Energy Services of America CORP - Annual Report: 2010 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended September 30, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission File Number: 001-32998
|
Energy Services of America Corporation
|
||
|
(Exact Name of Registrant as Specified in its Charter)
|
|
Delaware
|
20-4606266
|
|||
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification Number)
|
|||
|
100 Industrial Lane, Huntington, West Virginia
|
25702
|
|||
|
(Address of Principal Executive Office)
|
(Zip Code)
|
|||
|
(304) 399-6300
|
||
|
(Registrant’s Telephone Number including area code)
|
Securities Registered Pursuant to Section 12(b) of the Act:
|
Title of Class
|
|
Name of Each Exchange
On Which Registered
|
||
|
Common Stock, par value $0.0001 per share
|
NYSE Amex Equities
|
|||
|
Units (each Unit consisting of one share of
Common Stock and two Warrants)
|
NYSE Amex Equities
|
|||
|
Warrants (each Warrant is exercisable
for one share of Common Stock)
|
NYSE Amex Equities
|
|||
Securities Registered Pursuant to Section 12(g) of the Act:
|
None
|
||
|
(Title of Class)
|
||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES x NO o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x
(Do not check if a Smaller reporting Company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on March 31, 2010, as reported by the NYSE Amex Equities, was $14,510,650.
As of December 20, 2010, there were issued and outstanding 12,092,307 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Energy Services of America Corporation
Annual Report On Form 10-K
For The Fiscal Year Ended
September 30, 2010
Table of Contents
ITEM 1. Business
Forward Looking Statements
This Annual Report contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage, and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing products and services.
Overview
On September 6, 2006, we completed our initial public offering of 8,600,000 units. Each unit consisted of one share of our common stock and two warrants, each to purchase one share of our common stock at an exercise price of $5.00 per share.
Until August 15, 2008, we operated as a blank check company. On August 15, 2008, we completed our acquisitions of ST Pipeline, Inc. and C.J. Hughes Construction Company, Inc. Each of ST Pipeline and C.J. Hughes are held as separate subsidiaries of Energy Services.
Energy Services of America (ESA) is a provider of contracting services to America’s energy providers, primarily the gas and electricity providers. The Company’s services include:
|
●
|
The installation, replacement and repairs of pipelines for the oil and natural gas industries.
|
|
●
|
General electrical services for both power companies and various other industrial applications.
|
|
●
|
The installation of water and sewer lines for various governmental agencies.
|
|
●
|
Various other ancillary services related to the other services.
|
Our Consolidated Revenues for the year ended September 30, 2010 were $218 million, of which 74% was attributable to gas work, 20% to electrical services, and 6% to water and sewer installations and other ancillary services. Our Consolidated Revenues for the year ended September 30, 2009 were $107 million, of which 74% was attributable to gas work, 22% to electrical services and 4% to water and sewer installations and other ancillary services.
ESA operates primarily in the Mid Atlantic region of the country though our projects can be throughout the nation. The work includes a combination of both interstate and intrastate pipelines that move natural gas from the producing regions to consumption regions. The Company also offers other services indicated above. The Company does not own or is not directly involved in the exploration, transportation or refinement of oil and natural gas nor any of the facilities used for transporting electricity. The Company has established relationships with numerous customers which include many of the leading companies in the industries we serve.
Representative Customer list
Spectra Energy
Dominion Resources
Columbia Gas Transmission
Columbia Gas of Ohio and Pennsylvania
Nisource
Marathon Ashland Petroleum LLC
American Electric Power
Toyota
Hitachi
Kentucky American Water
Equitable Resources
Markwest Energy
Range Resources
Various State, County and municipal public service districts.
3
Energy Services’ sales force consists of industry professionals with significant relevant sales experience who utilize industry contacts and available public data to determine how to most appropriately market ESA’s 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, certain parts of the Company business, 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
Our Company’s backlog represents contracts for services that have been entered into but which have not yet been completed. At September 30, 2010, Energy Services had a backlog of work to be completed on contracts of $47.8 million. At September 30, 2009, the Company had a backlog of work to be completed on contracts of $144 million. The decrease in the current year backlog was primarily driven by the fact that two major projects were awarded in the fourth fiscal quarter of 2009 which was earlier than we normally see awards for spring work. The Company is currently bidding on several major projects for work that will start in the spring of 2011, although there can be no assurance we will be awarded any contracts or that we will receive the terms and conditions we expect. If we are successful these projects will increase our backlog significantly. Due to the timing of ESA’s 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. Most projects the Company performs can be completed in a short period of time, typically two to five months. Larger projects usually take seven to eighteen months to be completed. Generally, work starts shortly after the signing of the contract.
Types of Contracts
Energy Services’ 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 with a total agreed-upon price based on estimated units. 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 the Company uses are metal plate, structural steel, pipe, wire, 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 ESA 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
Energy Services revenues, cash flows and earnings are substantially dependent upon, and affected by, the level of natural gas exploration development activity and the levels of work on existing pipelines as well as the level of demand for our electrical services. Such activity and the resulting level of demand for pipeline construction and related services and electrical services are directly influenced by many factors over which the Company has no control. Such factors include the market prices of natural gas and electricity, market expectations about future prices, the volatility of such prices, the cost of producing and delivering natural gas and electricity, 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 as well as the demand for our electrical services.
4
Energy Services cannot predict the future level of demand for its construction services, future conditions in the pipeline or electrical construction industry or future pipeline and electrical construction rates.
Energy Services maintains banking relationships with three financial institutions and has lines of credit and borrowing facilities with these institutions. While there is no reason to believe that such lines won’t be available, any delays getting them established could create difficulties for the Company. The Company’s facilities have been sufficient to provide the working capital necessary to complete their ongoing projects. One of the keys to maintaining the Company’s growth will be the establishment and maintenance of sufficient lines of credit to provide cash flow to fund the Company’s projects. Management reviews its funding sources periodically and will continue to do so.
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 the Company 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 Energy Services. Certain of the Company’s competitors have greater financial and human resources than Energy Services, which may enable them to compete more efficiently on the basis of price and technology. The Company’s largest competitors are Otis Eastern, Miller Pipeline, Green Electric, Summit Electric and Apex Pipeline.
Operating Hazards and Insurance
Energy Services 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. Energy Services 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.
The Company’s insurance coverage for property damage to its equipment is based on estimates of the cost of comparable used equipment to replace the insured property. There is a deductible per occurrence on rigs and equipment of $2,500 and $2,500 for miscellaneous tools. The Company also maintains third party liability insurance and a commercial umbrella policy. Energy Services 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 Energy Services against liability for all consequences of well disasters, extensive fire damage or damage to the environment.
Government Regulation and Environmental Matters
General. Energy Services’ 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 Energy Services. In addition, Energy Services’ 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.
5
Environmental Regulation. Energy Services’ 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. The Company 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 the Company’s activities. In general, under various applicable environmental programs. The Company 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. Energy Services may also be subject to liability for natural resource damages and other civil claims arising out of a pollution event. The Company would be responsible for any pollution event that was caused by its actions. We have insurance that we believe is adequate to cover any such occurrences.
Environmental regulations that affect Energy Services’ customers also have an indirect impact on Energy Services. 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 Energy Services’ 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. Energy Services’ 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 have 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. Energy Services 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 Energy Services will be required in the near future to make material expenditures by reason of such health and safety laws and regulations, Energy Services is unable to predict the ultimate cost of compliance with these changing regulations.
Research and Development/Intellectual Property
Energy Services has not made any material expenditure for research and development. Energy Services does not own any patents, trademarks or licenses.
Legal Proceedings
Energy Services is not a party to any legal proceedings, other than in the ordinary course of business, that if decided in a manner adverse to the Company would be materially adverse to Energy Services’ financial condition or results of operations. At September 30, 2010, the Company 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.
Facilities and Other Property
The Company and its subsidiaries own the property where its subsidiary C J Hughes is located. All other facilities are leased including the corporate headquarters. The total amount of the lease payments for the various locations is $25,700 per month.
6
Employees
As of September 30, 2010, the Company had approximately 1,190 employees including management. A number of the Company’s employees are represented by trade unions represented by various collective bargaining units. Energy Services’ management believes that the Company’s relationship with its employees is good.
Item 1A. Risk Factors
Our business is subject to a variety of risks and uncertainties, including, but not limited to, the risk and uncertainties described below. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not known to us or not described below also may impair our business operations. If any of the following risks actually occur, our business financial condition and results of operations could be harmed and we may not be able to achieve our expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the section entitled “Forward looking statements”.
Our operating results may vary significantly from quarter to quarter.
We typically experience lower volumes and lower margins during the winter months due to lower demand for our pipeline services and more difficult operating conditions. Also, other items that can materially affect our quarterly results include:
Variations in the mix of our work in any particular quarter;
Unfavorable regional, national or global economic and market conditions;
A reduction in the demand for our services;
Changes in customer spending patterns;
Unanticipated increases in construction and design costs;
Timing and volume of work we perform;
Termination of existing agreements;
Losses experienced not covered by insurance;
Payment risks associated with customer financial condition;
Changes in bonding requirements of agreements;
Interest rate variations;
Changes in accounting pronouncements; and
Acquisitions and the integration of them and the costs associated with such integration.
Credit facilities to fund our operations and growth might not be available.
Our business relies heavily on having lines of credit in place to fund the various projects we are working on. Should acceptable funding not be available, it could severely curtail our operations and the ability to generate profits.
Economic downturns and financial crisis can impact the level of volumes of our customers spending.
The severe recession that occurred in the U.S. during the 2008 and 2009 calendar years resulted in many of our customers, delaying, cancelling or modifying many projects in 2009 and 2010. While the severity of the recession has moderated somewhat there can be no assurance that the recovery will include a large number of construction projects for the Company or that any recovery will be sustained.
An economic downturn in the industries we serve could lead to less demand for our services.
In addition to the effects of the economic recession, there could be industry specific reductions in the industries that we serve. If the demand for natural gas should drop dramatically, or the demand for electrical services drop dramatically, these would in turn result in less demand for our services.
7
Project delays or cancellations may result in additional costs to us, reductions in revenues or the payment of liquidated damages.
In certain circumstances, we guarantee project completion by a scheduled acceptance date or have achievement of certain acceptance and performance testing levels. Failure to meet any of these requirements could result in additional costs or penalties which could exceed the expected project profits.
We may be unsuccessful at generating internal growth.
Our ability to generate internal growth will be affected by our ability to:
Attract new customers
Expand our relationships with existing customers
Hire and maintain qualified employees
Expand geographically
Adjust quickly to changes in our industry
The slow recovery could significantly limit the number and size of projects that we have the opportunity to bid on. Many of the factors that could limit our internal growth may be beyond our control and therefore limit our ability to grow.
Our industry is highly competitive.
Our industry has been and remains very competitive with competitors ranging from small owner operated companies to large public companies. Within that group there may be companies with lower overheads that therefore are able to price their services at lower levels than we can. Accordingly, if that occurs, our volume levels could be severely limited.
The type of contracts we obtain could adversely affect our business.
We enter into various types of contracts, some fixed price, some variable pricing. On fixed price contracts our profits could be curtailed or eliminated by unanticipated pricing increases, poor productivity, and bad estimates associated with the contract.
Changes by the government in laws regulating the industries we serve could reduce our volumes.
If the government enacts legislation that has serious impacts on the industries we serve, it could lead to the curtailment of any capital projects in those industries and therefore lead to lower volumes for our company.
Many of our contracts can be cancelled or delayed or may not be renewed upon completion.
If our customers should cancel or delay many projects, our revenues could be reduced if we are unable to replace these contracts with others. Also, we have contracts that expire and are rebid periodically. If we are unsuccessful in rebidding those contracts, that could curtail our revenue as well.
Our business requires a skilled labor force and if we are unable to attract and retain qualified employees, our ability to maintain our productivity could be impaired.
Our productivity depends upon our ability to employ and maintain skilled personnel to meet our requirements. Should some of our key managers leave us, it could limit our productivity. Also, many of our labor personnel are trades union members. Should we encounter problems with the unions or there be a problem with enough available operators, welders, etc., it could curtail our production significantly.
8
Our backlog may not be realized.
Our backlog could be reduced due to cancellation of projects by customers and/or reductions in scope of the projects. Should this occur, our anticipated revenues would be reduced unless we were able to replace those contracts.
We extend credit to customers for purchases of our services and therefore have risk that they may not be able to pay us.
While we have not had any significant problems with collections of accounts receivables historically, should there be an economic crisis that would result in our customers’ inability pay it could curtail our operations and ability to operate.
Our financial condition could be impacted by goodwill impairment.
We are required annually under General Accepted Accounting Principles to test our goodwill for impairment. Goodwill is the asset that represents the excess amount we pay for a business including liabilities assumed over the fair value of the tangible and intangible assets of the business we acquire. We have recorded on our books at September 30, 2010 a total of $36,914,021 of goodwill. We had the required testing done as of July 1, 2010 by an outside party and the findings were that the goodwill we have recorded was not impaired. However, should the acquired companies experience downturns which would indicate a lesser value, future tests could indicate goodwill impairment which would result in a write down of the goodwill asset and a reduction in equity and therefore the book value of the Company.
We may incur liabilities or suffer negative financial or reputational impacts relating to occupational health and safety matters.
Our operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we are constantly monitoring our health and safety programs, our industry involves a high degree of operating risk and there can be no assurance given that we will avoid significant liability exposure and/or be precluded from working for various customers due to high incident rates. We believe we are taking the appropriate precautions in this area, but can not be certain of that.
Our dependence on suppliers, subcontractors and equipment manufacturers could expose us to risk of loss in our operations.
On certain projects, we rely on suppliers to obtain the necessary materials and subcontractors to perform portions of our services. We also rely on equipment manufacturers to provide us with the equipment needed to conduct our operations. Any limitations on availability of materials or equipment or failure to complete work on a timely basis by subcontractors in a quality fashion, could lead to added costs and therefore lower profitability for the Company.
During the ordinary course of business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations.
From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, claims and other legal proceedings. These actions may seek, among other things, compensation for alleged personal injury, worker’s compensation, employment discrimination, breach of contract, property damages, civil penalties and other losses of injunctive or declaratory relief. Also, we often indemnify our customers for claims related to the services we provide and actions we take under our contract with them. Because our services in certain instances may be integral to the operation and performance of our customer’s infrastructure, we may become subject to lawsuits or claims for any failure of the systems we work on. While we insure against such claims, the outcomes of any of the lawsuits, claims or legal proceedings could result in significant costs and diversion of management’s attention to the business. Payments of significant amounts, even if reserved, could adversely affect our reputation, liquidity and results of operations.
9
A portion of our business depends on our ability to provide surety bonds. We may be unable to compete for our work on certain projects if we are not able to obtain the necessary Surety bonds.
Current or future market conditions, including losses in the construction industry or as a result of large corporate bankruptcies, as well as changes in our sureties’ assessment of our operating and financial risk, could cause our surety providers to decline to issue or renew, or substantially reduce the amount of bonds for our work and could increase our bonding costs. These actions could be taken on short notice. Since a growing number of our customers require such bonding, should our surety providers limit or eliminate our access to bonding, our performance could be negatively impacted if we were unable to replace the bonded business with work that does not require bonding or come up with other means of securing the jobs performance such as with letters of credit or cash.
