or assist any person to access without authorization the IT Assets, or
(ii) otherwise significantly adversely affect the functionality of the IT
Assets, in either case except as disclosed in its documentation. To Sellers
Knowledge, no person has gained unauthorized access to the IT Assets. Seller
has implemented commercially reasonable backup and disaster recovery technology
consistent with industry practices.
(d)
To Sellers Knowledge, none of the software owned by it contains any shareware,
open source code, or other software whose use requires disclosure or licensing
of Intellectual Property.
Section 3.11 Labor Matters.
Other
than as set forth in the Disclosure Letter, Seller is not, and has not ever
been, a party to, or is or has ever been bound by, any collective bargaining
agreement, contract, or other agreement or understanding with a labor union or
labor organization with respect to its employees and no such agreement or
contract is currently being negotiated by Seller, nor is Seller the subject of
any proceeding asserting that it has committed an unfair labor practice or
otherwise relating to labor matters involving any current or former employees of
Seller or seeking to compel it to bargain with any labor organization as to
wages and conditions of employment, nor is any strike, other labor dispute or
organizational effort involving Seller pending or, to the Knowledge of Seller,
threatened. Seller is in compliance with applicable laws regarding employment
of employees and retention of independent contractors, and are in compliance
with applicable employment tax laws.
Section 3.12 Legal Proceedings.
Seller
is not a party to any, and there are no pending or, to Sellers Knowledge,
threatened legal, administrative, arbitration or other proceedings, claims
(whether asserted or unasserted), actions or governmental investigations or
inquiries of any nature, (i) against Seller, (ii) to which Sellers assets are
or may be subject, (iii) challenging the validity or propriety of any of the
transactions contemplated by this Agreement, or (iv) which could adversely
affect the ability of Seller to perform under this Agreement.
Section 3.13 Compliance With Applicable
Law/Permits.
(a)
Seller is in compliance in all material respects with all applicable federal,
state, local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable to it, its properties, assets and
deposits, its business, and its conduct of business and its relationship with
its employees.
(b)
Seller has all permits, licenses, authorizations, orders and approvals of, and
has made all filings, applications and registrations that are required in order
to permit it to own or lease its properties and to conduct its business as
presently conducted; all such permits, licenses, consents, certificates of
authority, orders and approvals are in full force and effect and, to the
Knowledge of Seller, no suspension or cancellation of any such permit, license,
certificate, consents, order or approval is threatened or will result from the
consummation of the transactions contemplated by this Agreement.
Section 3.14 Employee Benefit Plans.
(a)
The Disclosure Letter includes a descriptive list of all plans, programs,
policies, payroll practices, contracts, agreements and other arrangements
providing for bonus, incentive compensation, deferred compensation, pension,
retirement benefits or payments, profit-sharing, employee stock ownership,
stock bonus, stock purchase, restricted stock, stock option, stock
appreciation, phantom stock,
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and other
stock and stock related awards, severance, welfare benefits, fringe benefits,
employment, severance and change in control benefits or payments and all other
types of compensation and types of compensation and compensation and benefit
practices, policies and arrangements, in each case, sponsored or contributed
to, required to be contributed to or maintained by Seller in which any employee
or former employee, consultant or former consultant or director or former
director of Seller participates or to which any such employee, consultant or
director is a party or is otherwise entitled to receive benefits (the
Compensation and Benefit Plans). Other than as set forth in the Disclosure
Letter, Seller has no commitment to create any additional Compensation and
Benefit Plan or to modify, change or renew any existing Compensation and
Benefit Plan (any modification or change that increases the cost of such plans
would be deemed material), except as required by law or regulation to maintain
the qualified status thereof. Seller has made available to Purchaser true and
correct copies of the Compensation and Benefit Plans and amendments thereto.
The Disclosure Letter identifies all payments made by Seller to labor unions in
connection with the hiring or contracting of union employees during the past 12
months.
(b)
Each Compensation and Benefit Plan has been operated and administered in all
material respects in accordance with its terms and with applicable law,
including, but not limited to, ERISA, the Code, the Age Discrimination in
Employment Act, COBRA, HIPAA and any regulations or rules promulgated thereunder,
and all filings, disclosures and notices required by ERISA, the Code, the
Exchange Act, the Age Discrimination in Employment Act and any other applicable
law have been timely made or any interest, fines, penalties or other
impositions for late filings have been paid in full. Each Compensation and
Benefit Plan which is an employee pension benefit plan within the meaning of
Section 3(2) of ERISA and which is intended to be qualified under Section
401(a) of the Code is, and since its inception has been, so qualified, and has
received a favorable determination letter from the IRS, and Seller is not aware
of any circumstances which are reasonably likely to result in revocation of any
such favorable determination letter. There is no pending or, to the Knowledge
of Seller threatened, action, suit or claim relating to any of the Compensation
and Benefit Plans (other than routine claims for benefits). Neither Seller has
not engaged in a transaction, or omitted to take any action, with respect to
any Compensation and Benefit Plan that would reasonably be expected to subject
Seller to an unpaid tax or penalty imposed by either Section 4975 of the Code
or Section 502 of ERISA.
(c)
Seller does not sponsor or contribute on behalf of its employees to any
tax-qualified defined benefit pension plans within the meaning of ERISA Section
3(2) subject to the minimum funding standards of Section 412 of the Internal
Revenue Code. Similarly, Seller does not sponsor or contribute to any
nonqualified plans or deferred compensation subject to Section 409A of the
Internal Revenue Code that would be considered defined benefit pension plans.
(d)
All contributions required to be made under the terms of any Compensation and
Benefit Plan or ERISA Affiliate Plan or any employee benefit arrangements to
which Seller is a party or a sponsor have been timely made, and all anticipated
contributions and funding obligations are accrued on Sellers financial
statements to the extent required by GAAP. Seller has expensed and accrued as a
liability the present value of future benefits under each applicable
Compensation and Benefit Plan for financial reporting purposes as required by
GAAP.
(e)
Except as set forth in the Disclosure Letter, Seller has no obligations to
provide retiree health, life insurance, disability insurance, or death benefits
under any Compensation and Benefit Plan, other than benefits mandated by
Section 4980B of the Code and there has been no communication to employees by
Seller that would reasonably be expected to promise or guarantee such benefits.
(f)
With respect to each Compensation and Benefit Plan, if applicable, Seller has
provided or made available to Purchaser copies of the: (A) trust instruments
and insurance contracts; (B) two most recent Forms 5500 filed with the IRS; (C)
two most recent actuarial reports and financial statements; (D)
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most recent
summary plan description; (E) most recent determination letter issued by the
IRS; and (F) any Form 5310 or Form 5330 filed with the IRS within the last two
years.
(g)
The consummation of the Merger will not, directly or indirectly (including,
without limitation, as a result of any termination of employment or service at
any time prior to or following the Effective Time): (A) entitle any current or
former employee, consultant, independent contractor or director to any payment
or benefit (including severance pay, change in control benefit, or similar
compensation) or any increase in compensation, (B) result in the vesting or
acceleration of any benefits under any Compensation and Benefit Plan, (C)
result in any material increase in benefits payable under or the obligation to
fund benefits under any Compensation and Benefit Plan or (D) result in the
triggering or imposition of any restrictions or limitations on the rights of
Seller or the Purchaser to amend or terminate any Compensation and Benefit
Plan. The consummation of the Merger will not, directly or indirectly
(including without limitation, as a result of any termination of employment or
service at any time prior to or following the Effective Time), entitle any
current or former employee, director, consultant or independent contractor of
Seller to any actual or deemed payment (or benefit) which could constitute an
excess parachute payment (as such term is defined in Section 280G of the
Code).
(h)
Seller does not maintain any compensation plans, programs or arrangements under
which (i) payment is reasonably likely to become non-deductible, in whole or in
part, for tax reporting purposes as a result of the limitations under Section
162(m) of the Code and the regulations issued thereunder, or (ii) any payment
is reasonably likely to become subject to an excise tax under section 409A or
4999 of the Code.
(i)
There are no stock option, stock appreciation or similar rights, earned
dividends or dividend equivalents, or shares of restricted stock, outstanding
under any of the Compensation and Benefit Plans or otherwise as of the date
hereof and none will be granted, awarded, or credited after the date hereof.
(j)
Each Compensation and Benefit Plan can be amended, terminated or otherwise
discontinued without liability to the Seller, Purchaser or any ERISA Affiliate.
Section 3.15 Brokers, Finders and Financial
Advisors.
Neither
Seller nor any of its respective officers, directors, employees or agents, has
employed any broker, finder or financial advisor in connection with the
transactions contemplated by this Agreement, or incurred any liability or
commitment for any fees or commissions to any such person in connection with
the transactions contemplated by this Agreement.
Section 3.16 Environmental Matters.
(a)
Except as may be set forth in any Phase I Environmental Report identified in
the Disclosure Letter (a true copy of which has been provided to Purchaser),
with respect to Seller:
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(i) Sellers Property is, and has been, in compliance in all material
respects with, and is not liable under, any Environmental Laws;
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(ii) Seller
has received no written notice and does not otherwise have Knowledge that
there is any suit, claim, action, demand, executive or administrative order,
directive, investigation or proceeding pending and, to Sellers Knowledge, no
such action is threatened, before any court, governmental agency or other
forum against it or any Property (x) for alleged noncompliance (including by
any predecessor) with, or liability under, any Environmental Law or (y)
relating to the presence of or release into the environment of any Materials
of Environmental Concern (as defined herein), whether or not occurring at or
on a site owned, leased or operated by it or any Property;
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(iii)
Seller has received no written notice that there is any suit, claim, action,
demand, executive or administrative order, directive, investigation or
proceeding pending and, to Sellers Knowledge no such action is threatened,
before any court, governmental agency or other forum (x) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (y) relating to the presence of or release into the
environment of any Materials of Environmental Concern, whether or not
occurring at or on a site owned, leased or operated by a Property;
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(iv)
The properties currently owned or operated by Seller and, to the Sellers
Knowledge, the Properties (including, without limitation, soil, groundwater
or surface water on, or under the properties, and buildings thereon) are not
contaminated with and do not otherwise contain any Materials of Environmental
Concern;
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(v)
There is no suit from any federal, state, local or foreign governmental
entity or any third party indicating that it may be in violation of, or
liable under, any Environmental Law;
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(vi)
There are no underground storage tanks on, in or under any properties owned
or operated by Seller, and, to Sellers Knowledge, no underground storage
tanks have been closed or removed from any properties owned or operated by
Seller; and
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(vii)
During the period of (s) Sellers ownership or operation of any of their
respective current properties or (t) Sellers participation in the management
of any property, there has been no contamination by or release of Materials
of Environmental Concern in, on, under or affecting such properties that
could reasonably be expected to result in material liability under the
Environmental Laws. To Sellers Knowledge, prior to the period of (x)
Sellers ownership or operation of any of their respective current properties
or (y) Sellers participation in the management of any property, there was no
contamination by or release of Materials of Environmental Concern in, on,
under or affecting such properties that could reasonably be expected to
result in material liability under the Environmental Laws.
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(viii)
To Sellers knowledge, there is no reasonable basis for any suit, claim,
action, demand, executive or administrative order, directive or proceeding of
a type described in Section 3.16(a)(ii) or (iii).
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Section 3.17 Related Party Transactions.
Seller
is not a party to any transaction (including any loan or other credit
accommodation) with any affiliate of Seller.
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Section 3.18 Antitakeover Provisions
Inapplicable.
The
transactions contemplated by this Agreement are not subject to the requirements
of any moratorium, control share, fair price, affiliate transactions,
business combination or other antitakeover laws and regulations of any state,
including the provisions of West Virginia Corporate Law applicable to Seller.
Section 3.19 Customers and Suppliers.
The
Disclosure Letter contains a complete list of all customers who individually
accounted for more than 2% of the Sellers gross revenues during the fiscal
years ended December 31, 2005 and 2006 or the three-month period ended March
31, 2007. No customer listed on the Disclosure Letter has, within the past 12
months, cancelled or otherwise terminated, or, to the Knowledge of the Seller,
made any threat to cancel or terminate, its relationship with the Seller, or
decreased materially its usage of the Sellers services or products. Except as
set forth in the Disclosure Letter, no material supplier of the Seller has
cancelled or otherwise terminated any contract with the Seller prior to the
expiration of the contract term, or, to the Knowledge of the Seller, made any
threat to the Seller to cancel, reduce the supply or otherwise terminate its
relationship with the Seller. The Seller has not (i) breached (so as to provide
a benefit to the Seller that was not intended by the parties) any agreement
with or (ii) engaged in any fraudulent conduct with respect to, any customer or
supplier of the Seller.
Section 3.20 Inventory.
All
inventory of the Seller consists of a quality and quantity usable and saleable
in the ordinary course of business, except for obsolete items and items of
below-standard quality, all of which have been written-off or written-down to
net realizable value pursuant to the Sellers policies and the best estimates
of the Sellers management in accordance with GAAP. All inventories not
written-off have been priced at the lower of cost or market on a first-in,
first-out basis. The value of each type of inventory, whether raw materials,
work-in process or finished goods, are not excessive in the present
circumstances of the Seller in the best estimate of Sellers management in
accordance with GAAP.
Section 3.21 Accounts Receivable; Bank
Accounts.
All
accounts receivable of the Seller are valid receivables properly reflected
pursuant to the Sellers policies and practices and the best estimates of the
Sellers management in accordance with GAAP, and are subject to no setoffs or
counterclaims and are current and collectible (within 90 days after the date on
which they first became due and payable). Except as set forth in the Disclosure
Letter, all accounts receivable reflected in the financial or accounting
records of the Seller that have arisen since December 31, 2006 are valid
receivables subject to no setoffs or counterclaims and are current and
collectible (within 90 days after the date on which they first became due and
payable). The Disclosure Letter describes each account maintained by or for the
benefit of the Seller at any bank or other financial institution.
Section 3.22 Offers.
The
Seller has suspended or terminated, and has the legal right to terminate or
suspend, all negotiations and discussions of any acquisition, merger,
consolidation or sale of all or substantially all of the assets or member
interests of the Seller with partiers other than Purchaser.
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Section 3.23 Warranties.
No
product or service manufactured, sold, leased, licensed or delivered by the
Seller is subject to any guaranty, warranty, right of return, right of credit
or other indemnity other than (i) the applicable standard terms and conditions
of sale or lease of the Seller, which are set forth in the Disclosure v and
(ii) manufacturers warranties for which the Seller has no liability. The
Disclosure Letter sets forth the aggregate expenses incurred by the Seller in
fulfilling its obligations under its guaranty, warranty, right of return and indemnity
provisions during the past twenty-four (24) months and the Seller does not know
of any reason why such expenses would reasonably be expected to increase as a
percentage of sales in the future.
Section 3.24 Proxy Statement.
The
information to be supplied by the Seller for inclusion in Purchasers proxy
statement (such proxy statement, as amended or supplemented is referred to
herein as the Proxy Statement) shall not at the time the Proxy Statement is
filed with the SEC, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information to be supplied by
the Seller for inclusion in the proxy statement to be delivered to Purchasers
stockholders in connection with the meeting of Purchasers stockholders to
consider the approval of this Agreement (the Purchaser Stockholders Meeting)
shall not, on the date the Proxy Statement is first mailed to Purchasers stockholders,
and at the time of the Purchaser Stockholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not false or misleading; or
omit to state any material fact necessary to correct any statement provided by
the Seller in any earlier communication with respect to the solicitation of
proxies for the Purchaser Stockholders Meeting which has become false or
misleading. If at any time prior to the Purchaser Stockholders Meeting, any
event relating to the Seller or any of its affiliates, officers or managers
should be discovered by the Seller which should be set forth in a supplement to
the Proxy Statement, the Seller shall promptly inform Purchaser of such event.
Section 3.25 No Misstatements.
No
representation or warranty made by the Seller in this Agreement, the Disclosure
Letter or any certificate delivered or deliverable pursuant to the terms hereof
contains or will contain any untrue statement of a material fact, or omits, or
will omit, when taken as a whole, to state a material fact, necessary in order
to make the statements made, in light of the circumstances under which they
were made, not misleading; provided, however, that any representations and
warranties made by the Seller herein that are qualified by the Sellers
Knowledge or materiality shall be incorporated into the representation and
warranty made by this sentence of this Section 3.25. To the Knowledge of the
Seller, the Seller has disclosed to Purchaser all material information relating
to the business of the Seller or the transactions contemplated by this
Agreement.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser
represents and warrants to Seller that the statements contained in this Article
IV are true and correct as of the date of this Agreement and will be true and
correct as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Article
IV).
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Section 4.01 Organization.
Purchaser
is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. Purchaser has all requisite corporate power
and authority to own, lease and operate its properties and carry on its
business as now conducted and is duly licensed or qualified to do business in
the states of the United States and foreign jurisdictions where its ownership
or leasing of property or the conduct of its business requires such
qualification.
Section 4.02 Authority; No Violation.