Our failure to comply with environmental laws could result in significant liabilities.
Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products, PCB’s, fuel storage, etc. We also work around and under bodies of water. We spend a great deal of time and money to make sure that we are compliant with the appropriate laws and regulations. However, if we should inadvertently cause contamination of waters or soils, liabilities for our company relating to cleanup and remediation could be substantial and could exceed any insurance coverage we might have and result in a negative impact to the company’s ability to operate.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
We maintain our executive offices at 100 Industrial Lane, Huntington, West Virginia 25702. We consider our current office space adequate for our current operations.
ITEM 3. Legal Proceedings
At September 30, 2010, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.
ITEM 4. Removed and Reserved
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Our units, common stock and warrants are listed on the NYSE Amex Equities under the symbols ESA.U, ESA and ESA.WS, respectively. The following table sets forth the range of high and low sales prices for the units, common stock and warrants during each of the last two fiscal years.
10
Units
|
Fiscal 2010
|
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2009
|
$ | 4.40 | $ | 3.01 | $ | - | |||||||
|
Quarter ended March 31, 2010
|
4.60 | 2.65 | - | ||||||||||
|
Quarter ended June 30, 2010
|
4.75 | 3.08 | - | ||||||||||
|
Quarter ended September 30, 2010
|
5.70 | 3.25 | - | ||||||||||
|
Fiscal 2009
|
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2008
|
$ | 8.60 | $ | 3.00 | $ | - | |||||||
|
Quarter ended March 31, 2009
|
5.64 | 2.79 | - | ||||||||||
|
Quarter ended June 30, 2009
|
4.60 | 1.20 | - | ||||||||||
|
Quarter ended September 30, 2009
|
4.70 | 3.21 | - | ||||||||||
Common Stock
|
Fiscal 2010
|
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2009
|
$ | 3.60 | $ | 2.75 | $ | - | |||||||
|
Quarter ended March 31, 2010
|
3.60 | 2.12 | - | ||||||||||
|
Quarter ended June 30, 2010
|
3.85 | 3.03 | - | ||||||||||
|
Quarter ended September 30, 2010
|
4.59 | 2.90 | - | ||||||||||
|
Fiscal 2009
|
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2008
|
$ | 7.25 | $ | 3.70 | $ | - | |||||||
|
Quarter ended March 31, 2009
|
6.00 | 2.45 | - | ||||||||||
|
Quarter ended June 30, 2009
|
3.45 | 2.60 | - | ||||||||||
|
Quarter ended September 30, 2009
|
3.44 | 2.28 | - | ||||||||||
Warrants
|
Fiscal 2010
|
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2009
|
$ | 0.70 | $ | 0.46 | $ | - | |||||||
|
Quarter ended March 31, 2010
|
0.59 | 0.24 | - | ||||||||||
|
Quarter ended June 30, 2010
|
0.56 | 0.38 | - | ||||||||||
|
Quarter ended September 30, 2010
|
1.00 | 0.30 | - | ||||||||||
|
Fiscal 2009
|
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter ended December 31, 2008
|
$ | 1.03 | $ | 0.25 | $ | - | |||||||
|
Quarter ended March 31, 2009
|
0.70 | 0.30 | - | ||||||||||
|
Quarter ended June 30, 2009
|
0.70 | 0.21 | - | ||||||||||
|
Quarter ended September 30, 2009
|
0.69 | 0.44 | - | ||||||||||
As of September 30, 2010, there were three holders of record of our units, fifteen holders of record of our common stock and seven holders of record of our warrants.
We have not paid any cash dividends on our common stock to date. The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
11
(c) Energy Services of America Corp. did not repurchase any shares of its common stock during the relevant period.
ITEM 6. Selected Financial Data
Not required for smaller reporting company filer.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the historical 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.
Forward Looking Statements
Within Energy Services’ consolidated 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 Energy Services’ control. Energy Services has based its forward-looking statements on management’s 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 that any or all of Energy Services’ 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, Energy Services does not 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.
12
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. It operated as a “blank check company” until August 15, 2008 at which time it completed the acquisitions of ST Pipeline, Inc. and C J Hughes Construction Company, Inc. S.T. Pipeline and C.J. Hughes are considered predecessor companies to Energy Services. The Company acquired ST Pipeline for $16.2 million in cash and $3.0 million in a promissory note. The C J Hughes purchase price totaled $34 million, one half of which was in cash and one half in Energy Services common stock. The acquisitions are accounted for under the purchase method and the financial results of both acquisitions are included in the results of Energy Services from the date of acquisition.
Energy Services is engaged in the providing of contracting services for energy related companies. Currently Energy Services primarily services the Gas, Oil and Electrical industries though it does some other incidental work. For the Gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the Oil industry the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the Electrical industry, the Company provides a full range of electrical installations and repairs including substation and switchyard services, site preparation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company’s customers are located in West Virginia, Virginia, Ohio, Pennsylvania, Kentucky and North Carolina. The Company 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. The Company had consolidated operating revenues of $218 million for the year ended September 30, 2010 of which 74% was attributable to gas work, 20% to electrical services customers, and 6% for water and sewer installation and other ancillary services. Our consolidated operating revenues for the year ended September 30, 2009 were $107 million which 74% was attributable to gas work, 22% to electrical services and 4% to water and sewer installations and other ancillary services.
Energy Services’ customers include many of the leading companies in the industries it serves, including Marathon Ashland Petroleum LLC, Spectra Energy, Equitable Resources, Hitachi and Nisource. The Company 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 the Company agrees to do the work for a price per unit of work performed or for a fixed amount for the entire project. Most of the Company’s projects are completed within one year of the start of the work. On occasion, the Company’s customers will require the posting of performance and/or payment bonds upon execution of the contract, depending upon the nature of the work performed.
The Company 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 the customer.
13
Seasonality: Fluctuation of Results
Our 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 calendar year is typically the lowest in terms of revenues because inclement weather conditions causes delays in production and customers usually do not plan 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, reducing the revenues the Company receives and/or increasing the production costs. 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.
In addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in proportion to energy price fluctuations. As a result, our volume of business may be adversely affected by where our customers are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.
Accordingly, our 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. You should read “Understanding Gross Margins” and “Outlook” below for discussions of trends and challenges that may affect our financial condition and results of operations.
Understanding Gross Margins
Our 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 costs equipment rentals, subcontracted services, portions of insurance, facilities expense, materials and parts and supplies. Various factors, some controllable, some not impact our gross margin on a quarterly or annual basis.
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.
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 more margins while others that are extremely competitive in bidding may have narrower margins.
Service and Maintenance versus 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 versus 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 our industry, but can make comparability to other companies difficult.
14
Margin risk. Failure to properly execute a job including failure to properly manage and supervise a job could decrease the profit margin.
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 Consolidated Statement of Operations for the years ended September 30, 2010 and 2009.
|
Year Ended
|
Year Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
Percent
|
2009
|
Percent
|
|||||||||||||
|
(In thousands)
|
(In thousands)
|
|||||||||||||||
|
Contract Revenues
|
$ | 218,288 | 100.0 | % | $ | 106,766 | 100.0 | % | ||||||||
|
Cost of Revenues
|
193,916 | 88.8 | % | 102,683 | 96.2 | % | ||||||||||
|
Gross Profit
|
24,372 | 11.2 | % | 4,083 | 3.8 | % | ||||||||||
|
Selling, general and administrative expenses
|
12,733 | 5.8 | % | 11,259 | 10.5 | % | ||||||||||
|
Income (loss) from operations before taxes
|
11,639 | 5.3 | % | (7,176 | ) | (6.7 | %) | |||||||||
|
Interest Income
|
56 | 0.0 | % | 58 | 0.1 | % | ||||||||||
|
Interest expense
|
(1,842 | ) | (0.8 | %) | (1,623 | ) | ( 1.5 | %) | ||||||||
|
Other Income (Expense)
|
292 | 0.1 | % | (51 | ) | 0.0 | % | |||||||||
|
Income (loss) before Income Taxes
|
10,145 | 4.6 | % | (8,792 | ) | (8.2 | %) | |||||||||
|
Income taxes
|
4,373 | 2.0 | % | (2,870 | ) | (2.7 | %) | |||||||||
|
Net Income (Loss)
|
$ | 5,772 | 2.6 | % | $ | (5,922 | ) | (5.5 | %) | |||||||
|
Earnings (loss) Per Share-Basic
|
0.48 | (0.49 | ) | |||||||||||||
|
Earnings (loss) Per Share-Diluted
|
0.48 | (0.49 | ) | |||||||||||||
2010 compared to 2009
Revenues. Revenue increased by $111.5 million or 104.5% to $218.3 million for the year ended September 30, 2010. The increase was primarily driven by two major projects, totaling $90 million revenues.
Costs of Revenues. Cost of revenues increased by $91.2 million or 88.9% to $193.9 million for the year ended September 30, 2010. Cost of revenues increase was driven by the increase in revenues.
Gross Profit. Gross profits increased by $20.3 million or 496.8% to $24.4 million for the year ended September 30, 2010. The increase was due to increased revenues as well as anticipated progress of most of the Company’s projects. .
Selling, general and administrative expenses. Selling, general and administrative expenses increased by $1.5 million or 13.1% to $ 12.7 million for the year ended September 30, 2010. The increase was primarily driven by the increased staffing, professional fees and executives incentives for the period ending September 30, 2010.
Income from operations. Income from operations increased by $18.8 million or 262.2% to $11.6 million for the year ended September 30, 2010. This increase in net income reflects higher revenue partially offset by costs of revenues and selling, general and administrative expenses.
15
Interest Income. Interest income decreased by $1,234 or 2.1 % to $56,436 for the year ended September 30, 2010.
Interest Expense. Interest expense increased by $217,967 or 13.4% to $1.8 million for the year ended September 30, 2010. The increase was due to increased borrowing to fund increasing operating costs.
Other Income (Expense). Other income (expense) increased by $342,667 or 675.2% to $291,919 for the year ended September 30, 2010. This increase was due to the settlement of an IRS penalty for an amount lower than that which was accrued in 2009.
Income taxes. Income tax expense for the period ending September 30, 2010 was $4.4 million as compared to a credit of $2.9 million for the period ending September 30, 2009. The Company’s effective tax rate was 43.1% for the period ending September 30, 2010 and (32.65%) for the period ending September 30, 2009.
Net Income. Net income increased by $11.7 million to $5.8 million.
Comparison of Financial Condition
The Company had total assets of $130.5 million at September 30, 2010 an increase of $27.5 million from the prior fiscal year end balance. Some primary components of the balance sheet were accounts receivable which totaled $25.9 million an increase of $9.2 million from the prior year end balances and cost and estimated earnings in excess of billings of $20.3 million, an increase of $12.4 million from the prior year end. Other major categories of assets at September 30, 2010 included cash of $2.6 million a decrease of $0.25 million from the prior year balance as well as fixed assets of $27.1 million a decrease of $1.9 million from prior year balance.
Liabilities totaled $70.4 million an increase of $21.7 million from the prior year balance. Current maturities of long-term debt was reduced by $0.45 million. Accounts payable and accrued expenses increased by $16.2 million as a result of the increases in expenses discussed above. Stockholders’ equity was $60.1 million an increase of $5.8 million from prior year due to the net income generated by the Company in 2010.
Liquidity and Capital Resources
Cash Requirements
We anticipate that our cash and cash equivalents on hand at September 30, 2010 which totaled $2.6 million along with our credit facilities available to us and our anticipated future cash flows from operations will provide sufficient cash to meet our operating needs. However, with the increased demand for our services, we could be faced with needing significant additional working capital. We are currently working with our primary bank to ensure adequate working capital to cover our expected needs. Limited access to additional working capital could limit the company’s ability to grow.
Sources and Uses of Cash
As of September 30, 2010, we had $2.6 million in cash, working capital of $17.0 million and long term debt net of current maturities of $12.2 million. The maturities of the total long term debt is as follows
|
2011
|
$ | 6,804,734 | ||
|
2012
|
7,928,651 | |||
|
2013
|
2,240,343 | |||
|
2014
|
829,613 | |||
|
2015
|
625,091 | |||
|
Thereafter
|
551,163 | |||
|
Total
|
$ | 18,979,595 |
16
Line of Credit
The Company has established a nineteen million five hundred thousand ($19,500,000) Line of Credit agreement with a regional bank. Interest will accrue on the line of credit at an annual rate based on “Wall Street Journal” Prime Rate (the Index) with a floor of six percent (6.0%). Cash available under the line is calculated based on a percentage of the Company’s accounts receivable with certain exclusions. Major items excluded from calculation are certain percentages of receivables from bonded jobs and retainage as well as items greater than one hundred twenty (120) days old. At September 30, 2010 the Company had $6.0 million available on the line. A portion of the line of credit was used to repay other outstanding loan balances.
The following are the major covenants of the line:
|
1.
|
Current Ratio must be not less than 1.1 in the first year. As of September 30, 2010 our current ratio was 1.31 to 1.
|
|
2.
|
Debt to tangible net worth must not exceed 3.5 during the first year. This covenant has been waived until January 31, 2011.
|
|
3.
|
Capital Expenditures (CAPEX) must not exceed $7.5 million. CAPEX from the loan date was approximately $6.1 million.
|
|
4.
|
Dividends shall not exceed 50% of taxable income without prior bank approval. No dividends have been declared.
|
We were in compliance with all loan covenants as of the period ending September 30, 2010.
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 for the most part not material in nature, some of these are:
Leases
Our work often requires us to lease various facilities, equipment and vehicles. These leases usually are short term in nature, one year or less though at times we may enter into longer term leases when warranted. By leasing equipment, vehicles and facilities, we are able to reduce our capital outlay requirements for equipment vehicles and facilities that we may only need for short periods of time. The Company currently rents two pieces of real estate from stockholders-directors of the company under long-term lease agreements. The one agreement calls for monthly rental payments of $5,000 and extends through January 1, 2012. The second agreement is for the Company’s headquarter offices and is rented from a corporation in which two of the Company’s directors are shareholders. The agreement began November 1, 2008 and runs through 2011 with options to renew. The second agreement calls for a monthly rental of $7,500 per month. The Company also rents office and shop space from other independent lessors. The office space rental is $11,000 per month and extends to December 2012. The shop rental is $2,200 monthly and extends to October 2012.
Letters of Credit
Certain of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors, vendors, etc. on various customer projects. At September 30, 2010, the Company had no outstanding Letters of Credit.
Performance Bonds
Some customers, particularly new ones or governmental agencies, require us to post bid bonds, performance bonds and payment bonds. These bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail 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. We must reimburse the insurer for any expenses or outlays it is required to make. Depending upon the size and conditions of a particular contract, we 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 our borrowing capabilities. Historically, the Company has never had a payment made by an insurer under these circumstances and does not anticipate any claims in the foreseeable future. At September 30, 2010, we had $170 million in performance bonds issued by the insurer outstanding.
17
Concentration of Credit Risk
In the ordinary course of business the company 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, we are subject to potential credit risk related to business and economic factors that would affect these companies. However, we generally have certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, we may take title to the underlying assets in lieu of cash in settlement of receivables. The company had only two customers that exceeded ten percent of revenues for the year ended September 30, 2010. These customers represented 28% and 24% of revenues and 11% and 33% of accounts receivable respectfully.
Litigation
The Company 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, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.