(a)
Purchaser has full corporate power and authority to execute and deliver this
Agreement and, subject to (i) receipt of any required regulatory and
stockholder approvals and (ii) stockholders of Purchaser owning less than 20%
of the Purchaser securities sold in the Purchasers initial public offering
voting against the Merger and exercising their conversion rights as set forth
in the Purchasers Certificate of Incorporation, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Purchaser
and the completion by Purchaser of the transactions contemplated hereby, have
been duly and validly approved by the Board of Directors of Purchaser, and no
other corporate proceedings on the part of Purchaser are necessary to complete
the transactions contemplated hereby. This Agreement has been duly and validly executed
and delivered by Purchaser, and subject to the receipt of the regulatory
approvals, constitutes the valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors rights
generally, and subject, as to enforceability, to general principles of equity.
(b)
The execution and delivery of this Agreement by Purchaser, subject to receipt
of any required regulatory approvals, and compliance by Seller and Purchaser
with any conditions contained therein and stockholder approvals, the
consummation of the transactions contemplated hereby and compliance by
Purchaser with any of the terms or provisions hereof will not (i) conflict with
or result in a breach or violation of, or default under and provision of the
certificate of incorporation or bylaws of Purchaser or (ii) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree,
governmental permit or license or injunction applicable to Purchaser.
Section 4.03 Consents.
Except
for any regulatory approvals and compliance with any conditions contained
therein, the filing of the Proxy Statement with the SEC contemplated by Section
7.02 hereof, the approval of this Agreement by the requisite vote of the
stockholders and the satisfaction of Purchasers obligations as a special
purpose acquisition corporation, no consents, waivers or approvals of, or
filings or registrations with, any Governmental Entity are necessary, and, to
the Knowledge of Purchaser, no consents, waivers or approvals of, or filings or
registrations with, any other third parties are necessary, in connection with
(a) the execution and delivery of this Agreement by Purchaser and the completion
by Purchaser of the Merger. Purchaser has no reason to believe that (i) any
required consents or approvals will not be received, or that (ii) any public
body or authority, the consent or approval of which is not required or to which
a filing is not required, will object to the completion of the transactions
contemplated by this Agreement.
Section 4.04 Access to Funds.
Purchaser
has, or on the Closing Date will have, access to all funds necessary to
consummate the Merger and pay the aggregate Merger Consideration.
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Section 4.05 Legal Proceedings.
Purchaser
is not a party to any action, suit or proceeding that would materially
adversely affect the ability of Purchaser to consummate the transactions
contemplated by this Agreement.
Section 4.06 Operations of Merger Sub.
Merger
Sub will be formed by Purchaser solely for the purpose of engaging in the
transactions contemplated by this Agreement, has engaged in no other business
activities and has conducted its operations only as contemplated by this
Agreement. Merger Sub has no liabilities and, except for a subscription
agreement pursuant to which all of its authorized capital stock was issued to
Purchaser, is not a party to any agreement other than as is necessary to effect
the intent of this Agreement.
Section 4.07 Board Approval.
Subject
to certain conditions contained in Section 8.01 and 8.02, including, but not
limited to receiving a third party fairness opinion (the Opinion), the Board
of Directors of Purchaser (including any required committee or subgroup of the
Board of Directors of Purchaser) has, as of the date of this Agreement,
unanimously (i) declared the advisability of the Merger and approved this
Agreement and the transactions contemplated hereby, (ii) determined that the
Merger is in the best interests of the stockholders of Purchaser and (iii)
necessary to effect the intent of this Agreement.
Section 4.08 Proxy Statement.
The
information to be supplied by Purchaser for inclusion in the Proxy Statement
shall not at the time the Proxy Statement is filed with SEC contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not misleading.
The information to be supplied by Purchaser for inclusion in the Proxy
Statement to be delivered to Purchasers stockholders in connection with the
Purchaser Stockholders Meeting shall not, on the date the Proxy Statement is
first mailed to Purchasers stockholders, and at the time of Purchaser
Stockholders Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not false or misleading; or omit to state any material fact necessary
to correct any statement provided by Purchaser in any earlier communication
with respect to the solicitation of proxies for the Purchaser Stockholders
Meeting which has become false or misleading. If at any time prior to the
Stockholders Meeting, any event relating to Purchaser or any of its
affiliates, officers or managers should be discovered by Purchaser which should
be set forth in a supplement to the Proxy Statements, Purchaser shall promptly
inform Seller of such event.
Section 4.09 Offers.
The
Seller acknowledges that Purchaser is permitted to receive general inquiries
from third parties concerning potential transactions that would be in addition
to, the transaction contemplated by this Agreement (an Additional
Transaction), and to enter into an acquisition or stock purchase agreement
with respect to one or more Additional Transactions.
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ARTICLE V.
CONDUCT PENDING ACQUISITION
Section 5.01 Conduct of Business Prior to the
Effective Time.
Except
as expressly provided in this Agreement or with the prior written consent of
Purchaser, during the period from the date of this Agreement to the Effective
Time, Seller shall: (i) conduct its business in the ordinary and usual course
consistent with past practices; (ii) maintain and preserve intact its business
organization, properties, leases and advantageous business relationships and
retain the services of its officers and key employees; (iii) take no action
which would adversely affect or delay the ability of each of Seller to perform
its covenants and agreements on a timely basis under this Agreement; (iv) take
no action which would adversely affect or delay the ability of parties to
obtain any necessary approvals, consents or waivers required for the
transactions contemplated hereby or which would reasonably be expected to
result in any such approvals, consents or waivers containing any material
condition or restriction; and (v) take no action that results in or is
reasonably likely to have a Material Adverse Effect on Seller.
Section 5.02 Forbearances of Seller.
Without
limiting the covenants set forth in Section 5.01 hereof, from the date hereof
until the Effective Time, except as expressly contemplated or permitted by this
Agreement, without the prior written consent of Purchaser, which consent shall
not be unreasonably withheld, Seller will not:
(a)
change or waive any provision of its certificate of incorporation, charter or
bylaws or any similar governing documents;
(b)
change the number of authorized or issued shares of its capital stock, issue
any shares of Seller Common Stock that are held as Treasury Stock as of the
date of this Agreement, or issue or grant any right or agreement of any
character relating to its authorized or issued capital stock or any securities
convertible into shares of such stock, or split, combine or reclassify any
shares of its capital stock, or declare, set aside or pay any dividend or other
distribution in respect of its capital stock, or purchase or redeem or
otherwise acquire any shares of its capital stock, except that Seller may pay a
preclosing dividend of certain Seller assets as set forth at Disclosure Letter
5.02;
(c)
enter into, amend in any material respect or terminate any contract or
agreement (including without limitation any settlement agreement with respect
to litigation) involving a payment by Seller of $100,000 or more;
(d)
enter into any new line of business or introduce any new products;
(e)
grant or agree to pay any bonus (other than bonuses in the ordinary course of
business, consistent with past practice), severance or termination payment
(including, but not limited to discretionary severance pay) to, or enter into,
renew or amend any employment agreement, severance agreement and/or
supplemental executive agreement with, or increase in any manner the
compensation or fringe benefits of, any of its directors, officers or
employees;
(f)
enter into or, except as may be required by law, materially modify any pension,
retirement, stock option, stock purchase, stock appreciation right, stock
grant, profit sharing, deferred compensation, supplemental retirement,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement related thereto,
in respect of
22
any of its
directors, officers or employees; or make any contributions to any defined
contribution or defined benefit plan not in the ordinary course of business
consistent with past practice;
(g)
merge or consolidate Seller with any other corporation; sell or lease all or
any substantial portion of the assets or business of Seller; make any
acquisition of all or any substantial portion of the business or assets of any
other;
(h)
sell or otherwise dispose of the capital stock of Seller or sell or otherwise
dispose of any asset of Seller other than in the ordinary course of business
consistent with past practice;
(i)
incur any indebtedness for borrowed money (or guarantee any indebtedness for
borrowed money) or subject any asset of Seller to any lien, pledge, security
interest or other encumbrance;
(j)
take any action which would result in any of the representations and warranties
of Seller set forth in this Agreement becoming untrue as of any date after the
date hereof or in any of the conditions set forth in Article VIII hereof not
being satisfied, except in each case as may be required by applicable law;
(k)
waive, release, grant or transfer any material rights of value or modify or
change in any material respect any existing agreement or indebtedness to which
Seller is a party, other than in the ordinary course of business, consistent
with past practice;
(l)
enter into, renew, extend or modify any other transaction with any Affiliate;
(m)
except for the execution of this Agreement, and actions taken or which will be
taken in accordance with this Agreement and performance thereunder, take any
action that would give rise to a right of payment to any individual under any