Related Party Transactions
In the normal course of business, we enter into transactions from time to time with related parties. These transactions typically would not be material in nature and would usually relate to real estate, vehicle or equipment rentals.
Inflation
Due to relatively low levels of inflation during the years ended September 30, 2010 and 2009, inflation did not have a significant effect on our results.
New Accounting Pronouncements
In July 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing and the Allowance for Credit Losses. The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:
|
●
|
The nature of credit risk inherent in the entity’s portfolio of financing receivables;
|
|
●
|
How that risk is analyzed and assessed in arriving at the allowance for credit losses; and
|
|
●
|
The changes and reasons for those changes in the allowance for credit losses.
|
To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:
|
●
|
Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;
|
18
|
●
|
The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and
|
|
●
|
The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses.
|
For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this standard will require additional disclosures.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based on our pro forma consolidated financial statements, which have been prepared in accordance with 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. We evaluate our 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 our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Income Taxes
The Company and all subsidiaries file a consolidated income tax return on a fiscal year basis. The Company began filing tax returns for the year ended September 30, 2006 and therefore all prior Company tax returns are still subject to audit. Both C J Hughes and S T Pipeline filed as S Corporations prior to their acquisition by the Company, therefore any audits of those companies tax returns would result in an adjustment to the pass-through income to the shareholders at the time, and would not create any liability to the Company.
The Company follows the liability method of accounting for income taxes in accordance with the Income Taxes topic of the FASB ASC. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. GAAP prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or to be taken on a tax return.
Goodwill
The Company has selected July 1 as the date of the annual goodwill impairment evaluation, which is the first day of our fourth fiscal quarter. Goodwill was assigned to the operating units at the time of acquisition. The reporting units to which goodwill was assigned are CJ Hughes (“CJ”) and its subsidiary Contractors Rental Corp (“CRC”) as one unit, Nitro Electric (a subsidiary of CJ Hughes-“Nitro”) and to ST Pipeline. The assignment to CJ consolidated and ST Pipeline was based on the purchase price of each company. Both purchases were supported by fairness opinions. The allocation of the goodwill arising from the purchase of CJ was allocated between CJ/CRC and Nitro based on an internally prepared analysis of the relative fair values of each unit.
CJ Hughes and its subsidiary CRC are considered one reporting unit because CRC almost exclusively provides labor for CJ as a subcontractor. There have been no material operational changes to any reporting units since the date of acquisition. Although the Company uses a centralized management approach, the reporting units have continued to perform similar services to those performed prior to the acquisition. There have been no sales of equipment, other than in the ordinary course of business, or dispositions of lines of business by any of the operating units.
19
A discounted cash flow model requires estimates and judgments about such factors as the projected free cash flows, weighted average cost of capital (WACC) and terminal value assumptions. Projected free cash flows require assumptions about projected revenues, profitability and capital expenditures. Significant assumptions relating to the pricing multiple or market approach to value include multiples of price and enterprise value to various metrics including earnings and cash flows. These estimates and judgments about the future can be difficult to predict with certainty, and changes in these assumptions may result in a different conclusion of fair value.
The Company has determined that its operating units meet the criteria for aggregation and can be deemed a single reporting unit because of their similar economic characteristics. The July 1, 2010 annual impairment testing indicates that the fair value of the aggregated operating units is at least 10% higher than the carrying value at that date. Management is not aware of any changes in circumstances since the impairment test date that would indicate that goodwill might be impaired.
Revenue Recognition
Revenues from fixed price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. These contracts provide for a fixed amount of revenues for the entire project. Such contracts provide that the customer accept completion of progress to date and compensate us the services rendered, measured in terms of units installed, hours expended or some other measure of progress. Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, tools and expendables. The cost estimates are based on the professional knowledge and experience of the Company’s engineers, project managers and financial professionals. Changes in job performance, job conditions, and others all affect the total estimated costs at completion. The effects of these changes are recognized in the period in which they occur. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed for fixed price contracts. The current liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized for fixed price contracts.
Revenue on all costs plus and time and material contracts are recognized when services are performed or when units are completed.
Claims
Claims are amounts in excess of the agreed contract price that a contractor seeks to collect from customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. The Company records revenue on claims that have a high probability of success. Revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred.
Self Insurance
The Company has its workers compensation, general liability and auto insurance through a captive insurance company. While the Company believes that this arrangement has been very beneficial in reducing and stabilizing insurance costs the Company does have to maintain a restricted cash account to guarantee payments of premiums. That restricted account had a balance of $899,726 as of September 30, 2010. An additional amount of approximately $404,000 will be required by December 31, 2010. Should the Captive experience severe losses over an extended period, it could have a detrimental affect on the Company.
20
Current and Non Current Accounts Receivable and Provision for Doubtful Accounts
The Company 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 customer’s access to capital, our customer’s willingness or ability to pay, general economic conditions and the ongoing relationship with the customer. While most of our 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 September 30, 2010, the management review deemed that the allowance for doubtful accounts was adequate to cover any anticipated losses.
Outlook
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.
Prior to the general economic crisis that severely impacted demand in 2009, our customers were experiencing high demands for their products, particularly natural gas. Currently, we are seeing the increased demand for our services and accordingly, we would expect to see projected spending for our customers on their transmission and distribution systems increasing dramatically over the next few years. However, with the current uncertainty in the economy the demand for the customer’s project could wane and also their ability to fund planned projects could be reduced. The Company’s backlog at September 30, 2010 was $48 million and while adding additional business projects appears likely, no assurances can be given that the Company will be successful in bidding on projects that become available. Moreover, even if the Company obtains contracts, there can be no guarantee that the projects will go forward if the current economic instability continues.
If the increased demand anticipated in fiscal 2010 continues, we believe that the Company will have opportunities to continue to improve both revenue volumes and the margins thereon. However, as noted above, if the current economic conditions persist, growth could be limited.
If growth continues, we will be required to make additional capital expenditures for equipment to keep up with that need. Currently, it is anticipated that in fiscal 2011, the Company’s needed capital expenditures will be between $2 and $5 million dollars. However, if the customer demands continue to grow, this number could change dramatically. Significantly higher capital expenditure requirements could of course put a strain on the Company’s cash flows and require additional borrowings.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks, primarily related to increases in fuel prices and adverse changes in interest rates.
Interest Rate. Our exposure to market rate risk for changes in interest rates relates to our borrowings from banks. Some of our loans have variable interest rates. Accordingly, as rates rise, our interest cost would rise. We do not feel that this risk is significant.
ITEM 8. Financial Statements and Supplementary Data
Financial Statements are included as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
21
ITEM 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that Energy Services of America Corporation files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
(b) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has used the framework set forth in the report entitled “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has not indentified any material weakness in the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of the end of the most recent fiscal year.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only Management’s report in this Annual Report.
|
|
|
/s/ Edsel Burns | |
| Edsel R. Burns | |||
| Chief Executive Officer | |||
| /s/ Larry A. Blount | |||
| Larry A. Blount | |||
| Chief Financial Officer |
22
The report set forth under this Item 9AT (b) shall not have been deemed filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of Section 18.
(c) Changes in Internal Controls over Financial Reporting
There has been no change in Energy Services of America Corp.’s internal control over financial reporting during Energy Services of America Corporation’s fourth quarter of fiscal year 2010 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The principal occupation during the past five years of each director and executive officer is set forth below. All directors and executive officers have held their present positions since our inception unless otherwise stated.
Marshall T. Reynolds has served as Chairman of the Board of Directors since our inception. Mr. Reynolds has served as Chief Executive Officer and Chairman of the Board Directors of Champion Industries, Inc., a commercial printer, business form manufacturer and supplier of office products and furniture, from 1992 to the present, and sole stockholder from 1972 to 1993; President and General Manager of The Harrah & Reynolds Corporation, from 1964 (and sole stockholder since 1972) to present; Chairman of the Board of Directors of Portec Rail Products, Inc.; Chairman of the Board of Directors of the Radisson Hotel in Huntington, West Virginia; and Chairman of the Board of Directors of McCorkle Machine and Engineering Company in Huntington, West Virginia. Mr. Reynolds also serves as a Director of The Adams National Bank in Washington, D.C.; Chairman of the Board of Directors of First Guaranty Bank in Hammond, Louisiana; and Chairman of the Board of Directors of Premier Financial Bancorp, Inc. in Huntington, West Virginia. Mr. Reynolds is the father of Jack Reynolds and Douglas Reynolds. Mr. Reynolds is qualified to be a director based on his extensive experi8ence on various boards of directors and success as a businessman.
Jack M. Reynolds served as President, Chief Financial Officer and a member of our Board of Directors since our inception to September 2008. Mr. Reynolds has been a Vice President of Pritchard Electric Company since 1998. Pritchard is an electrical contractor providing electrical services to both utility companies as well as private industries. Mr. Reynolds also serves as a Director of Citizens Deposit Bank of Vanceburg, Kentucky. Mr. Reynolds is the son of Marshall Reynolds and the brother of Douglas Reynolds. Mr. Reynolds is qualified to be a director based upon his experience as an officer of Pritchard Electric.
Edsel R. Burns has been a Director since our inception. Mr. Burns became President of the Company in November 2008. Mr. Burns became Chief Executive Officer in December 2009. Mr. Burns was President and Chief Executive Officer of C. J. Hughes Construction Company, Inc. from September of 2002 to November 2008. C. J. Hughes is an underground utility construction company specializing in gas and water line replacement as well as utility environmental issues. From January 2002 to September of 2002, Mr. Burns was self-employed as an independent financial consultant to banks. From June of 2001 to December 2001, Mr. Burns was the Chief Financial Officer for Genesis Health Systems, a holding company for a collaborative group of three hospitals, two in Huntington, West Virginia and one in Point Pleasant, West Virginia. Mr. Burns is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants as well as the West Virginia and Ohio societies of CPAs. He also is on the Board of Directors of Premier Financial Bancorp, Inc. Mr. Burns is qualified to be a director based upon his extensive experience in the business Community.
Neal W. Scaggs has been a Director since our inception. Mr. Scaggs has been president of Baisden Brothers, Inc. (retail and wholesale hardware) from 1963 to the present. Mr. Scaggs is on the Boards of Directors of Premier Financial Bancorp, Inc., Champion Industries, Inc. and Portec Rail Products, Inc. Mr. Scaggs is qualified to be a director based upon his business experience and his experience as a director of Public Companies.
23
Joseph L. Williams has been a Director since our inception. Mr. Williams is the Chairman and Chief Executive Officer of Basic Supply Company, Inc., which he founded in 1977. Mr. Williams was one of the organizers and is a Director of First Sentry Bank, Huntington, West Virginia. Mr. Williams is a member of the West Virginia Governor’s Workforce Investment Council. He is a former Director of Unlimited Future, Inc. (a small business incubator) and a former Member of the National Advisory Council of the U.S. Small Business Administration. Mr. Williams is a former Mayor and City Councilman of the City of Huntington, West Virginia. He is a graduate of Marshall University with a degree in finance and is a member of its Institutional Board of Governors. Mr. Williams is qualified to be a director based upon his experience as a business owner and his experience as a director of a Public Company.
Richard M. Adams, Jr. was appointed to the Board of Directors on August 15, 2008. Mr. Adams has been the President of United Bank, Inc., a subsidiary of United Bankshares, Inc. since 2007. Prior to his appointment as President, Mr. Adams was the Executive Vice President of United Bank, Inc. He is also Executive Vice President of United Bankshares, Inc., a multi-state bank holding company doing business in Ohio, West Virginia, Virginia, Maryland, and Washington, D.C. Mr. Adams is qualified to be a director based upon his business experience as an officer and director of a public Company.
Keith Molihan was appointed to the Board of Directors on August 15, 2008. Mr. Molihan is a retired executive director of the Lawrence County Community Action Organization. Mr. Molihan has served as Chairman of the Board of Directors of Ohio River Bank, Chairman of the Board of Directors of Farmers Bank of Eminence Kentucky and Chairman of the Board EMEGA Turbine Technology, as well as President of the Lawrence County Ohio Port Authority and President of the Southeast Ohio Emergency Medical organization. Mr. Molihan is qualified to be a director based upon his extensive business experience and his experience as a director of a public Company.
Eric Dosch is the Chief Financial Officer of First Guaranty Bank located in Hammond, Louisiana. Mr. Dosch has worked for First Guaranty Bank since 2003. Prior to his association with First Guaranty, Mr. Dosch was a financial analyst with Livingston & Jefferson, a private asset management firm located in Cincinnati, Ohio. Mr. Dosch is a CFA Charterholder and a graduate from The Graduate School of Banking at Louisiana State University. Mr. Dosch obtained his undergraduate degree from Duke University. Mr. Dosch is qualified to be a director based upon his business experience in the field of banking.
Douglas V. Reynolds is an attorney for Reynolds & Brown, PLLC. Mr. Reynolds is the President of the Transylvania Corporation and a director of The Harrah and Reynolds Corporation, and Portec Rail Products, Inc. Mr. Reynolds is a graduate of Duke University and holds a law degree from West Virginia University. Mr. Reynolds is the son of Director Marshall T. Reynolds and brother of Jack M. Reynolds. Mr. Reynolds is qualified to be a director based upon his business experience and experience as a director of a public Company
Larry A. Blount was appointed as Chief Financial Officer and Secretary of the Company in August, 2008. Mr. Blount graduated from West Virginia State University with a Bachelor of Science degree in Business Administration and Accounting. He is also a Certified Public Accountant. Mr. Blount was employed by Union Boiler Company, in various capacities, including Staff Accountant, Internal Auditor, Chief Accountant and Controller, from 1980-1996. From 1996-2003 he was Controller and Vice-President of Accounting and Finance for Williams Group International. He served as Divisional Accounting Manager for Alberici Constructors from 2003-2005. From 2005-2007, Mr. Blount served as Vice President, Chief Financial Officer, Secretary and Treasurer for Nitro Electric Company.
James Shafer is the president, and until its sale to Energy Services was the owner, of ST Pipeline. Mr. Shafer is qualified to be a director based upon his extensive experience in owning and managing various businesses.
24
Section 16(a) Beneficial Ownership Reporting Compliance
Our common stock is registered with the Securities and Exchange Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934. The officers and directors and beneficial owners of greater than 10% of our common stock are required to file reports on Forms 3, 4 and 5 with the Securities and Exchange Commission disclosing beneficial ownership and changes in beneficial ownership of the common stock. Securities and Exchange Commission rules require disclosure in our Proxy Statement or Annual Report on Form 10-K of the failure of an officer, director or 10% beneficial owner of our common stock to file a Form 3, 4 or 5 on a timely basis. Based on our review of ownership reports required to be filed for the fiscal year ended September 30, 2010, all of our directors, officers and owners of more than 10% of our common stock filed these reports on a timely basis.
Meetings of the Board of Directors
During fiscal 2010, the Board of Directors held twelve regular meetings and one special meeting. No director attended fewer than 75% in the aggregate of the total number of board meetings held. All directors serving on our committees attended more than 75% of the total number of committee meetings on which they served during fiscal 2010. Although not required, attendance of Board members at the Annual Meeting of Stockholders is encouraged. All members of our Board of Directors attended the 2010 Annual Meeting of Stockholders except Eric Dosch.
Board Committees
The Board of Directors has an audit committee. The Board of Directors has adopted a charter for this committee. The charter has not been amended. The audit committee charter maybe viewed on our website at www.energyservicesofamerica.com.
Audit Committee. The audit committee consisted of Messrs. Scaggs, Williams, Adams and Molihan with Mr. Scaggs acting as chairman of the committee in fiscal 2010. The audit committee met five times during the fiscal year ended September 30, 2010. The independent directors appointed to the audit committee are independent members of the board of directors, as defined by Securities and Exchange Commission rules and the NYSE Amex Equities corporate governance listing standards. Each member of the audit committee is financially literate, and the Board of Directors has determined that Messrs. Adams and Molihan qualify as audit committee financial experts, as such term is defined by Securities and Exchange Commission rules.
The audit committee reviews the professional services and independence of our independent registered public accounting firm and our accounts, procedures and internal controls. The audit committee also recommends the firm selected to be our independent registered public accounting firm, reviews and approves the scope of the annual audit, reviews and evaluates with the independent public accounting firm our annual audit and annual consolidated financial statements, reviews with management the status of internal accounting controls, evaluates problem areas having a potential financial impact on us that are brought to the committee’s attention by management, the independent registered public accounting firm or the board of directors, and evaluates all of our public financial reporting documents.
The audit committee approved the appointment of Arnett & Foster P.L.L.C. to be our independent registered public accounting firm for the 2010 fiscal year. A representative of Arnett & Foster P.L.L.C. is expected to attend the Annual Meeting.
Other Committees. The Board has determined that the independent members of the Board of Directors will perform the duties of the nominating committee and the compensation committee of the Board of Directors and neither committee has a written charter. The independent directors will (i) identify individuals qualified to become members of the Board of Directors and recommend to the Board of Directors the nominees for election to the Board of Directors, (ii) recommend director nominees for each committee to the Board of Directors, (iii) identify individuals to fill any vacancies on the Board of Directors, (iv) discharge the Board of Directors’ responsibilities relating to compensation of our directors and officers and (v) review and recommend to the Board of Directors, compensation plans, policies and benefit programs, as well as approve chief executive officer compensation. The independent members of the Board of Directors met two times as the nominating committee during the fiscal year ended September 30, 2010.
25
The independent directors of the Board identify nominees by first evaluating the current members of the Board of Directors willing to continue in service. Current members of the Board of Directors with skills and experience that are relevant to our business and who are willing to continue in service are first considered for re-nomination, balancing the value of continuity of service by existing members of the Board of Directors with that of obtaining a new perspective. If any member of the Board of Directors does not wish to continue in service, or if the Board decides not to re-nominate a member for re-election, or if the size of the Board of Directors is increased, the independent directors would solicit suggestions for director candidates from all board members. The independent directors would seek to identify a candidate who at a minimum satisfies the following criteria:
|
●
|
has the highest personal and professional ethics and integrity and whose values are compatible with ours;
|
|
●
|
has experiences and achievements that have given him or her the ability to exercise and develop good business judgment;
|
|
●
|
is willing to devote the necessary time to the work of the Board of Directors and its committees, which includes being available for board and committee meetings;
|
|
●
|
is familiar with the communities in which we operate and/or is actively engaged in community activities;
|
|
●
|
is involved in other activities or interests that do not create a conflict with his or her responsibilities to us and our stockholders; and
|
|
●
|
has the capacity and desire to represent the balanced, best interests of our stockholders as a group, and not primarily a special interest group or constituency.
|
The independent directors will also take into account whether a candidate satisfies the criteria for “independence” under Securities and Exchange Commission rules and the American Stock Exchange and, if a nominee is sought for service on the audit committee, the financial and accounting expertise of a candidate, including whether an individual qualifies as an “audit committee financial expert.”
Procedures for the Nomination of Directors by Stockholders
The Board of Directors has adopted procedures for the submission of director nominees by stockholders. If a determination is made that an additional candidate is needed for the Board of Directors, the independent members of the Board of Directors will consider candidates submitted by our stockholders. Stockholders can submit the names of qualified candidates for director by writing to our Corporate Secretary at 100 Industrial Lane, Huntington, West Virginia 25702. The Corporate Secretary must receive a submission not less than forty-five (45) days prior to the date of our proxy materials for the preceding year’s annual meeting. The submission must include the following information:
|
●
|
a statement that the writer is a stockholder and is proposing a candidate for consideration by our independent directors;
|
|
●
|
the name and address of the stockholder as they appear on the our books and number of shares of our common stock that are owned beneficially by such stockholder (if the stockholder is not a holder of record, appropriate evidence of the stockholder’s ownership will be required);
|
|
●
|
the name, address and contact information for the candidate, and the number of shares of our common stock that are owned by the candidate (if the candidate is not a holder of record, appropriate evidence of the stockholder’s ownership should be provided);
|
26
|
|
●
|
a statement of the candidate’s business and educational experience;
|
|
|
●
|
such other information regarding the candidate as would be required to be included in the proxy statement pursuant to Securities and Exchange Commission Regulation 14A;
|
|
|
●
|
a statement detailing any relationship between the candidate and Energy Services of America Corporation;
|
|
|
●
|
a statement detailing any relationship between the candidate and any customer, supplier or competitor of Energy Services of America Corporation;
|
|
|
●
|
detailed information about any relationship or understanding between the proposing stockholder and the candidate; and
|
|
|
●
|
a statement that the candidate is willing to be considered and willing to serve as a director if nominated and elected.
|
A nomination submitted by a stockholder for presentation by the stockholder at an annual meeting of stockholders will also need to comply with any additional procedural and informational requirements adopted in the future.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics was previously filed as an exhibit to our Registration Statement on Form S-1. A copy of the Code will be furnished without charge upon written request to the Corporate Secretary, Energy Services of America Corporation, 100 Industrial Lane, Huntington, West Virginia.
ITEM 11. Executive Compensation
Executive and Director Compensation
No compensation of any kind, including finder’s and consulting fees, has been paid to any of our initial stockholders, officers or directors, or any of their respective affiliates, for services rendered prior to or in connection with the business combination.
27
Summary Compensation Table. The following table shows the compensation of Marshall T. Reynolds, our former principal executive officer, Edsel R. Burns, our current principal executive officer, and the one highest compensated executive officer who received total compensation of at least $100,000 during the past fiscal year for services to the company or any of its subsidiaries during the year ended September 30, 2010. During the year ended September 30, 2010, we did not make any non-equity incentive plan awards.
|
Summary Compensation Table
|
||||||||||||||||||||||||||||
|
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock Awards (3)
($)
|
Non-equity
incentive plan
compensation
($)
|
All other
compensation
($)
|
Total
($)
|
|||||||||||||||||||||
|
Marshall T. Reynolds,
Chairman and former Chief Executive Officer(1)
|
2009
2010
|
$
$
|
—
|
$ | — | $ | — | $ | — | $ |
10,000
12,000
|
(4) | $ |
10,000
12,000
|
||||||||||||||
|
Edsel R. Burns
President & current Chief Executive Officer (2)
|
2009
2010
|
$ | 122,596 125,000 | $ |
—
75,000
|
$ | — | $ | — | $ |
19,875
21,411
|
(4) | $ |
142,471
221,411
|
||||||||||||||
|
Larry Blount
Secretary/Treasurer and Chief Financial Officer
|
2009
2010
|
$ | 112,681 110,000 | $ |
30,000
50,000
|
$ |
—
37,980
|
$ | — | $ |
9,235
9,636
|
(4) | $ | 151,916 207,616 | ||||||||||||||
(1) Mr. Reynolds resigned as Chief Executive Officer effective December 11, 2009.
(2) Mr. Burns was appointed Chief Executive Officer effective December 11, 2009.
(3) Represents the aggregate grant date fair value of restricted stock awarded to Mr. Blount on August 11, 2010 pursuant to our Long Term Incentive Plan, based upon a grant date stock price of $4.17 per share, which was the final reported sales price of our common stock on the date of grant. The restricted stock award vests in equal installments over a three-year period commencing one year from the date of the grant. No forfeitures were assumed in calculating the aggregate grant date fair value in accordance with FASB ASC Topic 718 for financial statement reporting purposes.
(4) All other compensation includes Director fees of $12,000 and $10,000 for 2010 and 2009 respectfully for Mr. Reynolds and Mr. Burns, 401(k) match of $2,871 and $1,875 for Mr. Burns, and $1,961 and $2,100 for Mr. Blount for 2010 and 2009 respectfully and vehicle rental of $7,536 for Mr. Burns and $7,536 for Mr. Blount for 2010.
28
Outstanding Equity Awards at Year End. The following table sets forth information with respect to outstanding equity awards as of September 30, 2010 for the named executive officers.
|
OUTSTANDING EQUITY AWARDS AT SEPTEMBER 30, 2010 (1)
|
||||||||||||||||||||||||||||||||||||
|
Option awards
|
Stock awards
|
|||||||||||||||||||||||||||||||||||
|
Name
|
Number of
securities underlying unexercised options (#) exercisable |
Number of
securities underlying unexercised options (#) unexercisable |
Equity
incentive plan awards: number of securities underlying unexercised unearned options (#) |
Option
exercise price ($) |
Option expiration
date |
Number of
shares or units of stock that have not vested (1) |
Market value of
shares or units of stock that have not vested (2) |
Equity incentive
plan awards: number of unearned shares, units or other rights that have not vested (#) |
Equity
incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($) |
|||||||||||||||||||||||||||
|
Marshall T. Reynolds
|
— | — | — | |||||||||||||||||||||||||||||||||
|
Edsel R. Burns
|
— | — | — | |||||||||||||||||||||||||||||||||
|
Larry Blount
|
— | 9,000 | $ | 37,530 | — | — | ||||||||||||||||||||||||||||||
|
(1)
|
All equity awards noted in this table were granted pursuant to our Long Term Incentive Plan, which was approved by stockholders on August 11, 2010, and represent all awards held at September 30, 2010 by the named executive officers. Immediately following stockholder approval of the Long Term Incentive Plan, on August 11, 2010, Mr. Blount was granted 9,000 shares of restricted stock that vest at a rate of 1/3 per year commencing on August 11, 2011.
|
|
(2)
|
Based on the closing stock price of $4.17 per share on August 10, 2010.
|
29
Stock-Based Incentive Plan. Our stockholders approved the Energy Services of America Corporation Long Term Incentive Plan (the “LTIP”) at our 2010 Annual Meeting of Stockholders. The purpose of the LTIP is to provide our employees and directors with additional incentives to promote our growth and performance.
The LTIP authorizes the issuance of up to 1,200,000 shares of our common stock pursuant to grants of restricted stock awards, performance share awards, restricted stock units, performance share units, incentive stock options, non-qualified stock options and stock appreciation rights; provided, however, that in any five year period, no individual may receive a grant of any type for more than 180,000 shares. Awards may be granted in any combination as follows:
Stock Options. A stock option is the right to purchase shares of common stock at a specified price for a specified period of time. The exercise price may not be less than the fair market value of a share of our common stock on the date the stock option is granted. Fair market value for purposes of the LTIP means the final sales price of the Company’s common stock as reported on the NYSE Amex Equities Market on the date in question, or if the Company’s common stock was not traded on such date, then on the day prior to such date or on the next preceding day on which the Company’s common stock was traded, and without regard to after-hours trading activity. The compensation committee will determine the fair market value of the common stock, in accordance with Code Sections 422 and 409A, if it cannot be determined in the manner described above. Further, the compensation committee may not grant a stock option with a term that is longer than 10 years.
Stock options are either “incentive” stock options or “non-qualified” stock options. Incentive stock options have certain tax advantages that are not available to non-qualified stock options, and must comply with the requirements of Section 422 of the Code. Only employees are eligible to receive incentive stock options. Outside directors may only receive non-qualified stock options under the LTIP. Shares of common stock purchased upon the exercise of a stock option must be paid for at the time of exercise either (i) by personal, certified or cashiers check, (ii) by tendering stock of the Company owned by the participant in satisfaction of the exercise price, or (iii) by a “cashless exercise” through the Company or a third party.
Stock Appreciation Rights. A stock appreciation right is the right to receive a payment in an amount equal to the excess of the fair market value of a share of compensation committee common stock on the date specified in the grant agreement for the payment of the award over the fair market value of the common stock on the date of grant of the award. Stock appreciation rights are subject to any applicable vesting conditions and other restrictions established by the compensation committee as set forth in the LTIP or the award agreement. Stock appreciation rights are “deferred compensation” that is subject to Code Section 409A.
Restricted Stock and Performance Share Awards. A restricted stock award, including a performance share award, is a grant of common stock to a participant for no consideration or such minimum consideration as may be required by applicable law. Restricted stock awards, including performance share awards, may be granted only in whole shares of common stock and are subject to any applicable vesting conditions and other restrictions established by the compensation committee as set forth in the LTIP or the award agreement. Prior to their vesting, unless otherwise determined by the compensation committee, the recipient of a restricted stock award, including a performance share award, shall not exercise any voting rights with respect to common stock subject to the award and shall not receive any dividends and distributions with respect to the common stock.
Restricted Stock Units and Performance Share Units. A restricted stock unit, including performance share units, is the right to receive a payment in an amount equal to the fair market value of a share of Company common stock on the date specified in the grant agreement for the payment of the award. Restricted stock units, including performance share units, are subject to any applicable vesting conditions and other restrictions established by the Committee as set forth in the LTIP or the award agreement. Restricted stock units, including performance share units, are “deferred compensation” that is subject to the requirements of Code Section 409A.
30
Benefit Plans
Energy Services 401(k) Plan
In 2010 and 2009, C. J. Hughes Construction Company, Inc., a wholly owned subsidiary of the Company, maintained two tax-qualified 401(k) retirement plans, one for union employees and one for non-union employees. Employees who have attained age 18 and completed 1,000 hours of service during a 12-month period are eligible to participate. Employees can contribute up to 15% of eligible wages, provided the compensation deferred for a plan year does not exceed the indexed dollar amount set by the Internal Revenue Service, which was $16,500 for 2010 and 2009. C. J. Hughes will match $0.25 on each dollar contributed up to 6% of eligible wages. In addition, participants who are age 50 or older by the end of the plan year may elect to defer up to an additional $5,500 into the 401(k) plan for 2010 and 2009. Additionally, each plan year, C. J. Hughes may make discretionary profit-sharing contributions for participants who are actively employed on the last day of the plan year. The discretionary contributions made by C. J. Hughes will be allocated to a qualifying participant’s individual account based on the ratio of his or her compensation to the total compensation of all qualifying participants for the Plan Year. No discretionary profit sharing contributions were made for 2010 or 2009. Participants direct the investment of their account in the 401(k) plan, selecting from investment funds provided under the Plan, as determined by C. J. Hughes. Participants receive quarterly benefit statements and have immediate access to their plan accounts through an Interactive Voice Response System and the Internet. Plan benefits are paid as soon as administratively possible following the participant’s termination of employment. Lump sums, partial payments and installment payments are available in the non-union plan if the participant’s account balance exceeds $1,000. Lump sums and partial payments are available in the union plan if the participant’s account balance exceeds $1,000.
Effective November 1, 2009, ST Pipeline, Inc., a wholly owned subsidiary of the Company became an adopting employer of the 40l (k) retirement plan for non-union employees sponsored by C. J. Hughes Construction Company, Inc.