employment agreement;
(n)
make any capital expenditures in excess of $100,000 individually or $250,000 in
the aggregate, other than pursuant to binding commitments existing on the date
hereof which are set forth in the Disclosure Letter and other than expenditures
necessary to maintain existing assets in good repair;
(o)
purchase or otherwise acquire, or sell or otherwise dispose of, any assets or
incur any liabilities other than in the ordinary course of business consistent
with past practices and policies;
(p)
undertake or, enter into any lease, contract or other commitment for its
account, involving a payment by Seller of more than $25,000 annually, or
containing any financial commitment extending beyond 12 months from the date
hereof;
(q)
pay, discharge, settle or compromise any claim, action, litigation, arbitration
or proceeding; other than any such payment, discharge, settlement or compromise
in the ordinary course of business consistent with past practice that involves
solely money damages in the amount not in excess of $50,000 individually or $100,000
in the aggregate;
(r)
other than in the ordinary course of business consistent with past practice and
pursuant to policies currently in effect, sell, transfer, mortgage, encumber or
otherwise dispose of any of its material properties, leases or assets to any
individual, corporation or other entity or cancel, release or assign any
indebtedness of any such person, except pursuant to contracts or agreements in
force at the date of this Agreement and which are set forth in the Disclosure
Letter; provided, however, that no sales may be made with recourse;
23
(s)
fail to maintain all its properties in repair, order and condition no worse
than on the date of this Agreement other than as a result of ordinary wear and
tear;
(t)
revoke Sellers election to be taxed as an S Corporation within the meaning of
Code Sections 1361 and 1362 or take or allow any action that may result in the
termination of Sellers status as a validly electing S Corporation within the
meaning of Code Sections 1361 and 1362;
(u)
make or change any election in respect of Taxes, adopt or change any accounting
method in respect of Taxes or otherwise, enter into any closing agreement,
settle any claim or assessment in respect of Taxes, or consent to any extension
or waiver of the limitation period applicable to any claim or assessment in
respect of Taxes, except as required by law, rule, regulation or GAAP; or
(v)
make any withdrawals from retained earnings (including the Accumulated Adjustments
Account), other than for the payment of estimated taxes attributed to the
income of Seller to be reported on the individual income tax return of Sellers
exclusive of income reported as a result of the 338(h)(10) election
contemplated in this agreement and exclusive of income reported as a result of
the distribution of assets and except that Sellers may withdraw an amount equal
to the earnings from January 1, 2007 through December 31, 2007 less $7.0
million ($4.2 million net of taxes) and also an amount equal to: the result
obtained from multiplying the net earnings from January 1, 2008 through the end
of the month prior to closing by 95%; or
(w)
agree to do any of the foregoing.
Section 5.03 Maintenance of Insurance.
Seller
shall maintain insurance in such amounts as are reasonable to cover such risks
as are customary in relation to the character and location of its properties,
and the nature of its business.
Section 5.04 All Reasonable Efforts.
Subject to the
terms and conditions herein provided, Seller agrees to use, all commercially
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement.
ARTICLE VI.
COVENANTS
Section 6.01 Current Information.
(a)
During the period from the date of this Agreement to the Effective Time, Seller
will cause one or more of its representatives to confer with representatives of
Purchaser and report the general status of its ongoing operations at such times
as Purchaser may reasonably request. Seller will promptly notify Purchaser of
any material change in the normal course of its business or in the operation of
its properties and, to the extent permitted by applicable law, of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the known
threat of material litigation involving Seller.
(b)
Seller shall promptly inform Purchaser upon receiving notice of any legal,
administrative, arbitration or other proceedings, demands, notices, audits or
investigations (by any federal, state or local
24
commission,
agency or board) relating to the alleged liability of Seller under any labor or
employment law.
Section 6.02 Access to Properties and
Records.
Seller
shall permit Purchaser reasonable access upon reasonable notice to its
properties, and shall disclose and make available to Purchaser during normal
business hours all of its books, papers and records relating to the assets,
properties, operations, obligations and liabilities, including, but not limited
to, all books of account (including the general ledger), tax records, minute
books of directors (other than minutes that discuss any of the transactions
contemplated by this Agreement or any other subject matter Seller reasonably
determines should be treated as confidential) and stockholders meetings,
organizational documents, Bylaws, material contracts and agreements, filings
with any regulatory authority, litigation files, plans affecting employees, and
any other business activities or prospects in which Purchaser may have a
reasonable interest. Seller shall provide and shall request its auditors to
provide Purchaser with such historical financial information regarding it (and
related audit reports, consents and work papers) as Purchaser may reasonably
request. Purchaser shall use commercially reasonable efforts to minimize any
interference with Sellers regular business operations during any such access
to Sellers property, books and records. Seller shall permit Purchaser, at
Purchasers expense, to cause a phase I environmental audit and a phase II
environmental audit to be performed at any physical location owned or occupied
by Seller.
Section 6.03 Financial and Other Statements.
(a)
Promptly upon receipt thereof, Seller will furnish to Purchaser copies of the
audit of the financial statements of Seller made by its independent accountants
and copies of all internal control reports submitted to Seller by such
accountants in connection with such audit of the financial statements of
Seller.
(b)
With reasonable promptness Seller will furnish to Purchaser such additional
financial data that Seller possesses and as Purchaser may reasonably request,
including without limitation, detailed monthly financial statements.
Section 6.04 Disclosure Letter Supplements.
From
time to time prior to the Effective Time, Seller will promptly supplement or
amend the Disclosure Letter delivered in connection herewith with respect to
any matter hereafter arising which, if existing, occurring or known at the date
of this Agreement, would have been required to be set forth or described in
such Disclosure Letter or which is necessary to correct any information in such
Disclosure Letter which has been rendered materially inaccurate thereby.
Section 6.05 Consents and Approvals of Third
Parties.
In
addition to the Obligations of Article VI hereunder, Seller shall use all
commercially reasonable efforts to obtain as soon as practicable all consents
and approvals of any other persons necessary or desirable for the consummation
of the transactions contemplated by this Agreement.
Section 6.06 Failure to Fulfill Conditions.
In
the event that Seller determines that a condition to its obligation to complete
the Merger cannot be fulfilled and that it will not waive that condition, it
will promptly notify Purchaser.
25
Section 6.07 Employee Benefits.
(a)
In the event there are suitably qualified employees of Seller whose positions
do not continue after the Effective Time, the Purchaser intends to approach them
to fill vacancies within the Purchaser wherever possible. Purchaser will review
all Compensation and Benefit Plans to determine whether to maintain, terminate
or continue such plans.
Section 6.08 Voting Agreements.
James
E. Shafer and Pauletta Sue Shafer shall each execute a voting agreement
substantially in the form attached as Exhibit A as of the date hereof.
Section 6.09 Tax Periods Ending On or Before
the Closing Date.
(a)
Purchaser and Seller have agreed upon the methodology to be employed to
determine the allocation of the Merger Consideration among the assets of Seller
for purposes of preparing a properly completed form 8594 and any comparable
form required under state or local law and such methodology is reflected on the
Disclosure Letter (the Allocation Statement). Purchaser and Seller will agree
upon an allocation on and as of the Closing Date employing the methodology
included in the Allocation Statement. Purchaser and Seller will report the tax
consequences of the transactions contemplated by this Agreement in a manner
consistent with such allocation and will not take any position inconsistent
therewith.
(b)
Seller (or its shareholders) will prepare or cause to be prepared and file or
cause to be filed all tax returns for all periods ending on or prior to the
Closing Date which are filed after the Closing Date other than income tax
returns with respect to periods for which a consolidated income tax return of
Seller will include the operations of Merger Sub. Seller (or its shareholders)
will permit Purchaser to review and comment on each such tax return described
in the preceding sentence prior to filing.
Section 6.10 Cooperation on Tax Matters.
(a)
The parties hereto will cooperate fully, as and to the extent reasonably
requested by any other party or the Seller shareholders, in connection with the
filing of tax returns pursuant to this Section and any audit, litigation or
other proceeding with respect to all taxes. Such cooperation will include the retention
and (upon any other partys request) the provision of records and information
which are reasonably relevant to any such audit, litigation or other proceeding
and making employees available on a mutually convenient basis to provide
additional information and explanation of any material provided hereunder.
Merger Sub and Seller agree (i) to retain all books and records with respect to
tax matters pertinent to Seller relating to any taxable period beginning before
the Closing Date until the expiration of the statute of limitations (and, to
the extent notified by Seller or its shareholders, any extensions thereof) of
the respective taxable periods, and to abide by all record retention agreements
entered into with any regulatory authority, and (ii) to give the other parties
(and Seller shareholders) reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if any such person so
requests, Merger Sub or Seller, as the case may be, will allow such person to take
possession of such books and records.
(b)
Purchaser and Seller further agree, upon request, to use their best efforts to
obtain any certificate or other document from any regulatory authority or any
other person as may be necessary to mitigate, reduce or eliminate any tax that
could be imposed (including, but not limited to, with respect to the
transactions contemplated hereby).
26
(c)
Purchaser and Seller further agree, upon request, to provide the other party
(or Seller shareholders) with all information that such person may be required
to report pursuant to Section 6043 of the Code and all Treasury Department
Regulations promulgated thereunder.
Section 6.11
Employment of James E. Shafer.
Purchaser
agrees to enter into a three year employment contract with James E. Shafer
effective at the Closing Date substantially in the form attached. Such
agreement has been reviewed by Mr. Shafer.
Section 6.12
338(h)10 Election.
(a)
§338(h)(10) Election
. Purchaser, Seller and each Seller shareholder
shall join in making an election under Internal Revenue Code §338(h)(10) (and
any corresponding election under state, local, and foreign tax law) with
respect to the purchase and sale of stock hereunder (collectively, a
§338(h)(10) Election). Each Seller shareholder shall include any income,
gain, loss, deduction, or other tax item resulting from the §338(h)(10)
Election on his or her tax returns to the extent required by applicable law.
Purchaser further agrees that it will provide as additional consideration to
the Seller shareholder the amount equal to any additional tax liability
resulting from this election as mutually agreed to by the Purchaser and Seller.
(b)
Purchase Price Allocation
. Purchaser, Seller and Seller shareholders
agree that the per share Consideration and Seller liabilities (plus other
relevant items) will be allocated to the assets of Seller for all purposes
(including tax and financial accounting) in a manner consistent with Code §§338
and 1060 and the regulations thereunder. The parties further agree that the
fair market value of the Sellers fixed assets shall be equal to their tax
basis. Purchaser, Seller and each Seller shareholder shall file all tax returns
(including amended returns and claims for refund) and information reports in a
manner consistent with such values.
Section 6.13
Purchaser to become Guarantor of Seller Debt.
Purchaser agrees
to use its best efforts prior to closing, to arrange to become the guarantor of
Seller debt, effective at closing, in which James E. Shafer and Pauletta Sue
Shafer currently act as guarantor.
Section 6.14
Purchaser Note
In
the event that Seller does not have sufficient cash available to make the
payments contemplated by Section 5.02(v), Purchaser agrees to issue to James E.
Shafer and Pauletta Sue Shafer a note in such amount. Such note shall be repaid
from account receivables attributable to Sellers business as such receivables
are collected. The note shall bear interest equal to the prevailing federal
funds rate.
ARTICLE
VII.
REGULATORY AND OTHER MATTERS
Section 7.01 Meeting
of Stockholders.
(a) Seller shall take all steps necessary to duly call, give notice of, convene
and hold a meeting of its stockholders for the purpose of considering and
voting on approval of this Agreement and the Merger, and for such other,
purposes as may be, in Sellers reasonable judgment, necessary or desirable
(the Seller Stockholders Meeting). In lieu of holding a Seller Stockholders
Meeting, if permitted by Sellers Certificate of Incorporation, Bylaws and the
WVBCA, Seller may obtain
27
stockholder
approval by means of a consent solicitation. In connection with the
solicitation of proxies with respect to the Seller Stockholders Meeting, the
Board of Directors of Seller shall recommend approval of this Agreement to the
Seller Stockholders and cooperate and consult with Purchaser with respect to
each of the foregoing matters. Seller shall use its best efforts to solicit
approval of the Merger.
(b) Purchaser shall, once it has completed the negotiation of such
acquisition(s) as it deems in the best interests of its stockholders and required
in order to have a business combination or combinations in which the fair
market value of the business or businesses acquired simultaneously is equal to
at least 80% of the Purchasers net assets (excluding any deferred compensation
held by Ferris Baker Watts, Incorporated), prepare the Proxy Statement as
described in Section 7.02 below.
Section 7.02 Proxy
Statement.
As
soon as practicable after entering into the acquisitions referred to in Section
7.01(b), Purchaser shall prepare a Proxy Statement, for the purpose of taking
such stockholder action on the Merger, this Agreement, any other acquisition(s)
it has entered into, and any revisions to its Certificate of Incorporation
contemplated by Purchaser, and file such Proxy Statement with the SEC in
preliminary form, respond to comments of the staff of the SEC and promptly mail
the Proxy Statement to the holders of record (as of the applicable record date)
of shares of voting stock of Purchaser.
Section 7.03
Regulatory Approvals.
Each
of Seller and Purchaser will cooperate with the other and use all reasonable
efforts to promptly prepare and file any necessary documentation to obtain any
necessary regulatory approvals. Seller and Purchaser will furnish each other
and each others counsel with all information concerning themselves, directors,
officers and stockholders and such other matters as may be necessary or
advisable in connection with any application, petition or other statement made
by or on behalf of Seller or Purchaser to any regulatory or governmental body
in connection with the Merger and the other transactions contemplated by this
Agreement. Each party acknowledges that time is of the essence in connection
with the preparation and filing of the documentation referred to above. Seller
shall have the right to review and approve in advance all characterizations of
the information relating to Seller which appears in any filing made in
connection with the transactions contemplated by this Agreement with any
governmental body. In addition, Seller and Purchaser shall each furnish to the
other a copy of each publicly available portion of such filing made in
connection with the transactions contemplated by this Agreement with any
governmental body promptly after its filing.
ARTICLE
VIII.
CLOSING CONDITIONS
Section 8.01
Conditions to Each Partys Obligations under this Agreement.
The
respective obligations of each party under this Agreement shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions,
none of which may be waived:
(a)
Stockholder Approval
. (i)
Seller shall enter into an Additional Transaction to ensure that Sellers
initial combinations have an aggregate fair market value of at least 80% of
Sellers net assets (excluding deferred compensation or Ferris Baker Watts,
incorporated); (ii) this Agreement and the transactions contemplated hereby,
which shall include approval of another business combination to ensure that
Purchasers initial business combinations have an aggregate fair market value
of at least 80% of Purchasers net assets (excluding deferred compensation of
Ferris Baker Watts, Incorporated) shall have
28
been approved
by the requisite vote of the stockholders of Purchaser and Seller in accordance
with applicable law and regulations.
(b)
Injunctions
. None of the parties
hereto shall be subject to any order, decree or injunction of a court or agency
of competent jurisdiction, and no statute, rule or regulation shall have been
enacted, entered, promulgated, interpreted, applied or enforced by any
Governmental Entity or regulatory agency, that enjoins or prohibits the
consummation of the transactions contemplated by this Agreement.
(c)
Regulatory Approvals
. All
required regulatory approvals, consents, permits and authorizations shall have
been obtained and shall remain in full force and effect and all waiting periods
relating thereto shall have expired; and no such regulatory approval shall
include any condition or requirement, that would, in the judgment of the Board
of Directors of Purchaser, have a Material Adverse Effect on (x) Seller or (y)
Purchaser.
(d)
Simultaneous Closing
. Seller
acknowledges and agrees that the closing of the Merger must be simultaneous
with such other acquisition(s) that, in the aggregate, have a fair market value
of at least 80% of Purchasers net assets (excluding deferred compensation of
Ferris Baker Watts, Incorporated).
Section 8.02
Conditions to the Obligations of Purchaser under this Agreement.
The
obligations of Purchaser under this Agreement shall be further subject to the
satisfaction of the conditions set forth in this Section 8.02 at or prior to
the Closing Date:
(a)
Representations and Warranties
.
Each of the representations and warranties of Seller set forth in this
Agreement that are qualified as to materiality shall be true and correct in all
respects and each representation or warranty that is not so qualified shall be
true and correct in all material respects, in each case, as of the date of this
Agreement and upon the Effective Time with the same effect as though all such
representations and warranties had been made at the Effective Time (except to
the extent such representations and warranties speak as of an earlier date),
and Seller shall have delivered to Purchaser a certificate to such effect
signed by the Chief Executive Officer and the Chief Financial Officer of Seller
as of the Effective Time.
(b)
Agreements and Covenants
.
Seller shall have performed in all material respects all obligations and
complied in all material respects with all agreements or covenants to be
performed or complied with by it at or prior to the Effective Time, and
Purchaser shall have received a certificate signed on behalf of Seller by the
Chief Executive Officer and Chief Financial Officer of Seller to such effect
dated as of the Effective Time.