Nitro Electric, a wholly owned subsidiary of the Company, maintained a tax-qualified 401(k) retirement plan for all non-union employees. Employees are eligible to participate upon date of hire. Employees may contribute eligible wages up to the maximum indexed dollar amount set by the Internal Revenue Service, which was $16,500 for 2010 and 2009. In addition, participants who are age 50 or older by the end of the plan year may elect to defer up to an additional $5,500 into the 401(k) plan for 2010 and 2009. Nitro Electric may make annual discretionary matching contributions and/or profit sharing contributions to the plan. The matching contribution formula for the 2010 and 2009 plan year was $0.25 on each dollar contributed up to 6% of eligible wages. No profit sharing contributions were made in 2010 or 2009. Participants direct the investment of their account in the Plan, selecting from investment funds provided under the Plan, as determined by Nitro Electric. Participants receive quarterly benefit statements that provide information on their account balances and have immediate access to their account through an Interactive Voice Response System and the Internet. Benefits are paid in the form of a single lump sum cash payment as soon as administratively possible following the participant’s termination of employment.
Effective December 1, 2009, the C. J. Hughes Construction Company, Inc. 401(k) Plan for non-union employees was amended and restated and the Nitro Electric 401(k) Plan for non-union employees was merged into the C.J. Hughes Construction Company, Inc. 401(k) Plan for non-union employees. Employees are immediately eligible for the Plan upon date of hire but must wait until a quarterly entry date to join the Plan. Employees may contribute eligible wages up to the maximum indexed dollar amount set by the Internal Revenue Service, which was $16,500 for 2010 and 2009. In addition, participants who are age 50 or older by the end of the plan year may elect to defer up to an additional $5,500 into the 401(k) plan for 2010 and 2009. C. J. Hughes will match $0.25 on each dollar contributed up to 6% of eligible wages. Additionally, each plan year, C. J. Hughes may make discretionary profit-sharing contributions for participants who are actively employed on the last day of the plan year. The discretionary contributions made by C. J. Hughes will be allocated to a qualifying participant’s individual account based on the ratio of his or her compensation to the total compensation of all qualifying participants for the Plan Year. No discretionary profit sharing contributions were made in 2010 or 2009. Participants direct the investment of their account in the Plan, selecting from investment funds provided under the Plan, as determined by C. J. Hughes Construction Company. Participants receive quarterly benefit statements that provide information on their account balances and have immediate access to their account through an Interactive Voice Response System and the Internet. Plan benefits are paid as soon as administratively possible following the participant’s termination of employment. Lump sums, partial payments and installment payments are available if the participant’s account balance exceeds $1,000.
Effective January 1, 2010 Energy Services of America became the successor plan sponsor of the C. J. Hughes Construction Company 401(k) Plan for non-union employees. The Plan was renamed the Energy Services of America Staff 401(k) Retirement Plan. The four wholly owned subsidiaries, C. J. Hughes Construction Company, Inc., Nitro Electric Company, Inc., Contractors Rental Corporation, and ST Pipeline adopted the Plan on behalf of their non-union employees.
31
Energy Services of America Corporation 2009 Employee Stock Purchase Plan
The plan enables eligible employees to purchase common stock through payroll deductions. The plan is intended to qualify under Section 423 of the Internal Revenue Code and its regulations. If Code Section 423 is amended in any way, the Compensation Committee of our Board may amend the plan to conform to such changes. During the fiscal year ended September 30, 2010 we did not utilize this plan.
Directors’ Compensation
Cash Compensation. Other than as set forth below, members of the Board of Directors did not receive any compensation during the year ended September 30, 2010.
Directors’ Summary Compensation Table. The table set forth below the compensation received by directors for the fiscal year ended September 30, 2010. No stock awards, option grants or non-equity incentive plan compensation awards were made to directors during 2010.
|
Director Compensation
|
||||||||||||||||||||
|
Name
|
Fees earned
or paid in cash ($) |
Non-equity
incentive plan compensation ($)
|
Non-qualified
deferred compensation earnings ($)
|
All other compensation
($) |
Total
($)
|
|||||||||||||||
|
Jack M. Reynolds
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
|
Neal W. Scaggs
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
|
Joseph L. Williams
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
|
Richard M. Adams, Jr.
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
|
Keith Molihan
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
|
Douglas Reynolds
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
|
Eric Dosch
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
|
James Shafer
|
$ | 12,000 | — | — | — | $ | 12,000 | |||||||||||||
Compensation Committee Interlocks and Insider Participation
The compensation committee is comprised of our independent directors. Under the board’s policies, Mr. Marshall Reynolds, Mr. Edsel Burns, and any other director who is also an executive officer, will not participate in the Board of Directors’ determination of compensation for their respective offices in the future if compensation is given to executive officers.
Compensation Committee Report
As of the end of fiscal 2010, the compensation paid to officers was paid at the same rates as they had been paid by the subsidiaries prior to the acquisition. Consequently, the independent members of the Board of Directors have not met in their capacity as the Compensation Committee and have not formulated any policies on executive compensation. We plan to adopt standards and policies to govern compensation moving forward.
32
Persons and groups who beneficially own in excess of five percent of our common stock are required to file certain reports with the Securities and Exchange Commission regarding such ownership. The following table sets forth, as of October 30, 2009, the shares of common stock beneficially owned by each person who was the beneficial owner of more than five percent of our outstanding shares of common stock, as well as the shares owned by our directors and executive officers as a group.
|
Amount of Shares
|
|||||||||
|
Owned and Nature
|
Percent of Shares
|
||||||||
|
Name and Address of
|
of Beneficial
|
of Common Stock
|
|||||||
|
Beneficial Owners
|
Ownership(1)
|
Outstanding
|
|||||||
|
All Directors, Nominees and Executive Officers
|
7,946,407 | 50.48 | % | ||||||
|
as a Group (11 persons)
|
|||||||||
|
Principal Stockholders:
|
|||||||||
|
Marshall T. Reynolds
|
4,661,864 | (2) | 30.20 | % | |||||
|
100 Industrial Lane,
|
|||||||||
|
Huntington, West Virginia 25702
|
|||||||||
|
Edsel R. Burns
|
861,415 | (3) | 7.08 | % | |||||
|
100 Industrial Lane,
|
|||||||||
|
Huntington, West Virginia 25702
|
|||||||||
|
Douglas V. Reynolds
|
1,284,815 | (4) | 10.56 | % | |||||
|
100 Industrial Lane,
|
|||||||||
|
Huntington, West Virginia 25702
|
|||||||||
|
|
(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.
|
|
|
(2)
|
Based upon Schedule 13D/A, dated August 8, 2008, filed on behalf of Marshall T. Reynolds.
|
|
|
(3)
|
Based upon Schedule 13D/A, dated August 8, 2008, filed on behalf of Edsel R. Burns.
|
Based upon Schedule 13D, dated August 8, 2008, filed on behalf of Douglas V. Reynolds.
33
The table below sets forth certain information regarding our Board of Directors, including the terms of office of board members.
|
Names and Address (1)
|
Age(2)
|
Positions Held
|
Director Since
|
Current Term
to Expire
|
Shares of Common
Stock Beneficially
Owned on
October 30, 2010 (3)
|
Percent of
Class
|
||||||||
|
Directors:
|
||||||||||||||
|
Marshall T. Reynolds
|
74
|
Chairman
|
2006
|
2011
|
4,661,864
|
(4) |
30.20
|
% | ||||||
|
Edsel R. Burns
|
59
|
Chief Executive Officer and Director
|
2006
|
2011
|
861,415
|
(6) |
7.08
|
% | ||||||
|
Larry A. Blount
|
61
|
Secretary/Treasurer, Chief Financial Officer
|
n/a
|
n/a
|
-
|
-
|
||||||||
|
Jack M. Reynolds
|
45
|
Director
|
2006
|
2011
|
506,924
|
(5) |
4.17
|
% | ||||||
|
Neal W. Scaggs
|
74
|
Director
|
2006
|
2011
|
431,415
|
(7) |
3.55
|
% | ||||||
|
Joseph L. Williams
|
65
|
Director
|
2006
|
2011
|
184,424
|
(8) |
1.52
|
% | ||||||
|
Richard M. Adams, Jr.
|
42
|
Director
|
2008
|
2011
|
5,000
|
—
|
||||||||
|
Keith Molihan
|
68
|
Director
|
2008
|
2011
|
—
|
—
|
||||||||
|
Douglas Reynolds
|
34
|
Director
|
2008
|
2011
|
1,284,815
|
10.56
|
% | |||||||
|
Eric Dosch
|
32
|
Director
|
2008
|
2011
|
750
|
—
|
||||||||
|
James Shafer
|
67
|
Director
|
2008
|
2011
|
9,000
|
—
|
||||||||
|
All Directors and Executive Officers as a Group (11 persons)
|
7,946,407
|
(9) |
50.48
|
% | ||||||||||
|
(1)
|
The mailing address for each person listed is 100 Industrial Lane, Huntington, West Virginia 25702.
|
|
(2)
|
As of October 30, 2010.
|
|
(3)
|
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.
|
|
(4)
|
Includes 3,342,303 shares underlying warrants exercisable within 60 days from the record date.
|
|
(5)
|
Includes 76,924 shares underlying warrants exercisable within 60 days from the record date.
|
|
(6)
|
Includes 76,924 shares underlying warrants exercisable within 60 days from the record date.
|
|
(7)
|
Includes 76,924 shares underlying warrants exercisable within 60 days from the record date.
|
|
(8)
|
Includes 76,924 shares underlying warrants exercisable within 60 days from the record date.
|
|
(9)
|
Includes shares underlying warrants exercisable within 60 days from the record date.
|
|
(10)
|
Does not include 9,000 shares of unvested restricted shares each issued to Mr. Blount and Mr. Shafer.
|
The Board of Directors consists of a majority of “independent directors” within the meaning of the NYSE Amex Equities corporate governance listing standards. The Board of Directors has determined that Messrs. Scaggs, Williams, Adams, Molihan and Dosch are “independent directors” within the meaning of such standards. There were no transactions not required to be reported under “—Certain Relationships and Related Transactions” that were considered in determining the independence of our directors.
The Board of Directors has adopted a policy that the independent directors of the Board of Directors shall meet in executive sessions periodically, which meetings may be held in conjunction with regularly scheduled board meetings. One executive session was held during the fiscal year ended September 30, 2010.
34
Certain Relationships and Related Transactions
On August 30, 2006, we issued 2,150,000 shares of our common stock to the parties set forth below for $25,000 in cash, as follows:
|
Name
|
Number of
Shares
|
Relationship to Us
|
||
|
Marshall T. Reynolds
|
537,500
|
Chairman of the Board, Chief Executive Officer and Secretary(1)
|
||
|
Jack M. Reynolds
|
430,000
|
Director, President and Chief Financial Officer(1)
|
||
|
Edsel R. Burns
|
537,500
|
Director
|
||
|
Neal W. Scaggs
|
107,500
|
Director
|
||
|
Joseph L. Williams
|
107,500
|
Director
|
||
|
Douglas Reynolds
|
430,000
|
Director nominee (1)
|
|
(1)
|
Douglas Reynolds is the son of Marshall T. Reynolds and the brother of Jack M. Reynolds.
|
The holders of the majority of these shares may request that we register these shares pursuant to an agreement signed on September 6, 2006. We will use our best efforts to prepare and file such registration statement, although we are not obligated to do so. The holders of the majority of these shares may elect to exercise these registration rights at any time after the date on which these shares of common stock are released from escrow. In addition, these stockholders may request certain “piggy-back” registration rights on registration statements filed subsequent to the date on which these shares of common stock are released from escrow. We will use our best efforts to prepare and file such registration statements although we are not obligated to do so. We will bear the expenses incurred in connection with the filing of any such registration statements.
Five of our directors as well as Douglas Reynolds and as agreed with Ferris, Baker Watts, Incorporated, purchased in the aggregate 3,076,923 warrants in a private placement that occurred prior to our initial public offering at a price of $0.65 per warrant. In no event shall we be obligated to settle these warrants, in whole or in part, for cash. Therefore any and all such warrants can expire unexercised or unredeemed.
Audit Fees
We incurred fees from our principal accountant of $210,086 and $197,830 for the services Arnett & Foster, P.L.L.C. have performed in connection with the audit of our financial statements included in our Annual Report for fiscal 2010 and 2009, respectively.
Tax Fees
For the fiscal year ended September 30, 2010, we incurred fees of $55,000 from our principal accountant for tax compliance services. During the fiscal year ended September 30, 2009, we incurred fees from our principal accountant of $53,200 for tax compliance services.
All Other Fees
None
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent registered public accounting firm and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. All of the fees paid in the audit-related, tax and all other categories were approved per the pre-approval policies.
35
Changes in Independent Registered Public Accountants
None.
PART IV
|
The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:
|
|||
| (a)(1) | Financial Statements | ||
| Energy Services of America Corporation | |||
| ● | Report of Independent Registered Public Accounting Firm | F-1 | |
| ● | Balance Sheets, September 30, 2009 and September 30, 2010 | F-2 | |
| ● | Statements of Income, Period Ended September 30, 2009 and September 30, 2010 | F-3 | |
| ● | Statements of Shareholders’ Equity, Period Ended September 30, 2009 and September 30, 2010 | F-4 | |
| ● | Statements of Cash Flows, Period Ended September 30, 2009 and September 30, 2010 | F-5 | |
| ● | Notes to Financial Statements. | F-6 | |
|
(a)(2)
|
Financial Statement Schedules
|
||
|
No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.
|
|||
36
(a)(3) Exhibits
|
Exhibit No.
|
Description
|
|
|
3.1
|
Amended and Restated Certificate of Incorporation.(1)
|
|
|
3.2
|
Bylaws.(1)
|
|
|
3.3
|
Certificate of Amendment to the Registrant’s Certificate of Incorporation.(1)
|
|
|
4.1
|
Specimen Unit Certificate.(1)
|
|
|
4.2
|
Specimen Common Stock Certificate.(1)
|
|
|
4.3
|
Specimen Warrant Certificate.(1)
|
|
|
4.4
|
Form of Unit Purchase Option.(1)
|
|
|
4.5
|
Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant.(1)
|
|
|
10.1
|
Letter Agreements among the Registrant, Ferris, Baker Watts, Incorporated, and Officers and Directors.(1)
|
|
|
10.2
|
Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant.(1)
|
|
|
10.3
|
Form of Stock Escrow Agreement between the Registrant, Continental Stock Transfer & Trust Company and the Initial Stockholders.(1)
|
|
|
10.4
|
Form of Letter Agreement between Chapman Printing Co. and the Registrant regarding administrative support.(1)
|
|
|
10.5
|
Advance Agreement between the Registrant and Marshall T. Reynolds, dated March 31, 2006.(1)
|
|
|
10.6
|
Form of Amended Registration Rights Agreement among the Registrant and the Initial Stockholders.(1)
|
|
|
10.7
|
Warrant Placement Agreement between Marshall T. Reynolds, Edsel Burns, Douglas Reynolds, Jack Reynolds, Neal Scaggs, Joseph Williams and Ferris, Baker Watts, Incorporated.(1)
|
|
|
10.8
|
Energy Services of America Corporation Employee Stock Purchase Plan (2)
|
|
|
10.9
|
Energy Services of America Corporation Long Term Incentive Plan (3)
|
|
|
10.10
|
Change in Control Agreement between Registrant and Larry Blount
|
|
|
10.11
|
Management Incentive Plan
|
|
|
14
|
Code of Ethics(1)
|
|
|
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
(1)
|
Incorporated by reference to the Registration Statement on Form S-1 of Energy Services of America Corp. (file no. 333-133111), originally filed with the Securities and Exchange Commission on April 7, 2006, as amended.
|
(2) Filed as Appendix A to the Schedule 14-A filed with the Securities and Exchange Commission on October 16, 2008.