(c)
Good Standing
. Purchaser
shall have received certificates (such certificates to be dated as of a day as
close as practicable to the Closing Date) from appropriate authorities as to
the good standing or corporate existence, as applicable, of Seller.
(d)
Third Party Consents
. Seller
shall have obtained the consent or approval of each person whose consent or
approval shall be required in connection with the transactions contemplated
hereby under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument to which Seller is a party or is
otherwise bound.
(e)
Other Documents
. Seller will
furnish Purchaser with such certificates of its officers or others and such
other documents to evidence fulfillment of the conditions set forth in this
Section 8.02 or as are customary for transaction of the type provided for
herein as Purchaser may reasonably request.
29
(f)
Objecting/Converting Stockholders
.
Stockholders of Purchaser holding 20% or more of the shares sold in its initial
public offering do not vote against the Acquisition and any Additional
Transaction and do not exercise their conversion rights as set forth in the
Purchasers Certificate of Incorporation.
(g)
Dissenting Shareholders
. None
of the Sellers shareholders have indicated their intent to exercise their
dissenters right of appraisal.
(h)
Fairness Opinion
. Purchaser
shall have received an opinion from a firm specializing in the evaluation of
businesses to the effect that the fair market value of the Seller plus any
Additional Transaction entered into by Purchaser is equal to at least 80% of
Purchasers net assets (excluding any deferred compensation held by Ferris
Baker Watts, Incorporated).
Section 8.03
Conditions to the Obligations of Seller under this Agreement.
The
obligations of Seller under this Agreement shall be further subject to the
satisfaction of the conditions set forth in Sections 8.03 at or prior to the
Closing Date:
(a)
Representations and Warranties
.
Each of the representations and warranties of Purchaser set forth in this
Agreement that are qualified as to materiality shall be true and correct in all
respects and each representation or warranty that is not so qualified shall be
true and correct in all material respects, in each case, as of the date of this
Agreement and upon the Effective Time with the same effect as though all such
representations and warranties had been made at the Effective Time (except to
the extent such representations and warranties speak as of an earlier date),
and Purchaser shall have delivered to Seller a certificate to such effect
signed by the Chief Executive Officer and the Chief Financial Officer of
Purchaser as of the Effective Time.
(b)
Agreements and Covenants
.
Purchaser shall have performed in all material respects all obligations and
complied in all material respects with all agreements or covenants to be
performed or complied with by it at or prior to the Effective Time, and Seller
shall have received a certificate signed on behalf of Purchaser by the Chief
Executive Officer and Chief Financial Officer of Purchaser to such effect dated
as of the Effective Time.
(c)
Payment of Merger Consideration
.
Purchaser shall have delivered the Merger Consideration to the Paying Agent on
or before the Closing Date and the Paying Agent shall provide Seller with a
certificate evidencing such delivery.
(d)
Good Standing
. Seller shall
have received a certificate (such certificate to be dated as of a day as close
as practicable to the Closing Date) from the appropriate authority as to the
good standing or corporate existence, as applicable of each of Purchaser and
Merger Sub.
(e)
Other Documents
. Purchaser
will furnish Seller with such certificates of their officers or others and such
other documents to evidence fulfillment of the conditions set forth in this
Section 8.03 or as are customary for transaction of the type provided for
herein as Seller may reasonably request.
30
ARTICLE
IX.
THE CLOSING
Section 9.01 Time
and Place.
Subject
to the provisions of Articles VIII and X hereof, the Closing of the
transactions contemplated hereby shall take place at the offices of Luse Gorman
Pomerenk & Schick, P.C., at 10:00 a.m., or at such other place or time upon
which Purchaser and Seller mutually agree. A pre-closing of the transactions
contemplated hereby (the Pre-Closing) shall take place at the offices of Luse
Gorman Pomerenk & Schick, P.C., at 10:00 a.m. on the day prior to the
Closing Date.
Section 9.02
Deliveries at the Pre-Closing and the Closing.
At
the Pre-Closing there shall be delivered to Purchaser and Seller the opinions,
certificates, and other documents and instruments required to be delivered at
the Closing under Article IX hereof. At or prior to the Closing, Purchaser
shall deliver the Merger Consideration as set forth under Section 8.03(c)
hereof.
ARTICLE
X.
TERMINATION, AMENDMENT AND WAIVER
Section 10.01
Termination.
This
Agreement may be terminated at any time prior to the Closing Date, whether
before or after approval of the Merger by the stockholders of Seller:
(a)
At any time by the mutual written agreement of Purchaser and Seller;
(b)
By either party (provided, that the terminating party is not then in breach of
any representation, warranty, covenant or other agreement contained herein) if
there shall have been a breach of any of the representations or warranties set
forth in this Agreement (subject to the standard set forth in Section 8.02(a)
or 8.03(a), as applicable) on the part of the other party, which breach by its
nature cannot be cured prior to the Termination Date or shall not have been
cured within 30 days after written notice of such breach by the terminating
party to the other party;
(c) By either party (provided, that the terminating party is not then in breach
of any representation or warranty or breach of any covenant or other agreement
contained herein) if there shall have been a failure to perform or comply in
any material respect with any of the covenants, agreements or conditions to
each parties obligations have not been satisfied, all as set forth in this
Agreement on the part of the other party, which failure by its nature cannot be
cured prior to the Termination Date or shall not have been cured within 30 days
after written notice of such failure by the terminating party to the other
party;
(d) At the election of either party, if the Closing shall not have occurred by
the Termination Date, or such later date as shall have been agreed to in writing
by Purchaser and Seller;
provided,
that no party may terminate this Agreement pursuant to this Section 10.01(d) if
the failure of the Closing to have occurred on or before said date was due to
such partys willful breach of any representation or warranty or material
breach of any covenant or other agreement contained in this Agreement;
31
(e) By either party if (i) final action has been taken by any regulatory agency
whose approval is required in connection with this Agreement and the transactions
contemplated hereby, which final action (x) has become unappealable and (y)
does not approve this Agreement or the transactions contemplated hereby, (ii)
any regulatory agency whose approval or nonobjection is required in connection
with this Agreement and the transactions contemplated hereby has stated that it
will not issue the required approval or nonobjection, or (iii) any court of
competent jurisdiction or other governmental authority shall have issued an
order, decree, ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have become final and unappealable;
(f) By either party, if Stockholder Approval shall have not been obtained at
the Seller Stockholders Meeting duly convened therefor or at any adjournment or
postponement thereof;
(g) By Purchaser if prior to obtaining Stockholder Approval the Board of
Directors of Seller fails to publicly reaffirm its adoption and recommendation of
this Agreement, the Merger or the other transactions contemplated by this
Agreement within ten business days of receipt of a request by Purchaser to
provide such reaffirmation.
(h) By either party, if Stockholder Approval of the transactions contemplated
by this Agreement as well as an Additional Transaction that ensures that
Purchasers initial business combinations have an aggregate fair market value
of at least 80% of Purchasers net assets (excluding deferred compensation of
Ferris Baker Watts, Inc.) has not been obtained at the Purchaser Stockholders
Meeting duly convened therefore or at any adjournment or postponement thereof.
Section 10.02 Effect
of Termination.
(a) In the event of termination of this Agreement pursuant to any provision of
Section 10.01, this Agreement shall forthwith become void and have no further
force, except that (i) the provisions of Sections 10.02, 11.01, 11.06, 11.09,
11.10, and any other Section which, by its terms, relates to post-termination
rights or obligations, shall survive such termination of this Agreement and
remain in full force and effect.
(b) If this Agreement is terminated, expenses and damages of the parties hereto
shall be determined as follows:
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(i) Except as provided below, whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement shall be paid by the party
incurring such expenses.
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(ii) In the event of a termination of this Agreement because of a willful
breach of any representation, warranty, covenant or agreement contained in
this Agreement, the breaching party shall be liable for any and all damages,
costs and expenses, including all reasonable attorneys fees, sustained or
incurred by the non-breaching party as a result thereof or in connection
therewith or with respect to the enforcement of its rights hereunder.
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Section 10.03
Amendment, Extension and Waiver.
Subject
to applicable law, at any time prior to the Effective Time (whether before or
after approval thereof by the stockholders of Seller), the parties hereto by
action of their respective Boards of Directors, may (a) amend this Agreement,
(b) extend the time for the performance of any of the obligations or other acts
of any other party hereto, (c) waive any inaccuracies in the representations
and
32
warranties
contained herein or in any document delivered pursuant hereto, or (d) waive
compliance with any of the agreements or conditions contained herein; provided,
however, that after any approval of this Agreement and the transactions
contemplated hereby by the stockholders of Seller, there may not be, without
further approval of such stockholders, any amendment of this Agreement which
reduces the amount or value, or changes the form of, the Merger Consideration
to be delivered to Sellers stockholders pursuant to this Agreement. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto. Any agreement on the part of a party
hereto to any extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party, but such waiver or
failure to insist on strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Any termination of this Agreement
pursuant to Article X may only be effected upon a vote of a majority of the entire
Board of Directors of the terminating party.
ARTICLE
XI.
MISCELLANEOUS
Section 11.01 Public
Announcements.
Seller
and Purchaser shall cooperate with each other in the development and
distribution of all news releases and other public disclosures with respect to
this Agreement, and except as may be otherwise required by law, neither Seller
nor Purchaser shall issue any news release, or other public announcement or
communication with respect to this Agreement unless such news release or other
public announcement or communication has been mutually agreed upon by the
parties hereto.
Section 11.02
Survival.
All
representations, warranties and covenants in this Agreement or in any
instrument delivered pursuant hereto shall expire and be terminated and
extinguished at the Effective Time, except for those covenants and agreements
contained herein which by their terms apply in whole or in part after the
Effective Time.
Section 11.03
Notices.
All
notices or other communications hereunder shall be in writing and shall be
deemed given if delivered by receipted hand delivery or mailed by prepaid
registered or certified mail (return receipt requested) or by recognized
overnight courier addressed as follows:
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If to
Seller, to:
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Marshall T.
Reynolds
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Chairman of
the Board and Chief Executive Officer
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Energy
Services Acquisition Corp.
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2450 First
Avenue
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Huntington,
West Virginia 25703
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With
required copies to:
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Alan Schick,
Esq.
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Luse Gorman
Pomerenk & Schick, P.C.
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5335
Wisconsin Avenue, NW, Suite 400
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Washington,
DC 20015
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Fax: (202)
362-2902
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If to
Purchaser, to:
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James E.
Shafer and Pauletta Sue Shafer
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359 Spencer
Road
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Clendenin,
West Virginia 25045
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or such other
address as shall be furnished in writing by any party, and any such notice or
communication shall be deemed to have been given: (a) as of the date delivered
by hand; (b) three business days after being delivered to the U.S. mail,
postage prepaid; or (c) one business day after being delivered to the overnight
courier.
Section 11.04
Parties in Interest.
This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns;
provided, however,
that neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any party
hereto without the prior written consent of the other party, and that (except
as specifically provided in this Agreement) nothing in this Agreement is intended
to confer upon any other person any rights or remedies under or by reason of
this Agreement. Nothing in this Agreement is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of
this Agreement.
Section 11.05
Complete Agreement.
This
Agreement, including the Exhibits hereto and the documents and other writings
referred to herein or therein or delivered pursuant hereto, contains the entire
agreement and understanding of the parties with respect to its subject matter.
There are no restrictions, agreements, promises, warranties, covenants or
undertakings between the parties other than those expressly set forth herein or
therein. This Agreement supersedes all prior agreements and understandings
between the parties, both written and oral, with respect to its subject matter.
Section 11.06
Counterparts.
This
Agreement may be executed in two or more counterparts all of which shall be
considered one and the same agreement and each of which shall be deemed an
original.
Section 11.07
Severability.
In
the event that any one or more provisions of this Agreement shall for any
reason be held invalid, illegal or unenforceable in any respect, by any court
of competent jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement and the parties shall
use their reasonable efforts to substitute a valid, legal and enforceable
provision which, insofar as practical, implements the purposes and intents of
this Agreement.
Section 11.08
Governing Law.
This
Agreement shall be governed by the laws of the State of West Virginia, without
giving effect to its principles of conflicts of laws.
Section 11.09
Interpretation.
When
a reference is made in this Agreement to Sections or Exhibits, such reference
shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. The recitals hereto constitute an
34
integral part
of this Agreement. References to Sections include subsections, which are part
of the related Section (e.g., a section numbered Section 5.01(a) would be
part of Section 5.01 and references to Section 5.01 would also refer to
material contained in the subsection described as Section 5.01(a)). The table
of contents, index and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words include, includes or including are used
in this Agreement, they shall be deemed to be followed by the words without
limitation. The phrases the date of this Agreement, the date hereof and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to the date set forth in the Recitals to this Agreement.
Section 11.10
Specific Performance.
The
parties hereto agree that irreparable damage would occur in the event that the
provisions contained in this Agreement were not performed in accordance with
its specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
35
IN
WITNESS WHEREOF, Purchaser and Seller have caused this Agreement to be executed
under seal by their duly authorized officers as of the date first set forth
above.
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E
NERGY
S
ERVICES
A
CQUISITION
C
ORP
.
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By:
/s/ Marshall T. Reynolds
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Marshall T. Reynolds
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Chairman of
the Board and Chief Executive Officer
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S. T. P
IPELINE
, I
NC
.
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By:
/s/ James E. Shafer
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James E.
Shafer
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President
and Chief Executive Officer
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By:
/s/ Pauletta Sue Shafer
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Pauletta Sue
Shafer
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/s/ James E.
Shafer
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James E.
Shafer
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(In his
individual capacity)
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/s/ Pauletta
Sue Shafer
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Pauletta Sue
Shafer
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(In her
individual capacity)
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36
EXHIBIT A
VOTING AGREEMENT
January 22, 2008
Energy
Services Acquisition Corp.
Ladies and
Gentlemen:
Energy
Services Acquisition Corp. (the Purchaser) and S.T. Pipeline, Inc. (the
Seller) have entered into an Agreement and Plan of Merger dated as of January
22, 2008 (the Merger Agreement), pursuant to which, subject to the terms and
conditions set forth therein, (a) Seller will merge with and into a corporation
to be formed as a wholly owned Subsidiary of the Energy Services Acquisition
Corp. (the Merger) and (b) stockholders of Seller will receive the Merger
Consideration stated in the Merger Agreement. Capitalized terms not otherwise
defined herein shall have the meanings set forth in the Merger Agreement.
Purchaser
has requested, as a condition to its execution and delivery of the Merger
Agreement, that the undersigned, being a director or officer of Seller, execute
and deliver to Purchaser this Letter Agreement (the Agreement).
The
undersigned (the Stockholder), in order to induce Purchaser to execute and
deliver the Merger Agreement, and intending to be legally bound, hereby
irrevocably:
(a)
Agrees to be present (in person or by proxy) at all meetings of stockholders of
Seller called to vote for approval of the Merger so that all shares of common
stock of Seller over which the undersigned or a member of the undersigneds
immediate family now has sole or shared voting power (including any shares
acquired by the Stockholder prior to the record date for such meetings) will be
counted for the purpose of determining the presence of a quorum at such
meetings and to vote, or cause to be voted, all such shares (i) in favor of
approval and adoption of the Merger Agreement and the transactions contemplated
thereby (including any amendments or modifications of the terms thereof
approved by the Board of Directors of Seller), and (ii) against approval or
adoption of any other merger, business combination, recapitalization, partial
liquidation or similar transaction involving Seller, it being understood that
as to immediate family members, the undersigned will use his/her reasonable
efforts to cause the shares to be present and voted in accordance with (i) and
(ii) above;
(b)
Agrees not to vote or execute any written consent to rescind or amend in any
manner any prior vote or written consent, as a stockholder of Seller, to
approve or adopt the Merger Agreement;
(c)
Agrees not to sell, transfer or otherwise dispose of any Seller Common Stock on
or prior to the date of any meeting of Seller Stockholders to vote on the
Merger Agreement, except for transfers to charities, charitable trusts, or
other charitable organizations under Section 501(c)(3) of the Internal Revenue
Code, lineal descendants or the spouse of the undersigned, or to a trust or
other entity for the benefit of one or more of the foregoing persons, provided
that the transferee agrees in writing to be bound by the terms of this letter
agreement;
(d)
Represents that Stockholder (i) has full power, corporate or otherwise, to
enter into this Agreement and that it is a valid and binding obligation
enforceable against the undersigned in accordance with its terms, subject to
bankruptcy, insolvency and other laws affecting creditors rights and general
A-1
equitable
principles, (ii) is the beneficial owner of all shares of Seller Common Stock
as indicated on the final page of this Agreement (the Shares), which at the
date hereof are, and at all times up until the Termination Date will be, free
and clear of any liens, claims, options, charges, proxies or voting
restrictions or other encumbrances, and (iii) does not beneficially own any
shares of capital stock of Seller other than the Shares;
(e)
Agrees that Stockholder will not, and will cause his or her representatives and
agents not to, directly or indirectly (i) initiate, solicit or knowingly
encourage (including by way of furnishing non-public information or assistance)
the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Acquisition Proposal, or (ii) enter into or maintain or continue
discussions or negotiate with any Person in furtherance of or to obtain an
Acquisition Proposal or agree to or endorse any Acquisition Proposal, or
authorize any of its representatives or agents to take any such action;
provided, however, that nothing in this clause (e) shall prohibit Stockholder
from taking actions in such Stockholders capacity as director or executive
officer of the Seller in accordance with Section 6.07 of the Merger Agreement;
(f)
Agrees to execute and deliver any additional documents necessary, in the
reasonable opinion of Purchaser, to carry out the intent of this Agreement;
(g)
Agrees not to assert, demand or exercise any rights of appraisal or dissenters
in connection with the Merger;
(h)
Agrees that if any term or other provision of this Agreement is determined to
be invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to the Purchaser. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, Stockholder
and Purchaser shall negotiate in good faith to modify this Agreement so as to
effect the original intent of this Agreement as closely as possible to the
fullest extent permitted by applicable law in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible;
(i)
Agrees that this Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of Stockholder and Purchaser and their respective
successors and permitted assigns, but, except as otherwise specifically
provided herein, neither this Agreement nor any of the rights, interests or
obligations of Stockholder and Purchaser may be assigned by either Stockholder
or Purchaser without the prior written consent of the other;
(j)
Agrees that irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof or was
otherwise breached. It is accordingly agreed that Purchaser shall be entitled
to specific relief hereunder, including, without limitation, an injunction or
injunctions to prevent and enjoin breaches of the provisions of this Agreement
and to enforce specifically the terms and provisions hereof, in any state or
federal court in the State of New York, in addition to any other remedy to
which Purchaser may be entitled at law or in equity. Any requirements for the
securing or posting of any bond with respect to any such remedy are hereby
waived;
(k)
Agrees that this Agreement shall be governed by, and interpreted in accordance
with the laws of the State of West Virginia, without regarding to conflicts of
laws principles thereof; and
(l)
The obligations set forth herein shall terminate concurrently with any
termination of the Merger Agreement.