(3) Filed as Appendix A to the Schedule 14-A filed with the Securities and Exchange Commission on July 2, 2010.
(b) The exhibits listed under (a)(3) above are filed herewith.
(c) Not applicable.
37
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENERGY SERVICES OF AMERICA CORPORATION | |||
|
Date: December 20, 2010
|
By:
|
/s/ Edsel R. Burns | |
| Edsel R. Burns | |||
| Chief Executive Officer | |||
| (Duly Authorized Representative) | |||
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Name
|
Position
|
Date
|
|||
|
By
|
/s/ Marshall T. Reynolds
|
Chairman of the Board,
|
December 20, 2010
|
||
|
Marshall T. Reynolds
|
|||||
|
By
|
Jack R. Reynolds
|
Director
|
December 20, 2010
|
||
|
Jack R. Reynolds
|
|||||
|
By
|
/s/ Edsel R. Burns
|
Chief Executive Officer
(Principal Executive Officer)
|
December 20, 2010
|
||
|
Edsel R. Burns
|
|||||
|
By
|
/s/ Larry A. Blount
|
Secretary/Treasurer, Chief
Financial Officer
|
December 20, 2010
|
||
|
Larry A. Blount
|
|||||
|
By
|
/s/ Neal W. Scaggs
|
Director
|
December 20, 2010
|
||
|
Neal W. Scaggs
|
|||||
|
By
|
/s/ Joseph L. Williams
|
Director
|
December 20, 2010
|
||
|
Joseph L. Williams
|
|||||
|
By
|
Richard M. Adams, Jr.
|
Director
|
December 20, 2010
|
||
|
Richard M. Adams, Jr.
|
|||||
|
By
|
/s/ Keith Molihan
|
Director
|
December 20, 2010
|
||
|
Keith Molihan
|
|||||
|
By
|
/s/ Douglas Reynolds
|
Director
|
December 20, 2010
|
||
|
Douglas Reynolds
|
|||||
|
By
|
Eric Dosch
|
Director
|
December 20, 2010
|
||
|
Eric Dosch
|
|||||
|
By
|
/s/ James Shafer
|
Director
|
December 20, 2010
|
||
|
James Shafer
|
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Energy Services of America Corporation
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of Energy Services of America Corporation and subsidiaries as of September 30, 2010 and 2009, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our 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 Company’s 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Energy Services of America Corporation and subsidiaries as of September 30, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
|
ARNETT & FOSTER, P.L.L.C.
|
|
 |
|
Charleston, West Virginia
December 20, 2010
Innovation With Results
AF Center ∙ 101 Washington Street, East ∙ P.O. Box 2629 ∙ Charleston, West Virginia 25329
304/346-0441 ∙ 800/642-3601
www.afnetwork.com
F-1
|
ENERGY SERVICES OF AMERICA CORPORATION
|
||||||||
|
CONSOLIDATED BALANCE SHEETS
|
||||||||
|
As of September 30, 2010 and 2009
|
||||||||
|
|
2010
|
2009
|
||||||
|
Assets
|
||||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 2,576,551 | $ | 2,829,988 | ||||
|
Accounts receivable-trade
|
25,872,375 | 16,636,095 | ||||||
|
Allowance for doubtful accounts
|
(283,191 | ) | (283,207 | ) | ||||
|
Retainages receivable
|
13,932,520 | 3,135,461 | ||||||
|
Other receivables
|
399,874 | 141,530 | ||||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
20,301,075 | 7,870,120 | ||||||
|
Deferred tax asset
|
1,661,610 | 3,974,011 | ||||||
|
Prepaid expenses and other
|
1,945,671 | 3,026,541 | ||||||
|
Total Current Assets
|
66,406,485 | 37,330,539 | ||||||
|
Property, plant and equipment, at cost
|
39,370,608 | 35,350,004 | ||||||
|
less accumulated depreciation
|
(12,310,200 | ) | (6,424,355 | ) | ||||
| 27,060,408 | 28,925,649 | |||||||
|
Goodwill
|
36,914,021 | 36,914,021 | ||||||
|
Total Assets
|
$ | 130,380,914 | $ | 103,170,209 | ||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Current Liabilities
|
||||||||
|
Current maturities of long-term debt
|
$ | 6,804,734 | $ | 7,254,624 | ||||
|
Lines of credit and short term borrowings
|
13,493,860 | 7,885,579 | ||||||
|
Accounts payable
|
15,073,323 | 5,375,962 | ||||||
|
Accrued expenses and other current liabilities
|
12,171,528 | 5,717,730 | ||||||
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
1,984,098 | 4,501 | ||||||
|
Current portion of deferred income taxes payable
|
1,404,649 | - | ||||||
|
Total Current Liabilities
|
50,932,192 | 26,238,396 | ||||||
|
Long-term debt, less current maturities
|
7,474,861 | 10,497,844 | ||||||
|
Long-term debt, payable to shareholder
|
4,700,000 | 5,600,000 | ||||||
|
Deferred income taxes payable, net of current portion
|
7,154,112 | 6,498,526 | ||||||
|
Total Liabilities
|
70,261,165 | 48,834,766 | ||||||
|
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 12,092,307 shares
|
1,209 | 1,209 | ||||||
|
Additional paid in capital
|
55,988,324 | 55,976,368 | ||||||
|
Retained earnings (deficit)
|
4,130,216 | (1,642,134 | ) | |||||
|
Total Stockholders’ equity
|
60,119,749 | 54,335,443 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 130,380,914 | $ | 103,170,209 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
F-2
|
ENERGY SERVICES OF AMERICA CORPORATION
|
||||||||
|
CONSOLIDATED STATEMENTS OF INCOME
|
||||||||
|
For the years ended September 30, 2010 and 2009
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | 218,287,753 | $ | 106,766,096 | ||||
|
Cost of revenues
|
193,916,388 | 102,682,663 | ||||||
|
Gross profit
|
24,371,365 | 4,083,433 | ||||||
|
Selling and administrative expenses
|
12,733,279 | 11,258,848 | ||||||
|
Income (loss) from operations
|
11,638,086 | (7,175,415 | ) | |||||
|
Other income (expense)
|
||||||||
|
Interest income
|
56,436 | 57,670 | ||||||
|
Other nonoperating income (expense)
|
279,365 | (32,225 | ) | |||||
|
Interest expense
|
(1,841,455 | ) | (1,623,488 | ) | ||||
|
Gain (loss) on sale of equipment
|
12,554 | (18,523 | ) | |||||
| (1,493,100 | ) | (1,616,566 | ) | |||||
|
Income (loss) before income taxes
|
10,144,986 | (8,791,981 | ) | |||||
|
Income tax expense (benefit)
|
4,372,636 | (2,870,207 | ) | |||||
|
Net income (loss)
|
$ | 5,772,350 | $ | (5,921,774 | ) | |||
|
Weighted average shares outstanding-basic
|
12,092,307 | 12,092,307 | ||||||
|
Weighted average shares-diluted
|
12,099,390 | 12,092,307 | ||||||
|
Net income (loss) per share basic
|
$ | 0.48 | $ | (0.49 | ) | |||
|
Net income (loss) per share diluted
|
$ | 0.48 | $ | (0.49 | ) | |||
The Accompanying Notes are an Integral Part of These Financial Statements
F-3
|
ENERGY SERVICES OF AMERICA CORPORATION
|
|||||||||||
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|||||||||||
|
For the years ended September 30, 2010 and 2009
|
|||||||||||
|
Total
|
||||||||||||||||||||
|
Common Stock
|
Additional Paid
|
Retained
|
Stockholders’
|
|||||||||||||||||
|
Shares
|
Amount
|
in Capital
|
Earnings
|
Equity
|
||||||||||||||||
|
Balance at September 30, 2008
|
12,092,307 | $ | 1,209 | $ | 55,976,368 | $ | 4,279,640 | $ | 60,257,217 | |||||||||||
|
Net Income (Loss)
|
- | - | - | (5,921,774 | ) | (5,921,774 | ) | |||||||||||||
|
Balance at September 30, 2009
|
12,092,307 | $ | 1,209 | $ | 55,976,368 | $ | (1,642,134 | ) | $ | 54,335,443 | ||||||||||
|
Share-based compensation expense
|
- | - | 11,956 | - | 11,956 | |||||||||||||||
|
Net Income
|
- | - | - | 5,772,350 | 5,772,350 | |||||||||||||||
|
Balance at September 30, 2010
|
12,092,307 | $ | 1,209 | $ | 55,988,324 | $ | 4,130,216 | $ | 60,119,749 | |||||||||||
The Accompanying Notes are an Integral Part of These Financial Statements
F-4
|
ENERGY SERVICES OF AMERICA CORPORATION
|
|||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|||
|
For the years ended September 30, 2010 and 2009
|
|
Operating activities
|
2010
|
2009
|
||||||
|
Net income (loss)
|
$ | 5,772,350 | $ | (5,921,774 | ) | |||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||
|
Depreciation expense
|
6,117,125 | 5,907,150 | ||||||
|
Provision for bad debts
|
- | 93,731 | ||||||
|
(Gain) loss on sale/disposal of equipment
|
(12,554 | ) | 18,523 | |||||
|
Provision for deferred taxes
|
4,372,636 | (562,326 | ) | |||||
|
Share-based compensation expense
|
11,956 | - | ||||||
|
(Increase) decrease in contracts receivable
|
(9,236,296 | ) | 21,768,372 | |||||
|
(Increase) decrease in retainage receivable
|
(10,797,059 | ) | 3,168,229 | |||||
|
(Increase) decrease in other receivables
|
(258,344 | ) | 41,068 | |||||
|
(Increase) decrease in cost and estimated earnings in excess of billings on uncompleted contracts
|
(12,430,955 | ) | (2,597,451 | ) | ||||
|
(Increase) decrease in prepaid expenses
|
2,347,976 | (980,101 | ) | |||||
|
Increase (decrease) in accounts payable
|
9,697,361 | (5,960,718 | ) | |||||
|
Increase (decrease) in accrued expenses
|
6,678,593 | (3,421,611 | ) | |||||
|
Increase (decrease) in billings in excess of cost and estimated earnings on uncompleted contracts
|
1,979,597 | (504,726 | ) | |||||
|
Increase (decrease) in income taxes payable
|
- | (1,461,461 | ) | |||||
|
Net cash provided by (used in) operating activities
|
4,242,386 | 9,586,905 | ||||||
|
Cash flows from investing activities:
|
||||||||
|
Investment in property & equipment
|
(2,151,468 | ) | (1,227,057 | ) | ||||
|
Proceeds from sales of property and equipment
|
451,673 | 38,432 | ||||||
|
Net cash provided by (used in) investing activities
|
(1,699,795 | ) | (1,188,625 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Repayment of loans from shareholders
|
(900,000 | ) | (400,000 | ) | ||||
|
Borrowings on lines of credit and short term debt, net of (repayments)
|
5,141,175 | (1,910,629 | ) | |||||
|
Principal payments on long term debt
|
(7,037,203 | ) | (16,333,423 | ) | ||||
|
Principal payments on short term debt
|
- | (735,901 | ) | |||||
|
Net cash provided by (used in) financing activities
|
(2,796,028 | ) | (19,379,953 | ) | ||||
|
Increase (decrease) in cash and cash equivalents
|
(253,437 | ) | (10,981,673 | ) | ||||
|
Cash beginning of period
|
2,829,988 | 13,811,661 | ||||||
|
Cash end of period
|
$ | 2,576,551 | $ | 2,829,988 | ||||
|
Supplemental schedule of noncash investing and financing activities:
|
||||||||
|
Insurance premiums financed
|
$ | 1,267,106 | $ | 925,339 | ||||
|
Purchases of property & equipment under financing agreements
|
$ | 2,539,535 | $ | 359,234 | ||||
|
Short term borrowing renewed as long term note
|
$ | 800,000 | $ | - | ||||
|
Supplemental disclosures of cash flows information:
|
||||||||
|
Cash paid during the year for:
|
||||||||
|
Interest
|
$ | 1,841,139 | $ | 1,562,921 | ||||
|
Income taxes
|
$ | 356,545 | $ | 1,766,055 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
F-5
ENERGY SERVICES OF AMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Energy Services of America Corporation, formerly known as Energy Services Acquisition Corp., (the Company) was incorporated in Delaware on March 31, 2006 as a blank check company whose objective was to acquire an operating business or businesses. On September 6, 2006 the Company sold 8,600,000 units in the public offering at a price of $6.00 per unit. Each unit consisted of one share of the Company’s common stock and two common stock purchase warrants for the purchase of a share of common stock at $5.00. The warrants could not be exercised until the later of the completion of the business acquisition or one year from issue date. The Company operated as a blank check company until August 15, 2008. On that date the Company acquired S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. with proceeds from the Company’s Initial Public Offering. S. T. Pipeline and C. J Hughes operate as wholly owned subsidiaries of the Company.
S.T. Pipeline, Inc. (S.T) was incorporated in May 1990 under the laws of the State of West Virginia. S.T. engages in the construction of natural gas pipelines for utility companies in various states, mostly in the mid-Atlantic area of the country. S.T.’s contracts are primarily fixed price contract with some cost-plus service work performed as requested. All of the Company’s production personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.
C.J. Hughes Construction Company, Inc. (C.J. Hughes) is a general contractor primarily engaged in pipeline construction for utility companies. C.J. Hughes operates primarily in the mid-Atlantic region of the country. Nitro Electric Company, Inc., a wholly owned subsidiary of C. J. Hughes, is involved in electrical contracting providing its services to the power and refining industry. Nitro Electric operates primarily in the mid-Atlantic region of the country. Contractors Rental Corporation, Inc. a wholly owned subsidiary of C.J. Hughes is involved in main line pipeline installation and repairs in the mid-Atlantic region of the country as well. All of the C.J. Hughes, Nitro Electric, and Contractors Rental production personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of Energy Services include the accounts of Energy Services and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, references to Energy Services include Energy Services and its consolidated subsidiaries.
F-6
Reclassifications
Labor and insurance costs related to marketing and other administrative functions were reclassified for the twelve months September 30, 2009 from cost of revenues to selling and administrative expenses to conform to classifications used in the current year. The amount reclassified was $3,853,142. The 2009 balance sheet presentation includes a reclassification of $705,862 to other current assets from a $572,304 reduction of deferred tax assets and a $133,558 increase in deferred tax liabilities. This was a result of a realized tax refund from the 2009 net operating loss carryback that was larger than originally estimated.
Use of Estimates and Assumptions
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.