A-2
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The
undersigned intends to be legally bound hereby.
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Sincerely,
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Name:
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Title:
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Address for Notice:
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Shares beneficially
owned:
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shares of
Common Stock of ______________
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A-3
EXHIBIT B
PLAN OF MERGER
This
PLAN OF MERGER dated
as of ___________, 2008 (the Plan of Merger) is entered into by and between
Energy Services Merger Sub, Inc. (the Merger Sub), a West Virginia
corporation, and S.T. Pipeline, Inc., a West Virginia corporation (the
Seller). Capitalized terms not otherwise defined herein shall have the
meanings set forth in the Merger Agreement (as defined below).
WHEREAS
,
pursuant to an Agreement and Plan of Merger, dated as of January 22, 2008 (the
Merger Agreement), by and between Energy Services Acquisition Corp. (the
Purchaser) and Seller, Seller will merge with and into Merger Sub, a wholly
owned Subsidiary of Purchaser (the Merger); and
NOW,
THEREFORE
, in consideration of the premises and the
mutual covenants and agreements contained herein and in the Merger Agreement
and for good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
Section
1.
The Merger.
On the effective date, Merger Sub shall be merged with and into Seller, with
Seller being the surviving entity (the Merger). The Merger shall be subject
to the terms and conditions of the Merger Agreement. Upon completion of the
Merger, the separate corporate existence of Merger Sub shall thereupon cease.
Seller shall continue to be governed by the laws of the State of West Virginia
and its separate corporate existence with all of its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger.
Section
2.
Name of Surviving Corporation.
The name of the surviving corporation in
the Merger (the Surviving Corporation) shall be ____________________.
Section
3.
Location of Offices.
The
business of the Surviving Corporation shall be conducted at its administrative
office at ____________________________________________________, and at all
other locations where Seller was legally authorized to carry out its business
immediately prior to the Merger.
Section
4.
Effect on Outstanding Shares.
(a)
By virtue of the Merger, automatically and without any action on the part of
the holder thereof, each share of Seller Common Stock issued and outstanding at
the effective time of the Merger (the Effective Time), (i) shares held
directly or indirectly by Purchaser (other than shares held in a fiduciary
capacity or in satisfaction of a debt previously contracted), and (ii) Treasury
Stock shall become and be converted into the right to receive the merger
consideration set forth at Section 2.02 of the Merger Agreement.
(b)
At the Effective Time, each share of Seller Common Stock held directly or
indirectly by Purchaser (other than shares held in a fiduciary capacity or in
satisfaction of a debt previously contracted) and Treasury Stock shall be
cancelled and retired and cease to exist, and no exchange or payment shall be
made with respect thereto.
(c)
The shares of common stock of Merger Sub issued and outstanding immediately
prior to the Effective Time shall become shares of the Surviving Corporation at
the Effective Time by virtue of the Merger, automatically and without any
action on the part of the holder thereof, and shall thereafter constitute all
of the issued and outstanding shares of the capital stock of the Surviving
Corporation.
B-1
Section
5.
Assets and Liabilities.
At the Effective Time, all assets and property (real, personal, and mixed,
tangible and intangible, choses in action, rights, and credits) then owned by
Seller shall pass to and vest in the Surviving Corporation without any
conveyance or other transfer. The Surviving Corporation shall be deemed to be a
continuation of Seller. The rights and obligations, including liabilities, of
Seller shall become the rights and obligations of the Surviving Corporation.
Section
6.
Directors and Officers.
At the Effective Time, the directors and officers of Merger Sub shall become
the directors and officers of the Surviving Corporation.
Section
7.
Certificate of Incorporation and Bylaws.
At the Effective Time, the certificate of incorporation and bylaws of Seller
shall be amended in their entirety to conform to the certificate of
incorporation and bylaws of Merger Sub in effect immediately prior to the
Effective Time and shall become the certificate of incorporation and bylaws of
the Surviving Corporation.
Section
8.
Termination.
This Plan of Merger shall be terminated automatically without further act or
deed of either of the parties hereto in the event of the termination of the
Merger Agreement in accordance with Article X thereof.
Section
9.
Stockholder Approval.
The transactions contemplated by this Plan of Merger have been approved by the
affirmative vote of a majority of the outstanding shares of Seller as sole
shareholder of Merger Sub.
Section
10.
Amendments.
This Plan of Merger may be amended by a subsequent writing signed by the
parties hereto upon the approval of the board of directors of each of the
parties hereto.
Section
11.
Counterparts.
This Plan of Merger may be executed in two or more counterparts, each of which
shall be deemed to be an original and all of which taken together shall
constitute one instrument.
Section
12.
Successors.
This Plan of Merger shall be binding upon the successors of Seller.
Section
13.
Governing Law.
This Plan of Merger shall be governed by, and interpreted in accordance with
the laws of West Virginia, without regarding to conflicts of laws.
Section
14.
Severability.
In the event that any one or more provisions of this Plan of Merger shall for
any reason be held invalid, illegal or unenforceable in any respect, by any
court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Plan of Merger
and the parties shall use their reasonable efforts to substitute a valid, legal
and enforceable provision which, insofar as practical, implements the purposes
and intents of this Plan of Merger.
Section
15.
Captions and References.
The captions contained in this Plan of Merger are for convenience of reference
only and do not form a part of this Plan of Merger.
[Signature page follows]
B-2
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of
Merger to be duly executed as of the date first above written.
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E
NERGY
S
ERVICES
M
ERGER
S
UB
, I
NC
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By:
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Name
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Title
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I,
________________, the duly elected, qualified and acting Secretary of Energy
Services Merger Sub, Inc., hereby certify that this Agreement and Plan of
Merger has been approved and adopted by Energy Services Acquisition Corp., the
sole stockholder of Energy Services Merger Sub, Inc., as of
____________________, 2008.
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[Name]
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Secretary
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S.T. P
IPELINE
, I
NC
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By:
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[Name]
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[Title]
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I,
_________________________, the duly elected, qualified and acting Secretary of
Energy Services Acquisition Corp. hereby certify that this Agreement and Plan
of Merger has been approved and adopted by Energy Services Acquisition Corp.,
as of ___________________, 2008.
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Marshall T.
Reynolds
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Chairman of
the Board and
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Chief Executive Officer
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B-3
Annex B
Agreement and Plan of Merger by and between
Energy Services Acquisition Corp.
and C.J. Hughes Construction Company, Inc.
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
ENERGY SERVICES ACQUISITION CORP.
AND
C. J. HUGHES CONSTRUCTION COMPANY, INC.
DATED AS OF FEBRUARY 21, 2008
TABLE OF CONTENTS