Cash and Cash Equivalents
Energy Services considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Fair Value Measurements
The carrying values of cash equivalents, accounts receivable (including retainage receivable), accounts payable and accrued expenses approximate fair value due to the short-term nature of those instruments. Categorization for disclosure purposes is required for qualifying assets and liabilities into three broad levels based on the priority of the inputs used to determine the fair values. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). All of the Company’s cash equivalents that require categorization are categorized as Level 1 assets at September 30, 2010 as all fair values are based on unadjusted quoted prices for identical assets in an active market that the Company has the ability to access.
The carrying amount for borrowings under the Company’s revolving credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the Company’s long term fixed-rate debt to unrelated parties was estimated using a discounted cash flow analysis and a yield rate that was estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, which is a level 3 input. It was not practicable to estimate the fair value of notes payable to related parties, The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $12.2 million at September 31, 2010 was $12.5 million.
F-7
The Company uses fair value measurements on a non-recurring basis in its assessment of assets classified as goodwill and long-lived assets held and used. In accordance with its annual impairment test during the quarter ended September 30, 2010, the carrying amount of goodwill was compared to its fair value. No changes in carrying amount resulted. The level of inputs used for fair value measurements for goodwill and long-lived assets held and used, are the lowest level (Level 3) inputs for which the Company uses the assistance of third party specialists to develop valuation assumptions.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts when collection of an account or note receivable is considered doubtful, and receivables are written off against the allowance when deemed uncollectible. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s access to capital, the customer’s willingness or ability to pay, general economic conditions and the ongoing relationship with the customer. Retainage billed but not paid pursuant to contract provisions will be due upon completion of the contracts. Based on the Company’s past experience management considers all amounts classified as retainage receivable to be collectible. All retainage receivable amounts are expected to be collected within the next fiscal year.
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 productivity of the asset are expensed as incurred. Property and equipment are depreciated principally on the straight- line method over the estimated useful lives of the assets: buildings 39 years; operating equipment and vehicles 5-7 years; and office equipment, furniture and fixtures 5-7 years.
Goodwill and Other Intangibles
The Company’s goodwill was acquired in two separate purchase transactions that were consummated on August 15, 2008. The Company has selected July 1 for its annual impairment testing date, which is the first day of the fourth fiscal quarter. In accordance with U.S. Generally Accepted Accounting Principals goodwill will be tested for impairment between annual testing dates if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No impairment loss has been recognized for the years ended September 30, 2010 or 2009.
Impairment of Long-Lived Assets
A long-lived asset shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value is required.
F-8
Revenue Recognition
Revenues from fixed price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. These contracts provide for a fixed amount of revenues for the entire project. Such contracts provide that the customer accept completion of progress to date and compensate us for the services rendered, measured in terms of units installed, hours expended or some other measure of progress. Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, tools and expendables. The cost estimates are based on the professional knowledge and experience of the Company’s engineers, project managers and financial professionals. Changes in job performance, job conditions, and others all affect the total estimated costs at completion. The effects of these changes are recognized in the period in which they occur. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed for fixed price contracts. The current liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized for fixed price contracts.
Revenue on all costs plus and time and material contracts are recognized when services are performed or when units are completed.
Claims
Claims are amounts in excess of the agreed contract price that a contractor seeks to collect from customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. The Company records revenue on claims that have a high probability of success. Revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred.
Advertising
All advertising costs are expensed as incurred. Total advertising expense was $24,056 and $24,524 for the years ended September 30, 2010 and 2009, respectively.
Income Taxes
The Company and all subsidiaries file a consolidated income tax return on a fiscal year basis. The Company began filing tax returns for the year ended September 30, 2006 and therefore all prior Company tax returns are still subject to audit. Both C J Hughes and S T Pipeline filed as S Corporations prior to their acquisition by the Company, therefore any audits of those companies tax returns would result in an adjustment to the pass-through income to the shareholders at the time, and would not create any liability to the Company.
F-9
The Company follows the liability method of accounting for income taxes in accordance with U.S. Generally Accepted Accounting Principals. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. U.S. GAAP also prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or to be taken on a tax return.
Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the year, and diluted earnings per share is computed using the weighted average number of common shares outstanding during the year adjusted for all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalent would be
antidilutive. Potential common shares that may be issued by the Company relate to the warrants issued to the initial shareholders and as part of the units in the Company’s initial public offering and restricted stock issued.
Collective Bargaining Agreements
Certain Energy Services subsidiaries are party to collective bargaining agreements with unions representing certain of their employees. The agreements require such subsidiaries to pay specified wages and provide certain benefits to the union employees. These agreements expire at various times and have typically been renegotiated and renewed on terms that are similar to the ones contained in the expiring agreements.
Under certain collective bargaining agreements, the applicable Energy Services subsidiary is required to make contributions to multi-employer pension plans. If the subsidiary were to cease participation in one or more of these plans, a liability could potentially be assessed related to any underfunding of these plans. The amount of such assessment, were one to be made, cannot be reasonably estimated.
Litigation Costs
The Company reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Litigation costs are expensed as incurred.
Segments
The Company has determined that its three operating units, CJ Hughes/Contractors Rental, Nitro Electric and S.T. Pipeline, qualify for aggregation under the Segment Reporting topic of the FASB ASC due to the similar nature of their operating characteristics.
F-10
New Accounting Pronouncements
In July 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing and the Allowance for Credit Losses. The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:
|
|
●
|
The nature of credit risk inherent in the entity’s portfolio of financing receivables;
|
|
|
●
|
How that risk is analyzed and assessed in arriving at the allowance for credit losses; and
|
|
|
●
|
The changes and reasons for those changes in the allowance for credit losses.
|
To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:
|
|
●
|
Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;
|
|
|
●
|
The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and
|
|
|
●
|
The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses.
|
For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this standard will require additional disclosures.
F-11
3. CORRECTION OF AN ERROR
During 2010, the Company discovered an error related to the calculation of the deferred tax liability attributable to the acquisition of CJ Hughes. The error involved the use of incorrect tax basis in computing the initial deferred tax liability recorded as a purchase accounting adjustment. The error had no effect on net income or retained earnings for the current year or any prior year. The error resulted in an over-statement of Goodwill and of long term deferred tax liability of $1,555,142 each. The September 30, 2009 balance sheet has been restated to correct the error.
4. GOODWILL AND INTANGIBLE ASSETS
A summary of changes in the Company’s goodwill is as follows:
|
Year Ended September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balance at beginning of year
|
$ | 36,914,021 | $ | 36,914,021 | ||||
|
Impairment
|
-0- | -0- | ||||||
|
Balance at end of year
|
$ | 36,914,021 | $ | 36,914,021 | ||||
5. ACCOUNTS RECEIVABLE:
Activity in the Company’s allowance for doubtful accounts consists of the following:
|
Year Ended September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balance at beginning of year
|
$ | 283,207 | $ | 363,819 | ||||
|
Charged to expense
|
-0- | 93,731 | ||||||
|
Deductions for uncollectible receivables written off, net of recoveries
|
(16 | ) | (174,343 | ) | ||||
|
Current year additions from acquisitions
|
-0- | -0- | ||||||
|
Balance at end of year
|
$ | 283,191 | $ | 283,207 | ||||
6. UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows:
|
Year Ended September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Costs incurred on contracts in progress
|
$ | 215,024,745 | $ | 37,568,730 | ||||
|
Estimated earnings, net of estimated losses
|
21,611,438 | 7,102,334 | ||||||
| 236,636,183 | 44,671,064 | |||||||
|
Less Billings to date
|
218,319,206 | 36,805,445 | ||||||
| $ | 18,316,977 | $ | 7,865,619 | |||||
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
$ | 20,301,075 | $ | 7,870,120 | ||||
|
Less Billings in excess of costs and estimated earnings on uncompleted contracts
|
1,984,098 | 4,501 | ||||||
|
|
$ | 18,316,977 | $ | 7, 865,619 | ||||
F-12
7. CLAIMS
The Company has reported $3.5 million in claim revenue for the period ending September 30, 2010. These claims were a result of a combination of customer-caused delays, errors in specification and designs, and disputed or unapproved contract change orders. Revenue from these claims was recorded only to the extent contract costs relating to the claim have been incurred, factored by a probability factor to insure a conservative amount was recorded. The Company considers collection of these claims highly probable.
Resolution of these claims is a three step process. The Company first meets with the customer to try to resolve all issues. Secondly, if that is unsuccessful, non-binding mediation is held with an impartial mediator who tries to get both sides to agree on the issues. If mediation is unsuccessful, the third phase is binding arbitration. Under this step each party presents its case before a panel of three arbitrators who rule on the merits of the case. The claims reported are at the first phase of this process.
8. PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
| Year Ended September 30, | ||||||||
|
2010
|
2009
|
|||||||
|
Land
|
$ | 702,000 | $ | 702,000 | ||||
|
Buildings and leasehold improvements
|
429,598 | 255,570 | ||||||
|
Operating equipment and vehicles
|
37,901,995 | 34,027,594 | ||||||
|
Office equipment, furniture and fixtures
|
337,015 | 364,840 | ||||||
| 39,370,608 | 35,350,004 | |||||||
|
Less Accumulated Depreciation and Amortization
|
12,310,200 | 6,424,355 | ||||||
|
Property and equipment net
|
$ | 27,060,408 | $ | 28,925,649 | ||||
9. SHORT-TERM DEBT
Short-term debt consists of the following:
A line of credit of $19.5 million has been established with a local bank. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 6.0%. Cash available under the line is calculated based on a percentage of the Company’s accounts receivable with certain exclusions. Major items excluded from calculation are certain percentages of receivables from bonded jobs and retainage as well as all items greater than one hundred twenty (120) days old. At September 30, 2010 the Company had $6 million available on the line.
F-13
10. LONG-TERM DEBT
A summary of long-term debt as of September 30, 2010 and 2009 is as follows:
|
2010
|
2009
|
|||||||
|
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.
|
-0- | $ | 79,999 | |||||
|
Notes payable to various finance companies, payable in monthly installments totaling $16,130, including interest at rates ranging between 0% and 8%, with varying maturity dates from March 2008, through April 2012, secured by vehicles and equipment acquired with the notes.
|
692,199 | 978,535 | ||||||
|
Notes payable to finance company, payable in monthly installments of $94,719.11, including interest at 4.19%, maturity date of December 2009.
|
-0- | 189,438 | ||||||
|
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 June 2011, secured by vehicles acquired with the notes.
|
582,220 | 1,336,928 | ||||||
|
Note payable to bank, due in monthly installments of $5,000, including interest at 6.75%, final payment due September 2012, secured by real estate, vehicles, and equipment
|
329,803 | 366,147 | ||||||
|
Notes payable to finance companies, due in monthly installments totaling $312,971, including interest ranging from 1.0% to 7.92%, final payments due December 2010 through July 2015, secured by equipment.
|
8,179,273 | 8,134,683 | ||||||
|
Notes payable to banks, due in monthly installments totaling $108,497, including interest at prime plus .5% to 8.75%, final payments due April 2010 through July 2011, secured by equipment, receivables, and intangibles.
|
2,495,689 | 3,413,338 | ||||||
|
Notes payable to individuals, due in annual installments of $1 million dollars with interest at 7.5%
|
2,000,411 | 3,253,400 | ||||||
|
Notes payable to shareholder, interest rate at prime, note matures in August of 2012
|
4,700,000 | 5,600,000 | ||||||
| 18,979,595 | 23,352,468 | |||||||
|
Less Current Maturities
|
6,804,734 | 7,254,624 | ||||||
|
Total Long term debt
|
$ | 12,174,861 | $ | 16,097,844 | ||||
F-14
Maturities of long-term debt for the next five years are as follows:
|
2011
|
$ | 6,804,734 | |||
|
2012
|
7,928,651 | ||||
|
2013
|
2,240,343 | ||||
|
2014
|
829,613 | ||||
|
2015
|
625,091 | ||||
|
Thereafter
|
551,163 | ||||
|
|
$
|
18,979,595 | |||
11. INCOME TAXES
The components of income taxes are as follows:
|
Year Ended September 30,
|
||||||||||
|
|
2010
|
2009
|
||||||||
| Federal |
Current
|
$ | -0- | $ | (2,307,880 | ) | ||||
|
Deferred
|
3,610,861 | (168,809 | ) | |||||||
|
Total
|
3,610,861 | (2,476,689 | ) | |||||||
| State |
Current
|
-0- | (25,500 | ) | ||||||
|
Deferred
|
761,775 | (368,018 | ) | |||||||
|
Total
|
761,775 | (393,518 | ) | |||||||
| Total income tax expense (benefit) | $ | 4,372,636 | $ | (2,870,207 | ) | |||||
The provision for income taxes differs from the amount computed by applying the federal statutory rate of 34 percent on income from operations as indicated in the following analysis:
|
Year Ended September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Statutory rate
|
34.00 | % | (34.00 | )% | ||||
|
Meals
|
3.22 | 4.30 | ||||||
|
Other
|
(.12 | ) | 3.05 | |||||
|
State Income Taxes
|
6.00 | (6.00 | ) | |||||
|
Effective tax rate
|
43.10 | % | (32.65 | )% | ||||
F-15
Deferred income taxes are provided for significant difference between the basis of assets and liabilities for financial reporting and income tax reporting. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
The income tax effects of temporary differences giving rise to the deferred tax liabilities are as follows:
|
Year Ended September 30,
|
||||||||
|
Current Deferred Tax Assets
|
2010
|
2009
|
||||||
|
Net operating loss carryover
|
$ | 499,541 | $ | 2,946,060 | ||||
|
Other deferred assets
|
1,162,069 | 1,027,951 | ||||||
| 1,661,610 | 3,974,011 | |||||||
|
Current Deferred Tax Liabilities
|
||||||||
|
Contract Claims
|
$ | 1,404,649 |
-0-
|
|||||
|
Long Term Deferred Tax Liabilities
|
||||||||
|
Property, Plant and Equipment
|
$ | 6,477,876 | $ | 6,017,343 | ||||
|
Others
|
676,236 | 481,183 | ||||||
| 7,154,112 | 6,498,526 | |||||||
The deferred tax asset valuation allowance recognized at September 30, 2010 and 2009 was zero ($0.0). The Company does not believe that it has any unrecognized tax benefits included in its consolidated financial statements that require recognition under U.S. Generally Accepted Accounting Principals. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if applicable, in general and administrative expenses. During the years ended September 30, 2010 and 2009 the Company did not recognize any interest or penalties related to income taxes in its consolidated financial statements, nor has it recorded an accrued liability for interest or penalty payments.
The Company had a net operating loss carryover for federal income tax purposes at September 30, 2009 of $5,720,282 available to offset future taxable income. In 2010 $5,220,741 of the loss carryover was used leaving $499,541 to carryover. The carryover expires at September 30, 2024.
12. EARNINGS PER SHARE:
Shares not included in the calculation of diluted earnings per share because they are anti-dilutive were warrants of 20,276,923 at September 30, 2010.
F-16
The amounts used to compute the basic and diluted earnings per share for the years ended 2010 and 2009 is illustrated below:
| Year Ended September 30, | ||||||||
|
2010
|
2009
|
|||||||
|
Net Income (loss) from continuing operations available to common shareholders
|
$ | 5,772,350 | $ | (5,921,774 | ) | |||
|
Weighted average shares outstanding basic
|
12,092,307 | 12,092,307 | ||||||
|
Effect of dilutive securities:
|
||||||||
|
Warrants
|
0 | 0 | ||||||
|
Restricted stock grants
|
0 | 0 | ||||||
|
Weighted average shares outstanding diluted
|
12,099,390 | 12,092,307 | ||||||
|
Net Income (loss) per share‐basic
|
$ | 0.48 | $ | (0.49 | ) | |||
|
Net Income (loss) per share‐diluted
|
$ | 0.48 | $ | (0.49 | ) | |||
13. WARRANTS AND UNIT PURCHASE OPTION
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 Company’s 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 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. A total of 17,200,000 warrants were issued in the IPO and all are still outstanding and unexercised.
Preceding the public offering the initial shareholders of the Company purchased an aggregate of 3,076,923 warrants at $.65 per warrant from the Company in a private placement offering. 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 3,076,923 warrants are all still outstanding and unexercised.
The Company 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.
F-17
For the public warrants and the unit purchase option, the Company is only required to use its best efforts to cause a registration statement covering the resale of the public warrants, 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 public warrants, units and the securities comprising the units. Additionally, in no event, is the Company obligated to settle the public warrants, 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 public warrants, units and the securities comprising the units. The holder or holders of the public warrants or 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 Company’s common stock.
14. STOCK PURCHASE PLAN
At the annual meeting of the shareholders on November 19, 2008 the shareholders approved the establishment of an employee stock purchase plan. The stock purchase plan authorizes the issuance of up to 1,200,000 shares of common stock for purchase by eligible employees. A participant’s stock purchased during a calendar year may not exceed the lesser of (a) a percentage of the participant’s compensation or a total amount as specified by the compensation committee of the Board, or (b) $25,000. The stock will be offered at a purchase price of at least 85% of its fair market value on the date of purchase.
The major plan provisions cover the purposes of the plan, effective date and duration, administration, eligibility, stock type, stock purchase limitations, price of stock, participation election, payroll deductions, payment for stock, date of purchase, termination of agreement, termination of employment, recapitalization, change of control, assignability, Stockholder rights, compliance with code section 423, amendment and termination, application of funds, tax withholdings, governing laws, employment at will and arbitration.
The Company accounts for its equity based compensation as prescribed by U.S. Generally Accepted Accounting Principles for share-based payments. The Company has adopted a fair value based method of accounting for employee equity based plans, whereby compensation cost is measured at the grant date based on the fair value of the award (the discount on the stock purchase) and is recognized at the purchase date, as there is no vesting period. As a result, compensation expense relating to the stock purchase plan will be reflected in net income as part of “Salaries and employee benefits” on the Consolidated Statements of Income.
There have been no agreements with any employees made under this plan as of the year ended September 30, 2010.
F-18
15. LONG TERM INCENTIVE PLAN:
At the annual meeting of the shareholders on August 11, 2010 the shareholders approved the Energy Services of America Corporation Long Term Incentive Plan (the “LTIP”), to provide employees and directors of Energy Services of America Corporation (the “Company”) with additional incentives to promote the growth and performance of the Company. By approving the LTIP, our stockholders will give us the flexibility we need to continue to attract and retain highly qualified employees and directors by offering a competitive compensation program that is linked to the performance of our common stock. At September 30, 2010 future awards of 1,149,000 shares could be made under the plan.
On August 11, 2010 a total of 51,000 shares were granted to six officers of the Company at a grant date fair value per share of $4.22. These grants vest over a period of three years. Market value of the grants was $215,220 and is recognized as compensation expense over the vesting period. For the year ending September 30, 2010, $11,956 was recognized as compensation expense and $4,782 in deferred tax benefit as a result of these grants. The holders of the restricted stock do not receive dividends and do not have the right to vote the shares.
16. RELATED PARTY TRANSACTIONS:
Total long-term debt including short term portion at September 30, 2010 was $19 million, of which, $6.7 million was payable to certain directors, officers and former owners of an acquired company. The related party debt consist of a $4.7 million note due in August 2012, and a $2.0 million note payable in two payments of $1.0 million each on December 15, 2010 and August 15, 2011. The Company also purchases and rents various pieces of equipment and materials from a certain director who was a former owner of one of the acquired subsidiaries. Those transactions totaled approximately $1.9 million through the twelve month period ending September 30, 2010.
Certain Energy Services subsidiaries 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.
F-19
17. LEASE OBLIGATIONS
The Company leases various equipment and office space under operating lease agreements with terms up to 60 months, with renewal options of up to an additional 60 months. The Company also leases vehicles from certain stockholders and spouses under non-cancelable operating leases.
The future minimum lease payments under operating leases as of September 30, 2010, are as follows:
|
2011
|
$ | 283,393 | ||||
|
2012
|
187,759 | |||||
|
2013
|
107,816 | |||||
|
2014
|
7,500 |
18. MAJOR CUSTOMERS
Revenues for the period ending September 30, 2010 were $218.3 million. Two major customers made up 28% and 24% respectively of the total. Receivables from major customers at September 30, 2010 were $11.5 million, which represent 44% of the total receivables at September 30, 2010. Virtually all work performed for major customers was awarded under competitive bid fixed price or unit price arrangements. During the period ended September 30, 2010 the Company’s major customers operated within the natural gas transmission and distribution industry within the Company’s 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 Company’s operations, the major customers and sources of revenues may change from year to year.
19. RETIREMENT AND EMPLOYEE BENEFIT PLANS
In 2010 and 2009, C. J. Hughes Construction Company, Inc., maintained a tax-qualified 401(k) retirement plans for union employees. Employees can contribute up to 15% of eligible wages, provided the compensation deferred for a plan year did not exceed the indexed dollar amount set by the Internal Revenue Service which was $16,500 for 2010 and 2009. C. J. Hughes will match $0.25 on each dollar contributed up to 6% of eligible wages. C. J. Hughes contributed $16,512 for the fiscal year ended September 30, 2010 to the union plan. Additionally, each plan year, C. J. Hughes may make a discretionary profit-sharing contribution for participants who are actively employed on the last day of the plan year. No discretionary profit-sharing contribution was made for the 2010 or 2009 plan year.
Additionally, C. J. Hughes maintained a tax qualified 401(k) retirement plan for non-union employees. The C. J. Hughes plan provided that employees can contribute up to 15% of eligible wages, provided the compensation deferred for a plan year did not exceed the indexed dollar amount set by the Internal Revenue Service which was $16,500 for 2010 and 2009. C. J. Hughes will match $0.25 on each dollar contributed up to 6% of eligible wages.
F-20
Additionally, each plan year, C. J. Hughes may make a discretionary profit-sharing contribution for participants who are actively employed on the last day of the plan year. No discretionary profit-sharing contribution was made for the 2010 or 2009 plan year.
Effective November 1, 2009, ST Pipeline, Inc. a wholly owned subsidiary of the Company became an adopting employer of the 401(k) retirement plan for non-union employees sponsored by C. J. Hughes Construction Company, Inc.
In 2009, Nitro Electric, a wholly owned subsidiary of the Company maintained a tax-qualified 401(k) retirement plan for non-union employees. Employees are eligible to participate upon date of hire. Employees may contribute eligible wages up to maximum indexed dollar amount set by the Internal Revenue Service which was $16,500 for 2010 and 2009. Nitro Electric may make annual discretionary matching contributions and/or profit sharing contributions to the plan. The matching contribution formula for the 2010 and 2009 plan year was $0.25 on each dollar contributed up to 6% of eligible wages. No profit sharing contribution was made for the 2010 or 2009 plan year.
Effective December 1, 2009, the C. J. Hughes Construction Company, Inc. 401(k) Plan for non-union employees was amended and restated and the Nitro Electric 401(k) Plan for non-union employees was merged into the C. J. Hughes Construction Company, Inc. 401(k) Plan for non-union employees. Employees are immediately eligible for the Plan upon date of hire but must wait until a quarterly entry date to join the Plan. Employees may contribute eligible wages up to the maximum indexed dollar amount set by the Internal Revenue Service which was $16,500 for 2010 and 2009. C. J. Hughes will match $0.25 on each dollar contributed up to 6% of eligible wages.
Additionally, each plan year C. J. Hughes may make discretionary profit sharing contributions for participants who are actively employed on the last day of the plan year. No discretionary profit sharing contribution was made for the 2010 or 2009 plan year.
Effective January 1, 2010, Energy Services of America became the successor plan sponsor of the C. J. Hughes Construction Company, Inc. 401(k) Plan for non-union employees. The Plan was renamed the Energy Services of America Staff Retirement Plan. The four wholly owned subsidiaries, C. J. Hughes
Construction Company, Inc., Nitro Electric Company, Inc., Contractors Rental Corporation, and ST Pipeline adopted the Plan on behalf of their non-union employees.
Energy Services of America and its wholly owned subsidiaries contributed $56,003 for the fiscal year ended September 30, 2010.
F-21
20. CREDIT RISK:
Financial instruments which potentially subject the Companies to credit risk consist primarily of cash, 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 $250,000 on interest bearing accounts. As of September 30, 2010, the Companies had no uninsured bank balances. The Companies perform periodic credit evaluations of its customers financial condition and generally do not require collateral. Credit losses consistently have been within managements expectations.
21. COMMITMENTS AND CONTINGENCIES
During the normal course of operations, the companies are subject to certain subcontractor claims, mechanic’s 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.
F-22
22. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
|
ENERGY SERVICES OF AMERICA CORPORATION (Parent Only)
|
||||||||
|
BALANCE SHEETS
|
||||||||
|
As of September 30, 2010 and 2009
|
||||||||
|
Assets
|
2010
|
2009
|
||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 85,874 | $ | 315,697 | ||||
|
Other receivables
|
1,300 | 1,300 | ||||||
|
Deferred tax asset
|
145,580 | 8,415 | ||||||
|
Prepaid expenses and other
|
506,903 | 1,801,847 | ||||||
|
Total Current Assets
|
739,657 | 2,127,259 | ||||||
|
Property, plant and equipment, at cost
|
352,818 | 275,433 | ||||||
|
less accumulated depreciation
|
(109,050 | ) | (45,612 | ) | ||||
| 243,768 | 229,821 | |||||||
|
Due from affiliates
|
18,288,364 | 11,608,163 | ||||||
|
Investment in subsidiaries
|
57,305,134 | 50,790,016 | ||||||
|
Total Assets
|
$ | 76,576,923 | $ | 64,755,259 | ||||
|
Liabilities and Stockholders' Equity
|
||||||||
|
Current Liabilities
|
||||||||
|
Current maturities of long-term debt
|
$ | 2,000,411 | $ | 2,253,400 | ||||
|
Lines of credit and short term borrowings
|
13,493,860 | 7,085,579 | ||||||
|
Accounts payable
|
8,310 | 33,932 | ||||||
|
Accrued expenses and other current liabilities
|
909,819 | - | ||||||
|
Total Current Liabilities
|
16,412,400 | 9,372,911 | ||||||
|
Long-term debt, less current maturities
|
- | 1,000,000 | ||||||
|
Deferred income taxes payable
|
44,774 | 46,905 | ||||||
|
Total Liabilities
|
16,457,174 | 10,419,816 | ||||||
|
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 12,092,307
|
||||||||
|
shares
|
1,209 | 1,209 | ||||||
|
|
||||||||
|
Additional paid in capital
|
55,988,324 | 55,976,368 | ||||||
|
Retained earnings
|
4,130,216 | (1,642,134 | ) | |||||
|
Total Stockholders' equity
|
60,119,749 | 54,335,443 | ||||||
|
Total liabilities and stockholders' equity
|
$ | 76,576,923 | $ | 64,755,259 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
F-23
|
ENERGY SERVICES OF AMERICA CORPORATION (Parent Only)
|
||||||||
|
STATEMENTS OF INCOME
|
||||||||
|
For the years ended September 30, 2010 and 2009
|
||||||||
|
2010
|
2009
|
|||||||
|
General and administrative expenses
|
$ | 323,629 | $ | 853,313 | ||||
|
Net loss from operations before taxes
|
(323,629 | ) | (853,313 | ) | ||||
|
Other nonoperating income (expense)
|
16,446 | (38,432 | ) | |||||
|
Interest income (expense)
|
(916,060 | ) | (298,373 | ) | ||||
|
Net Income (loss) before tax
|
(1,223,243 | ) | (1,190,118 | ) | ||||
|
Income tax expense (benefit)
|
(480,475 | ) | (432,400 | ) | ||||
| - | ||||||||
|
Equity in undistributed income
|
||||||||
|
(loss) of subsidiaries
|
6,515,118 | (5,164,055 | ) | |||||
|
Net Income (loss)
|
$ | 5,772,350 | $ | (5,921,773 | ) | |||
|
Weighted average shares outstanding- basic
|
12,092,307 | 12,092,307 | ||||||
|
Weighted average shares- diluted
|
12,099,390 | 12,092,307 | ||||||
|
Net income per share- basic
|
$ | 0.48 | $ | (0.49 | ) | |||
|
Net income per share- diluted
|
$ | 0.48 | $ | (0.49 | ) | |||
The Accompanying Notes are an Integral Part of These Financial Statements
F-24
|
ENERGY SERVICES OF AMERICA CORPORATION (Parent Only)
|
||||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
|
For the years ended September 30, 2010 and 2009
|
||||||||
|
Operating activities
|
2010
|
2009
|
||||||
|
Net income (loss)
|
$ | 5,772,350 | $ | (5,921,773 | ) | |||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||||||
|
Provision for current tax (benefit)
|
(341,179 | ) | (470,890 | ) | ||||
|
Provision for deferred income tax
|
(139,296 | ) | 38,490 | |||||
|
Depreciation expense
|
63,438 | 45,612 | ||||||
|
Equity in undistributed (income) loss of subsidiaries
|
(6,515,118 | ) | 5,164,055 | |||||
|
Share-based compensation expense
|
11,956 | - | ||||||
|
Changes in:
|
||||||||
|
Other receivables
|
- | (1,300 | ) | |||||
|
Prepaid expenses
|
1,294,944 | (1,120,050 | ) | |||||
|
Account payable
|
(25,622 | ) | 33,931 | |||||
|
Accrued expenses and other current liabilities
|
909,819 | 200,662 | ||||||
|
Net cash provided by (used in) operating activities
|
1,031,292 | (2,031,263 | ) | |||||
|
Cash flows from investing activities:
|
||||||||
|
Investment in property & equipment
|
(77,385 | ) | (255,489 | ) | ||||
|
Advances to subsidiaries
|
(6,339,022 | ) | (11,608,163 | ) | ||||
|
Net cash provided by (used in) investing activities
|
(6,416,407 | ) | (11,863,652 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Borrowings on lines of credit, net of (repayments)
|
6,408,281 | 7,085,579 | ||||||
|
Principal payments on long term debt
|
(1,252,989 | ) | - | |||||
|
Net cash provided by (used in) financing activities
|
5,155,292 | 7,085,579 | ||||||
|
Increase (decrease) in cash and cash equivalents
|
(229,823 | ) | (6,809,336 | ) | ||||
|
Cash beginning of period
|
315,697 | 7,125,033 | ||||||
|
Cash end of period
|
$ | 85,874 | $ | 315,697 | ||||
|
Supplemental disclosures of cash flows information:
|
||||||||
|
Cash paid during the year for:
|
||||||||
|
Income taxes
|
$ | 356,545 | $ | 1,766,055 | ||||
|
Interest
|
$ | 918,612 | $ | 325,363 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
F-25